Bubblemongers don’t get a second chance

Tyler Cowen recently made this statement:


I used to think Bitcoin was a bubble, but I no longer hold this view.


Yes, but at the risk of being a pedant I wish he had said the following:


I used to think Bitcoin was a bubble, but we now know that this is not the case.


There is literally nothing that could happen between now and the end of time that would in any sense confirm the view that bitcoin is a bubble.  It isn’t.


But let’s say I’m wrong.  What would that imply about bubble claims?  If we gave bubblemongers a second chance, then they could do the following:


1.  Predict that Bitcoin was a bubble when the price was $10.


2.  After they were shown to be wrong they could make a new prediction that bitcoin is a bubble, this time when the price hits $100.


3.  After that prediction was shown to be wrong, make a new bubble prediction when the price hits $1000


4.  After that prediction was shown to be wrong, make a new bubble prediction when the price hits $10,000.


I hope you see the problem here.  In any 100% efficient, bubble-free market, where prices are highly volatile, eventually there will come a time when predictions that prices are too high will come true.  But that’s virtually a tautology, a market cannot be both highly volatile and efficient, unless there are occasional steep plunges in the price.  There will be some price which, in retrospect, will have been the peak price—even in an efficient market.  I don’t understand why so many people have difficulty grasping this point.


So what would tend to confirm bubble theories?  I can think of lots of evidence.  For instance, a meta-study of mutual funds that shows the superiority of funds taking advantage of bubble theories did better than funds that assumed the EMH is true (i.e. contrarian funds vs. index funds).


But again, we know for certain that bitcoin bubble theories are useless.  It’s far to late for any new information to change that fact.


Perhaps part of the problem is that people don’t spend enough time reading Richard Rorty.  They think that truth is some sort of objective reality out in the world, which we can grasp.  Perhaps (they think) the bubble theory can still be shown to be true, but for a price of $10,000, not $10.  Sorry, things don’t work that way.  In fact, there is no objective reality.  True ideas are simply useful ideas.  Since bitcoin bubble theories have already been shown to be useless, and would continue to be useless even if prices plunged by 99% tomorrow, bitcoin bubble theories can never become true.  They are already falsified for all time.  There are no second chances–so if you are going to call a bubble, don’t do so at a time when the asset price is about to rise far higher.


Here’s an analogy.  If you claim that a certain coin is unfair, biased towards heads, you don’t get to keep flipping it until you happen to get 20 heads in a row.  You get 20 coin flips.  And those first 20 flips are your test.  Sorry bubblemongers; you lost.

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