why i would bet against bitcoin

I am not one of those economists who has been looking down his nose at Bitcoin from the start. As I argued back in 2013, I think the condescension that some economists bring to the topic of Bitcoin is an instinctive dismissal of anything with a whiff of anti-central banking. I have believed my friend Tim Lee when he argued Bitcoin is something worth thinking about for economists. Yet the Bitcoin bubble is now screaming too loudly to ignore. And it has revealed flaws about the cryptocurrency that I think will keep it from being more widely embraced as a currency and unit of exchange.

What is a bubble, how do you know when there is a bubble, and when will a bubble pop? These are all very, very hard questions for economists. But a good sign that there is a bubble is when a large share of market participants are buying based on untenable assumptions. So what are the assumptions that bitcoin market participants have? Many, I believe, are buying because they think prices are going to continue to skyrocket, making this a "good investment". I did a twitter poll of Bitcoin buyers, and 72% of of the 79 respondents are purchasing because they want to profit from rising prices.Let's dig into this assumption a bit. Why might Bitcoin continue to rise in price? It can't be because people simply view it as a good investment because it rises in price. This is a ponzi scheme, and the number of people who think Bitcoin is a good investment simply because prices are rising is limited. I don't know how much longer that can go on for, but it must end eventually. And once prices stop rising rapidly, all the buyers who were purchasing based on the assumption of rapidly rising prices will no longer have a use for it and will exit the market.

Another reason prices might continue to rise is that Bitcoin will be useful as a medium of exchange for a growing number of people. However, it's important to recognize that these two assumptions run contrary to each other. Rapidly rising prices are not a desirable feature of a currency. And yet I think some market participants hold these contradictory assumptions in there head: I'm going to make a ton of money off of Bitcoin because prices will continue to grow exponentially AND Bitcoin will expand as a currency.Anecdotally, I think a non-trivial share of market participants actually believe Bitcoin will replace the dollar and the Fed. But if Bitcoin's prices are growing exponentially under the minor demand boom we are seeing, what would they do if everyone tried to use it instead of dollars? Let's take a look at some numbers.

The monetary base, which includes cash held in vaults and at the Federal Reserve, is $3.9 trillion. If you look M2, which is a wider definition of money that includes checkable deposits and savings accounts then this goes up to $13.8 trillion.So if everyone decided to behave collectively delusionally and replace dollars with Bitcoins, this would mean Bitcoin needs to rise to $13.8 trillion in market cap up from around $300 billion. So prices would have to grow to 4,600% from current levels. So a single Bitcoin would have to cost $871,056 instead of the $18,936 it is worth as of writing this. To get to these levels would completely undermine it's usefulness as s currency.