About the real bubble in the crypto-currency market.

The recent sharp increase in the market value of the Crypto-currency, especially the giants Bitcoin and the Etherium, predictably caused much anxiety and lazy cries about the bubble. Even different crypto-communities accuse each other of the fact that one of them is a bubble.

Being an economist in a free market, I tend to be skeptical about the concept of bubbles. In the most vulgar, most vulgar sense, this means that assets have values ​​that they do not. Even financial assets do not have their intrinsic value, despite attempts to calculate it using the discounted expectation of profit, because in an economy characterized by genuine uncertainty, it is not possible to accurately predict future revenue streams.
Even if we take a bubble to freely designate a situation where the asset class appears to be valued above its reasonable market value because of the irrational excessive investor optimism, the problem arises that when someone starts analyzing actual historical bubbles, one can see , That they never really arose spontaneously.

Rather, they were usually preceded by waves of creating artificial credit, provided by central banks, and other favorable conditions created by the government. For example, take the last price bubble in the market. People who bought secondary homes with mortgage loans with zero down payments could not have done this if the Fed had not invested much new money to give out loans to banks, Fannie Mae and Freddie Mac did not seek to take out a mortgage. Similarly, the notorious bubble dot com was preceded by a similar credit expansion, and the specific niche into which the artificial credit entered was determined by the circumstances of the time.

Now, of course, in principle, a rapid increase in prices and trade volumes in crypto-space could be due to a similar mechanism. However, this is unlikely, because large institutional investors, who are usually the largest beneficiaries of the generosity of the central bank, face many regulatory and other obstacles to investing in crypto-currency assets. They are also generally risky, which should not be surprising. If you look at what they did during the housing boom, they invested in what was perceived by almost everyone as a fairly safe asset class, not advanced technology.

Nevertheless, there are some doubts that may arise in people who I try to formulate below.

Why do assets value so much?

Most of the appeals to the bubble are probably motivated by the people's obvious disbelief that it is possible without consequences to get really huge profits for short periods of time. When Laszlo Chaniez bought two pizzas for 10,000 BTC, one bitcoin did not cost a cent, when he was now close to $ 3,000.

Nevertheless, there is nothing magical about such a rise in prices, if one understands how entrepreneurs, including speculators, usually earn money. The only way to win in a competitive market is to find a resource that is currently undervalued and resold at a higher price. Until recently, there was enough room for this, because very few knew about the existence of crypto-currencies and followed their evolution.

You can argue that enriching a few geeks is unfair (which is a matter for another discussion), but there is nothing really mysterious in this mechanism.

Prices, exchange rates and sources of doubt

Another true reason for doubt may arise because of the crypto currency. Any number of them can be used in transactions, so why can not there be situations when the bulk of the relevant crypto currency simply sits in the holders' purses, but only a small part of it spreads, and one BTC exchanges for $ 1 instead of almost $ 3,000?

Here you need to understand that the crypto currency is inherently not different from the usual means of exchange, such as dollars and euros, and exchange rates between them. Let's try to look at the exchange rate between the three currencies and compare their cash reserves. Of course, this will be very crude analysis and superficial, but it will be sufficient to show that there probably is no magic.

The last figures of money reserves for the United States, Britain and the EU at the time of writing are about 13.5 trillion. Doll. The United States, 1.66 trillion pounds and 10.9 trillion euros. The exchange rate is as follows:

USD / EUR - 0.89
GBP / USD - 1.27
GBP / EUR - 1,14
It is true that the exchange rates between GBP and USD and EUR are much lower than the correlation between their stocks, but if you take into account that the UK economy is relatively small compared to the US and the EU, these rates look more intelligible. And the USD / EUR exchange rate is strikingly consistent with the fact that the ratio between the EUR and USD cash reserves is 0.81, and the economy is about the same size.

As mentioned above, this analysis is very rude and this analysis suggests something important to consider. Despite the divisibility of the respective currencies, some of them do not have very low exchange rates. The reason for this is that currency holders will not exchange it at a very low price if they know that there are people who can offer a higher price, and that people on the other side of the market bear alternative costs, expecting that someone Will accept their very low rates, which they offer. There is no reason to believe that this reality will not take place for exchange with the cryptographic currency, provided that its holders will not be exposed to alternative costs from waiting.

But all the Crypto currency is not.