July 31, 2017 Reading Time: 2 minutes

People tend to use the term “bubble” derisively, calling to mind gullible investors who follow a herd and buy into the next big thing only to find out that the dot-com stocks, mortgage-backed securities, or tulips they purchased were far overvalued. This irrational exuberance certainly plays a role in a bubble, but the full picture is more complex. Recently, people have begun using the B word when talking about Bitcoin and other applications that run on similar blockchain technology.

Observers are in fact beginning to discuss two different potential bubbles. The first is a “Bitcoin bubble,” referring to the possibility of a major downward correction in the price of the cryptocurrency. As I’ve previously discussed, the value of Bitcoin will ultimately depend on whether it is a viable currency, but the market is not yet mature enough for large fluctuations not to be driven by the whims of a few investors. The price of Bitcoin may go up and down many times without any real implications for whether we’ll all be using it or another cryptocurrency down the road.

We’re also beginning to hear commentators talk about a “blockchain bubble,” referring to the rush of investors funding other blockchain-related projects, particularly in the form of “initial coin offerings.” A major wave of funding and innovation, followed by a crash, sounds a lot like the dot-com bubble of the early 2000s. This type of bubble has some potential long-term benefits. Investor funding allows a large number of start-ups to proliferate and bring their ideas to the market. The ensuing shakeout leaves only the fittest firms in place—firms that investors wouldn’t necessarily be able to pick as the “winners” ex ante. This is often how markets deal with new technology, and speaks to the benefits of free enterprise over central planning. To wind up with successful companies such as Amazon, Facebook, and Google, the market had to be allowed to experiment and evolve. Similarly, a “blockchain bubble” might kick-start novel applications of this important new technology.

Recognizing these societal benefits by no means implies that individual investors shouldn’t think carefully about the value of the underlying assets of the companies in which they invest. But it reminds us that the existence of a bubble doesn’t mean blockchain technology isn’t important in the long run. And the Amazons and Googles of this next wave of technology may need a little irrational exuberance to get off the ground.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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