Bitcoin is in the midst of a bubble, says Pitt professor, but investors are still placing bets

Pittsburgh Post-Gazette

What do horse racing, venture capitalists and Overstock.com have in common? They all involve placing bets that could return exactly $0.

Putting crisp dollar bills down on the horse expected to win the Kentucky Derby is one thing, but familiar online retailer Overstock.com has upped the ante — accepting bitcoin as a legitimate form of payment for that discounted kettle or kitchen set of your dreams.

On Dec. 17 last year, bitcoin — a digital currency that exists outside of the traditional banking system — topped out at a value of $19,783.06 per coin. For context, the first bitcoin transaction in 2010 required 10,000 coins to order two pizzas.

Now everyone wants in on what seems like free money.

Therein lies the danger. If something seems too good to be true, it probably is. Or, as University of Pittsburgh mathematics professor Gunduz Caginalp puts it, “It lookslike we’re in a later phase of bubble.”

Bubbling over

In February, Mr. Caginalp published a research paper, “Validation, Liquidity Price, and Stability of Cryptocurrencies,” with his son Carey Caginalp, a Carnegie Mellon University professor and visiting scholar at Pitt.

The younger Mr. Caginalp had been following bitcoin for some time, and the two began thinking about bitcoin, or the lack thereof, as an asset. Their research indicates that cryptocurrency prices will likely never stabilize.

On Tuesday, for example, a single bitcoin traded for less than $11,000, a significant drop from last December’s high.

While bitcoin is speculative, with a winner-takes-all ethos, the currency has no real intrinsic value, explained Mr. Caginalp.

In other investments, terms like equity at least imply partial ownership of a company, voting rights and perhaps a dividend. Bonds accumulate interest and are repaid upon maturity.

“I think for the average person, by the time that you hear about [bitcoin], it seems like it’s going to go up forever and it’s often actually the peak,” Mr. Caginalp said. “Any type of speculative asset becomes somewhat dangerous to buy, especially with relatively little knowledge.”

Bitcoin prices are solely based on how many people want to buy and sell the cryptocurrency at a given time, he said. It’s difficult to know at what price bitcoin should be trading at on a given day.

Even art dealers have carved out a more exact science to valuation.