Bitcoin values in 2017

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Some have said that its worth lies in a high cost of production. Others see it as simply a form of credit that allows the transfer of resources, which is why it can take the form of pieces of paper or even digital records. Then there is the idea that a currency is worth whatever somebody is willing to pay for it given the limited supply. All these approaches run into trouble of one form or another. But their value has little relation to this cost.

Today we get an answer of sorts, thanks to the work of Spencer Wheatley at ETH Zurich in Switzerland and a few colleagues, who say the key measure of value for cryptocurrencies is the network of people who use them. The value of a network is famously accredited to Bob Metcalfe, the inventor of Ethernet and founder of the computer networking company 3Com.

In other words, it assumes that all nodes can connect with each other. It also reveals when Bitcoin has been overvalued. Wheatley and co point to four occasions when Bitcoin has become overvalued and then crashed; in other words, when the bubble has burst. These events have been well documented. The first big crash occurred in when Mt. A crash in was preceded by the discovery of a Ponzi fraud involving Bitcoin.

Another crash occurred in when high trading volumes overwhelmed Mt. Gox, causing it to collapse; the value of Bitcoin then dropped by 50 percent in two days. The most recent collapse, at the end ofoccurred after South Korean regulators threatened to shut down cryptocurrency exchanges. Sornette has long suggested that it is possible to predict the collapse of speculative bubbles using certain characteristics of the markets.

Indeed, readers of this blog will be familiar with his ideas. First, he looks for markets that are growing at a super-exponential rate—in other words, markets where the growth rate itself is growing. That can happen for short periods of time because of factors such as herding behavior. But it is not sustainable without an infinite number of people. For this reason, a crash, or correction, is inevitable. This much is uncontroversial. But Sornette goes on to say that the timing of the crash is predictable.

And this makes the market increasingly unstable, to the point that almost any small disturbance can trigger a crash. So in the Bitcoin crashes listed above, the triggering events are insignificant.

The situation is analogous to a forest fire. If the forest is dry enough to burn, almost any spark can trigger a blaze. And the size of the resulting fire is unrelated to the size of the spark that started it. Instead, it is the network of connections between the trees that allows the fire to spread. Clearly, a prediction that Bitcoin is about to crash in the next few hours or days is much more powerful than a prediction that it will crash in the coming months or years.

They put it, rather confusingly, like this: And that means there is uncertain weather ahead, at best. That sends a not-altogether-unexpected message to Bitcoin miners, speculators, investors, and potential regulators: Are Bitcoin Bubbles Predictable? Everything included in Insider Basic, plus the digital magazine, extensive archive, ad-free web experience, and discounts to partner offerings and MIT Technology Review events. Unlimited online access including all articles, multimedia, and more.

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