Bitcoin: Bubble, Or No Bubble?

Summary

WSJ Your Money Briefing

Episode: Bitcoin: Bubble, Or No Bubble?
Date: December 17, 2018
Host: J.R. Whalen
Guest: Spencer Jakab, "Heard on the Street" columnist, The Wall Street Journal

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Main Theme

This episode explores whether Bitcoin’s massive price decline in 2018 marks the bursting of a speculative bubble, comparing it to historic financial manias and examining how investors can recognize and learn from bubbles. Insights are drawn from both history and expert analysis, notably referencing the criteria for bubbles developed by Harvard lecturer Vikram Mansharamani.

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Key Discussion Points & Insights

1. Context: Bitcoin’s Dramatic Decline

• Bitcoin experienced an 82% drop from its peak of $20,000 (Dec 2017) to about $3,300-$3,500 (Dec 2018).
• The episode questions whether this is a typical correction in a volatile asset or confirms speculation of a bubble.

2. What Defines an Investment Bubble?

• Spencer Jakab references Vikram Mansharamani’s framework from “Boombustology.”
  • Multiple specific criteria are required to call something a bubble.
  • Mansharamani did not, at first, believe Bitcoin qualified—even as its price soared—a view he put to the test by buying in 2017, then selling near the 2017 peak.
• Quote:

  “He did something very interesting... He said, 'no, I disagree. I don't think that this really meets the criteria.' ... He wound up buying then and then selling most of it near the top.”
  – (Spencer Jakab, 03:45)

3. Ubiquity as a Warning Sign

• One "unofficial" test: when everyone—including non-investors like cab drivers—starts asking about an asset, it's often a red flag for a bubble.
• Parallels drawn to the dot-com boom: when everyone wanted stock tips, caution was warranted.
• Quote:

  “When taxicab drivers are asking about it, you know, it's a bubble.”
  – (Spencer Jakab, 04:57)

• Quote:

  “People would ask you about it then... and then they'd start lecturing me because they're such geniuses for having made so much money. And the same thing with Bitcoin.”
  – (Spencer Jakab, 05:43)

4. The Dangers of Leverage and Hype

• The late stages of bubbles often see excessive risk-taking:
  • Examples: families selling everything for Bitcoin, people buying with credit cards, and investors facing big tax liabilities without real wealth.
• These are hallmark signs of a market top.
• Quote:

  “People using credit cards, people being, being wiped out, people being saddled with bigger tax liabilities than their remaining wealth in cryptocurrency...”
  – (Spencer Jakab, 07:08)

5. The Importance of Historical Perspective

• Investors must be cautious, remembering that history tends to repeat itself.
• Reference to Sir John Templeton: “The four most dangerous words in investing are ‘this time is different.’”
• Quote:

  “It's very easy to get carried away in a speculative mania and really think that this time is different...”
  – (Spencer Jakab, 07:53)

6. Bubbles and Long-Term Value

• The popping of a bubble does not mean the underlying technology is worthless.
  • Example: The internet bubble created failures, but also Amazon, which thrived after the burst.
  • Similarly, blockchain and Bitcoin may have lasting roles, even after speculative excesses.
• Quote:

  “The fact that something was caught up in a bubble ... doesn't mean that it has no value or that it doesn't have any value to society.”
  – (Spencer Jakab, 08:14)

7. Prudent Investing: Singles Over Home Runs

• No need to chase every new trend; steady, wise investing can yield solid gains.
• Skepticism about hype does not mean missing out on genuine innovations.
• Quote:

  “You can live a very long, fruitful life, make a lot of money in markets without jumping on the new new thing...”
  – (Spencer Jakab, 09:22)

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Notable Quotes & Moments

• On Bitcoin’s Bubble-Like Qualities:
  “This is now almost on par with the worst previous crash. But there have been lots of peaks and valleys in a very long term ascent for the values of these cryptocurrencies...”
  — Spencer Jakab, 02:43

• Bubble Detection in Popular Culture:
  “When Lambo is in the Urban dictionary, which is when will I be able to buy a Lamborghini with my cryptocurrency winnings.”
  — Spencer Jakab, 02:25

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Important Segment Timestamps

• [02:25] — Bitcoin’s peak and present prices, cultural mania signals
• [03:45] — Mansharamani’s “Boombustology” criteria and real-life investment actions
• [04:49] — The "taxicab driver test" for bubbles
• [05:43] — Parallels to dot-com bust, anecdotal investor stories
• [07:01] — Risks of leverage and “maximalist” speculation
• [07:53] — Sir John Templeton’s warning and the danger of ignoring history
• [08:14] — Bubbles don’t invalidate the core technology (Internet, Amazon, Blockchain, Bitcoin)
• [09:22] — Prudent, steady investing vs. fear of missing out

