Yanhao "Max" Wei: Bubbles Are Good for Bitcoin

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Over the last few weeks, the price of bitcoin has hit a record high of more than $41,000, blowing past the 2017 bubble high point of $19,783. The price has since declined relatively rapidly, and questions have arisen about what’s next for this latest bubble. This presents an opportune moment to analyze why these bubbles form and what they mean for the future of bitcoin.

Price volatility causes market uncertainty and is often viewed as detrimental. However, for bitcoin, the price volatility – such as this recent bubble and past ones of varying sizes in 2017 and 2019 – can be ultimately beneficial for the future of cryptocurrencies, because it promotes wider adoption of this up and coming technology.

Yanhao "Max" Wei is an assistant professor of marketing at USC Marshall School of Business.

In some sense, bubbles, which we are defining as a price surge that experiences a decline afterward and then stabilizes at a lower level, essentially becomes free advertising for bitcoin. Headlines splash across major mainstream media outlets about the rising price. Social media buzz begins to build. Soon, people start wondering about bitcoin and whether they should get in on the action.

This phenomenon was borne out in research I conducted with my USC Marshall colleague Anthony Dukes, blending standard models of product diffusion with macro-financial economics to identify a new view of currency speculation.
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