Black Swans & Bitcoin Bubbles

Before the European discovery of Australia, it was thought that black swans did not exist. This is what empirical evidence suggested.

That is, no-one had seen a black swan, therefore black swans did not exist.

The logic was sound enough.

However, it illustrates a severe limitation to our learning from observations and the fragility of our knowledge.

Black Swans

Ex-Wall-Streeter turned professional author Nicholas Taleb introduced the phrase ‘Black Swan’ in 2008 to make sense of the Global Financial Crisis.

Black Swan moments are essentially extreme outlier events that have enormous and unforeseen consequences.

They have three criteria;

  1. The event is a surprise.
  2. The event has a major effect.
  3. After the first recorded instance of the event, it is rationalised by hindsight, as if it could have been expected.

A financial bubble is a Black Swan moment.

In fact, other than moments of war or leading to them, such as Franz Ferdinand’s assassination, most recorded Black Swan moments have been financial.

Taleb contends that banks and trading firms are very vulnerable to Black Swan events. He argues that defective financial models driven by hindsight expose them to unpredictable losses.

The Wall Street crash of 1929, the Dot-Com collapse of the early 2000s, and of course the GFC of 2007 are all examples of financial bubbles popping.

Black Swan moments.

Does This Mean That Bitcoin is a Bubble?

No, that’s hindsight driven logic.

There’s no question that the bitcoin value is uncertain. And that results in volatility.

But even that is too simplistic.

All of the previous financial ‘correction’ moments mentioned in this article have been falsely inflated because of market lies.

The price of bitcoin however has not been inflated because of a rabid increase in credit to fund stocks, or packages of sub-prime mortgages, or an inflated idea about the potential of a new technology.

It is increasing because it is a life-changing financial invention.

It is increasing because more people are adopting it. The ‘network effect’ is in full swing.

The more people that continue to get involved with bitcoin, the higher the price will climb. And because of its finite nature, if the demand rises, the price has to rise. Basic economics.

The Visibility of Bubbles

Let’s go back to Taleb’s first rule of a Black Swan for a moment. The event must come as a surprise.

Bitcoin has been called a bubble by basically every institution in the world.

Most notably by JP Morgan boss Jamie Dimon who said ‘Bitcoin is a fraud that will blow up.”

There was a notable absence of such warnings during every other bubble in history.

Consider this quote from the Federal Reserve on 10 January 2008; ‘The Federal Reserve is not currently forecasting a recession.

The very nature of a bubble means that no-one can see it.

If bitcoin were a bubble, it would be the largest one humankind has ever witnessed.

Unless you are one of those who consider the 6,000-year old relevancy of gold a bubble, of course.

The Forming of Bubbles

Speculative bubbles can happen over lifetimes.

The Australian property market has been tipped as in a bubble for decades. And it might well be.

However that does not change the fact that the market might run for another two decades — or it might crash tomorrow.

Your stance depends on the outcomes you want to influence.

The banks want to crush bitcoin before it crushes them, so of course in their mind it is a bubble.

However if it is indeed the start of a new economic system based on technology and decentralised cryptography rather than central banks, then this is just the start. The bubble might pop at $1m per bitcoin, or even $10 million.

It all depends on where you see the ceiling.

Markets naturally correct themselves when they are overbought. This is the nature of free markets.

However when a commodity or idea collapses completely, it is because of a market misconception — not because it was overbought.

Until I can see evidence that any part of the bitcoin economy is anything but superior to the traditional market, then I can’t see a market misconception.

At this point George Soros’s theory on reflexivity is ringing in my ears (my emphasis added);

Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced.

Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.

We have been observing economic bubbles for 400 years and — without hindsight — one objective fact remains.

You can’t predict a bubble.

Sometimes you just have to see a swan off the coast of Perth to realise the frailty of our knowledge.


Dion Dalton-Bridges,

Junior Analyst, Money Morning 

PS: Want to find out more about the secret world of bitcoin? Click here.

Dion Dalton-Bridges is a junior analyst at Money Morning.

He has an academic grounding in business, having completed his bachelor at the Copenhagen Business School and Queensland University of Technology.

His primary focus is in digital assets including cryptocurrencies, as well as small market cap opportunities within the ASX.

Money Morning Australia