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Conclusion

This episode of WSJ Your Money Briefing provides a nuanced look at Bitcoin’s collapse and its bubble-like characteristics, offering listeners frameworks for understanding speculative manias both past and present. Drawing on academic expertise, Wall Street experience, and historic precedent, the conversation encourages investors to remain cautious, skeptical of hype, and mindful of history—while also allowing that true innovation can arise from even the wildest bubbles.

Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Bitcoin is down big this year, but does it represent a bubble? And if it does, what should we have learned from past investment bubbles? We'll discuss what the Wall Street Journal heard on the street columnist in a moment. First, these money and market stories you should know Private sector workers average hourly compensation, including both pay and benefits, rose 2.9% from a year earlier in the third quarter. The annual gain was a slight uptick from the prior quarter. Notably, the gain was led by a 3% increase in wages and salaries. With the first period since mid-2016 that base pay increased at a faster rate than benefits. Supplemental pay, which includes bonuses and overtime pay, rose 10.9% from a year earlier, though it was the smallest annual gain for the category in a year. And consumer spending during the holidays is fueling an already hot U.S. economy. But economists have a wary eye. In 2019, nearly half of economists who responded to a survey by the Wall Street Journal said that they viewed the U.S. dispute with Beijing as the number one risk for 2019, and some 20% cited financial market disruptions. About 12% pointed to a slowdown in business investment as a risk for next year. And when might the economy slide into recession? More than half of economists polled expected the next recession to start in 2020, and just over a quarter expected it to start in 2021. Just 10% of economists forecast a recession starting next year. Bubble? What bubble? By now, you've heard plenty about Bitcoin's epic 82% decline from its peak roughly one year ago. But is the cryptocurrency just in a funk and ready for a turnaround? Well, that depends on who you ask. Let's bring in Hurt on the street columnist Spencer Jacob to sort all this out for us. So, Spencer, at the bitcoin peak, there were plenty of people who didn't want to believe it was a speculative craze. And the question about whether you're going to buy a Lamborghini was actually part of our vernacular.

[Spencer Jacob]

Exactly. Yeah. Now it's called when Lambo is in the Urban dictionary, which is when will I be able to buy a Lamborghini with my cryptocurrency winnings.

[J.R. Whalen]

So it sat at $20,000. Bitcoin did December of 2017, and our last count was in the neighborhood of $3,500.

[Spencer Jacob]

Yeah, I think about 3,300 something this morning depends on which exchange you look at. But yeah, it's down very substantially from the peak. And the thing is that people who are real big believers in the wealth, I guess not even so much the blockchain, but the sort of the wealth that can be still gained from cryptocurrency always pointed out that while there were lots of crashes, it wasn't even the worst crash. I think this is now almost on par with the worst previous crash. But there have been lots of peaks and valleys in a very long term ascent for the values of these cryptocurrencies. And so why isn't this just like another one? You know, the road isn't kind of an upward sloping ascent forever.

[J.R. Whalen]

Well, in your story, you discuss the findings of a Harvard University lecturer who was making all these points and arguments why it was not a bubble waiting to happen, and then it did. But he had a whole list of arguments and a whole list of unchecked boxes to make the argument that in fact, okay, this could go on for a very, very long time.

[Spencer Jacob]

Yeah, the person I spoke with and I read his book some years ago. Apparently it's coming out in a new edition. I think it's a really good framework for understanding bubbles generally. Vikram Mancharamani and he, it's called boombustology. He has certain hard criteria for deciding if something is a bubble. And you know, you can scoff at an academic saying this is a bubble, this isn't a bubble. What does he know? Doesn't have skin in the game. He did something very interesting, which is back in March 2017 when it had just crossed $1,000. This is up from 20 cents back in 2010. He said, no, I disagree. I don't think that this really meets the criteria, even though it's up by a million percent or more and I'm going to buy some and see what happens. And he wound up buying then and then selling most of it near the top in December 2017, which is good for him. But it also shows some conviction in the criteria that he has. By then, I think only one of his criteria had not been met, which would be very difficult to meet for Bitcoin.

[J.R. Whalen]

Well, one of his tests you don't really need a big time academic degree for. He says that when taxicab drivers are asking about it, you know, it's a bubble.

