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Bitcoin Was Prone to Bubbles Until Bears Could Bet Against It


Noah Smith:

Limits to arbitrage can help explain why Bitcoin has been so bubble-prone. Until recently, it was easy enough to take a long position, but expensive and risky to bet against the cryptocurrency. Things really changed in December, when U.S. regulators allowed the trading of Bitcoin futures. That move came in the middle of a historic runup in the price of Bitcoin and other cryptocurrencies. But as soon as futures contracts began to trade, an interesting thing happened — futures prices suggested that Bitcoin’s growth would slow.

What happened next is historic. Bitcoin’s price crashed from a high of about $19,000 to less than $7,000 as of the writing of this article[.]

This is certainly not the only theory as to why the most recent bitcoin bubble deflated1, but it is quite compelling. I’m posting it mainly because I’ve been fascinated by the role, mechanism and psychology of short sellers just recently. It would seem like the development of these markets would tend to take bitcoin closer to “regular” finance. That might be a good thing if you like stability. But it might be a bad thing if you like purity, and want “finance professionals” as far away from your trust minimised medium of evangelical as possible. There are myriad arguments for both sides, I’m sure.

Personally, I like stability. But I like a solid market for goods and services as a basis for that stability. Which I guess is a little bit of a chicken and egg problem right now.

  1. Which seems like a more accurate description than “popped”, thankfully.