www.pitt.edu/~caginalpThe spectacular rise of Bitcoin's price has attracted the attention of many, including government regulators and speculators, in addition to those who wish to use a virtual currency, often with little trace or record [1]. On October 13, 2017, Bitcoin's market capitalization (number of Bitcoins multiplied by the trading price) surpassed both Goldman Sachs and Morgan Stanley as it catapulted past $96 billion, an increase of nine-fold over the previous year (see Figure 1). Governments have floundered as they scramble to control cryptocurrencies [2,3,4].Many currencies and speculative instruments have evolved in modern times. However, we believe that the basic requirements for currencies and speculative assets are mutually exclusive. The former requires stability, namely, that tomorrow's purchasing power of the given currency should be nearly identical to today's. Prolonged stability, however, usually terminates the speculative interest in an asset. Thus far, Bitcoin, Ethereum, and some other cryptocurrencies seem to satisfy the conditions for speculation But, in our opinion, stability will not easily materialize.We argue that an asset which has no value by traditional measures will tend to trade at a price that is determined largely by the fraction, 𝐿𝐿, of the amount of dollars available for the asset divided by the total number of units of the asset. This conclusion is deduced from mathematical modeling and economics experiments that we discuss below. Both strongly suggest that stability will be lacking, so the cryptocurrencies may simply be a mechanism for a transfer of wealth from the late-comers to the early entrants and nimble traders.
Valuation and Bubbles.From an academic perspective, there is a growing sense that this is a new bubble, much like those before: the housing bubble of 2008, the Internet bubble of 1999, the South Sea bubble of 1720, and the Dutch tulip bulbs bubble of 1637 [6,7]. As in the Internet bubble, the advent of a new technology is attractive to a large number of people who are blinded to the possible pitfalls of the investment.