[Spencer Jacob]

Yeah, just like with tech stocks, right? I mean, I recall many conversations, many questions I got from cab drivers and that's when I started to really get worried. Guys who. Not that a cab driver shouldn't be able to invest his or her money into something, but they're driving all day, they're not an expert in the markets. They work very hard for their money. Or just the apocryphal story of the shoeshine boy and Joe Kennedy.

[J.R. Whalen]

Well, I lived through that.

[Spencer Jacob]

1929.

[J.R. Whalen]

Well, sure, in the late 90s, you'd go to a party, you'd go to the dentist, you'd go in a cab, go to Thanksgiving. And people say, hey, do you know any good stocks? And they'd buy a stock based on what I thought about. And I said, well, by no means. And I was in my 20s at that point. By no means am I an expert here. And the speculation was so rampant.

[Spencer Jacob]

The thing that really scared me then in 1999 and also scared me in 2017, was people would ask you about it then. I was a stock analyst at the time. I'm a Wall Street Journal investor writer now. I mean, I have purportedly some expertise in this, and I'd be very cautious back in 1999, like some older person who maybe like a friend of the family who doesn't even know English very well and telling me about buying Lucent and saying, listen, I really wouldn't put so much of your savings into these stocks. As a matter of fact, I'd take some of the gains off the table and then they'd start lecturing me because they're such geniuses for having made so much money. And the same thing with. With Bitcoin. I wrote an investing book in 2016 about how people can become better investors. Over the course of 2017 and even earlier this year in the course of marketing it, inevitably, I'd get a couple of questions about Bitcoin and cryptocurrency from older people who. Not that older people can't grasp the technology behind it, but maybe their retirement savings had fallen short or whatever, and it's just absolutely not an appropriate investment for them because it's not backed by anything objective. And that's another criteria that Mancha Armani brings up is, like, when prices start going up without any link to objective reality. That's a real sign of a bubble.

[J.R. Whalen]

There was one alarming thing in your story, and that's the use of leverage in these speculative time periods. And some of the stuff is just so risky.

[Spencer Jacob]

Yeah, well, there's the story that we ran and others ran of the family that sold all of its possessions to, you know, Drove around in a rv, basically put everything into Bitcoin, People using credit cards, people being, being wiped out, people being saddled with bigger tax liabilities than their remaining wealth in cryptocurrency and so on and so forth. So, you know, if you really want to sort of, you know, get the most bang for the buck, then that's what you do. But that's really a sign of the top when a lot of people begin to do that.

[J.R. Whalen]

Well, it seems that whenever one of these crazes and one of these speculative periods comes around, it's another reminder of responsibility by the investor to be mindful of history. History can repeat itself.

[Spencer Jacob]

Yeah. I mean, Sir John Templeton, the great value investor said, and he was a real contrarian, he would buy very heavily during panics and things like that. He said the four most dangerous words in investing are this time is different. If we learn that it's very easy to get carried away in a speculative mania and really think that this time is different because you have some better understanding and you're at some unique moment in history. Having said that, the one thing I want to make sure I leave people with is that the fact that something was caught up in a bubble, I think this clearly now with the year of hindsight, that was a bubble that popped. It doesn't mean that it has no value or that it doesn't have any value to society. So blockchain technology, in which I'm not an expert at all, may be transformative. Bitcoin itself may be headed higher, just like the Internet is a real thing, just like Amazon.com There are many notable failures, but Amazon.com went on to be worth many times what it was at its bubble era peak. It was a darling stock then and is many, many, many times more valuable today. That doesn't mean that you'll make money by scattering your money and loony ICOs. But what it does mean is that you can't dismiss a technology because it's been like railroads or something like that because there was a speculative frenzy surrounding it. Railroads are still a thing, Right?

[J.R. Whalen]

Right, right. You may not hit home runs all the time, but hitting singles here and there with investments. Nothing wrong with that.

[Spencer Jacob]

Nothing wrong with that. It doesn't mean you have to invest in it at all. I mean, just the fact that something attracts a prodigious amount of money, it might turn out to be a real thing. You can live a very long, fruitful life, make a lot of money in markets without jumping on the new new thing just doesn't mean that it won't be a new thing, even if you're skeptical that the two are not mutually exclusive.

[J.R. Whalen]

All right. Well, check out Spencer's column on WSJ.com and the WSJ app that is heard on the Street. Columnist Spencer Jacob with us. Spencer, thanks for being in our studio.

[Spencer Jacob]

Thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York.

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