The Media and the Bitcoin Bubble
The noise that surrounded Bitcoin since 2011 has intensified over the past 2 years. Everybody wants their say on where the price of this virtual currency is headed; advocates mention millions of dollars while far less optimistic onlookers suggest pennies. It is typical of what happens when something has no intrinsic value and yet everyone wants to name their price for it.
Disregard the hype surrounding “money 2.0” and you are left with scarcely little. Bitcoin is less of a digital currency and more of an ongoing modern parable about behavioural finance. Right now, there is only one certainty for Bitcoin: books about the irrationality of its hikes in price are being penned at this very moment in time for next Christmas.
A book they would do well to match on the subject is “Irrational Exuberance,” by Nobel prize- winning economist, Robert Shiller[i]. In a chapter covering the news media, he writes, “The history of speculative bubbles begins roughly with the advent of newspapers.” The relationship between the media (in particular, newsprint media) and economic bubbles is thereafter laid out by Shiller.
The Bitcoin phenomenon is almost certainly one such media-driven bubble. There appears to be a strong correlation between the frenzy created by the media and the price of Bitcoin. Unfortunately, much of the noise has been generated specifically by the financial media, who seem to have learned little from recent crises. For some people, it seems that virtual currency is just too much of a good narrative not to follow.
Word on the Street
Bitcoin received its first mention in the pages of the Financial Times of London on June 6, 2011[ii]. Interestingly, it was referred to in the title of the article as “virtual money,” which seems a far more accurate means of describing it than “digital money,” or “money 2.0.” One bitcoin could be purchased that day for $8.
Three days later, on June 9, 2011, the Wall Street Journal published an article, “Bitcoin: Online Currency Taking Off.”[iii] Bitcoins were already trading at $15 and were climbing. In the same article, the journalist pointed out to readers, “the thing to note is that Bitcoin has real, and actual, value;” Confusing a price with value: the hallmark of a bubble
By June 13, 2011, the price of Bitcoin had risen to $28 – a bullish market by anyone’s standards. In Just seven days, its price had risen 250%. In the same period, the S&P 500 fell from 1,286 to 1,271 – a fall of 1%. Granted, it’s not as good a story as that of Bitcoin’s meteoric rise, but at least the fall was probably more closely related to fundamentals.
Other media were also getting in on the action. On June 20th 2011, The Bloomberg news channel ran a report on “what some are calling the money of the future.”[iv] Therein, we were told that “you can speculate” on Bitcoin. The piece finished by interviewing a man making Bitcoin ATMs – because presumably his venture on Betamax videos didn’t pay off.
“This time it’s different”
Headlines, articles and general financial media analysis of Bitcoin’s ascent show some outlets to be more culpable than others; what the majority of them were guilty of is giving weight to a phenomenon, which frankly, doesn’t deserve it (speaking from an economic perspective, at least).
One example is how much of the coverage features a supposed technology guru, who is understandably excited about the programming behind Bitcoin. The natural impluse for an investor who knows no better is to make an association with the last hugely successful tech shares they let go too late to invest in.
Secondly, coverage of Bitcoin frequently uses the expression, “money 2.0,” suggesting that this is the next generation of money – the internet generation. What investor would want to miss out on the next generation of money? Nobody wants to be the guy in the marketplace that was using leather money long after everyone else had changed over to paper.
Plus ça Change
Something else was happening, which could have had an effect on the price of Bitcoin: stock prices were hitting pre-crisis levels. In 2012, the S&P 500 continued its steady rise until it reached a record high at the beginning of 2013. With stocks touching a peak, it might make sense to “get in on the ground” elsewhere. Looking around for inspiration, investors might have been struck by the new virtual money that everyone seemed to be talking about.
At around the same time that the S&P 500 was approaching its pre-crisis peak, Bitcoin was receiving increasingly regular media coverage. A study conducted at the Charles University in Prague has shown the relationship between searches on Google containing the word “Bitcoin” and the price for a single bitcoin over the period between June 2011 and May 2013[v]. The studied correlation seems clear (see figure 1).
Figure 1. Relationship between Google Trends Searches and Bitcoin price
Source: Dr. Ladislav Kristoufek
Although causality is impossible to prove, even someone ardently against the idea that the media has played a significant role in the Bitcoin bubble would find it hard to reject the relationship between the above variables. The correlation has remained strong until the time of writing at December 2013.
The year 2013 finished as it begun – with more stories on the new form of money that was going to make you and yours rich. On December 26th, Forbes.com ran a graphic with the headline, “How you should have spent $100 in 2013 (Hint: Bitcoin),”[vi] as value investors everywhere looked on in bewilderment.
Media commentators play an important role in bringing efficiency to capital markets. The information they provide is quickly contained in asset prices and allows investors to make better informed decisions. They cannot always be expected to get it right. That said, they have played a large role in the Bitcoin pricing bubble that at the time of writing, continues to expand.
The problem is that when prices become too remotely distant from value, investors get hurt. Certainly, Bitcoin has made millionaires and might make many more. As the renowned Professor of Finance, Aswath Damodaran, points out, “you can be right in your assessment of value and go bankrupt being right.”[vii]
When media commentators use the expression “money 2.0,” we should stop and ponder for a moment. Money went through its second incarnation several thousand years ago. To say “money 2.0,” shows a lack of knowledge of the complexity of money and how it got to here. And then, in speaking of the forms that money took – perhaps their advice should be taken with a pinch of salt.
[i] Shiller, Robert J, 2000. Irrational Exuberance. Princeton University Press.
[v] Kristoufek, Robert, 2013. Bitcoin meets Google Trends and Wikipedia: Quanitifying the relationship between phenomena of the Internet era. Scientific Reports 3. Article 3415.