How hard is it to burst a bubble?

 Many people and even financial institutions believe there is a bubble in Bitcoin and other cybercurrencies, but why aren't they taking any action? Of course, some may have already taken actions; however, there is any known significant large short position created by any financial institutions. It is hard to short Bitcoin or burst the bubble because of several reasons.

Firstly, if you want to short something, you need to find someone who is willing to long it, then a contract can be made. However, no financial institution would like to offer investors to place short positions on Bitcoin, so no one can find an institution that allows them to massively short Bitcoin. Secondly, Bitcoin is not very liquid, it is very hard to convert Bitcoin into fiat money, this restricts either one time long position size or one time short position size. Thirdly, the transaction cost for Bitcoin is very high, the high transaction cost (including time consuming) makes any investment in Bitcoin less attractive. Fourthly, to burst a bubble requires some degree of market power or coordination. However, to create coordination may lead to information leak. If the market receives the information of potential coordination to burst the bubble, the market will react ahead before the short side traders coordinate and take actual actions.

Because of these reasons, shorting Bitcoin is not many people's choice.

Perfect substitutes rise in values together?

Bitcoin and other types of cybercurrencies are almost homogenous products for the same use. Microeconomics tells us that when a good increases in its demand, its substitutes will fall in prices. However, if we agree that all cybercurrencies are substitutes for each other, then their price changes should in opposite direction with one or another. There is one explanation for substitutes' prices move in the same direction, that is the values of substitutes have not been fully captured by the market. When all products still cannot satisfy the entire market demand, the prices for all will increase.

Therefore, if it is reasonable for all cybercurrencies increase in prices depends on if the total value of cybercurrencies capture its market. Yesterday I argued that the value of Bitcoin is approximately 11000 USD per Bitcoin. However, my calculation misses other cybercurrencies. If all cybercurrencies are included, Bitcoin should be valued as much. The total market for cybercurrencies would be shared between cybercurrencies. Of course, the cybercurrencies could choose to compete with each other; however, such competition is a very brutal one that only one winner will survive since all are homogenous products.

Based on my valuation of Bitcoin, the overall market for cybercurrencies have already been captured by today's value of cybercurrencies; therefore, a general increase in cybercurrencies' prices is a noise trading phenomenon.

How much does Bitcoin actually value?

 There are many debates about whether Bitcoin is currently overpriced or underpriced. I would like to propose a way to measure the value of Bitcoin. In the future, I expect that we will no longer need cash. No cash market would be very welcomed by governments and regulators since it is easy for them to monitor market activities. No cash market is not something that is difficult to achieve, all it needs is a common agreement that the society commonly agrees the numbers shown on our bank accounts have values, it is similar as we commonly agree the numbers on banknotes have values. However, once cash disappears, there is one group that may have to find an alternative to cash, this group is criminal groups and organizations. For them, the alternative is Bitcoin, it is even more untraceable than cash, helps them escape from governments' and regulators' monitoring. There is another group that may require Bitcoin as their medium of exchange, which is the population in the unrested countries. In these unrested countries, the governments lose their credibility, their issued banknotes do not have credit backup; when people do not trust their centralized fiat money, they turn to Bitcoin, this decentralized cybercurrency.

Since the criminal group and the populations in unrested countries need Bitcoin as their medium of exchange, when we sum up their market size in terms of USD and divided it by the total number of Bitcoin, we can get how much one Bitcoin values in terms of USD. There is a report suggesting criminal markets are now worth approximately 2 trillion USD a year, according to the UN Office on Drugs and Crime, and the GDPs in Venezuela and Zimbabwe where the local people are reported to use Bitcoin as their median of exchange are 215.307 billion and 17.105 billion USD, and the theoretical total number of Bitcoin is 21 million, so the value of one Bitcoin is approximately 11076 dollars.

If you believe the criminal markets are larger than what is mentioned in this article or you believe the number of countries where people use Bitcoin is larger, then the value of Bitcoin could be higher than 11076 dollars; vice versa.

What happens when a bubble is forming?

 Bubble is basically a miscalculation or misestimation about the market fundamental value; however, since it is very difficult to value the market fundament, it is almost impossible to be 100% certain about the existence of bubbles in the market before they actually burst. Now the bitcoin price is still incredibly high, but there is no agreement on whether there is a bubble in the bitcoin market or not.

Since no one is certain about the existence of bubbles in the market, when the market price is rising, people tend to follow such lead, not only noise traders will do so, but sophisticated traders will also do the same, because of the momentum of the market, the best strategy is to ride the "bubble ". Moreover, because of greater fool theory, once people explore there is a possibility for a price to decrease, they quickly apply greater fool theory and rush to buy in the asset and sell off at a higher price, and others will do the similar things at different levels until the point when the bubble bursts. The initial driver might be a sensible fundamental improvement, but once people are making money from buying at low and selling at high, the momentum is built and the price rises and deviates from tis fundamental value, then the bubble is created.

Therefore, when one stock is increasing in its price and draws too much attention of the market, people will rush into the market and earn profits via greater fool theory without paying too much attention to the market, a bubble will be built.

Emotional traders

There are many attitudes towards. People may vary their behaviours towards risk according to probabilities of states, potential losses and gains, (relevant and irrelevant) experiences, and information. Irrational behaviours are those decisions made based on irrelevant experiences and under poorly informed condition. However, at most of the time, people are always under such condition, because of countless existing constraints. Therefore, no one is a pure sophisticated investor (trader) in the market, and no one is a pure noise trader either; everyone is in-between noise trader and sophisticated trader.

Noise trader is not necessarily an emotional trader, as noise traders can just process their activities based on their incoming information without any analysis. However, emotional traders must be noise traders. Their activities are affected by their emotions, and their emotions could be affected by their trading performances and or any other things (such as their relationships with other people). Such emotional traders are almost unpredictable. But luckily these are usually retail investors that are unlikely to have the power to affect the entire market. However, black swan theory tells nothing is impossible, such unexpected noise might just create significant impacts on the market.

Is Median Voter Theorem useful in the real world election?

Majority rule is used in making group decisions that the option will be chosen if it gets the most votes among all options. Median Voter Theorem suggests that if all voters have single-peaked preferences over a given ordering of policy alternatives in a single dimension, then a Condorcet winner always exists and it is the ideal point of the median voter. However, this theorem has multiple assumptions that are not necessarily realistic. The theorem suggests that political parties will move towards the median of voters’ political positions. In modern politics, usually, political parties behave like what the theorem suggests that they are trying to capture the interests of the ordinary people (the median group). However, there are anomalies in recent years. The US presidential election probably is the most obvious one. Hillary Clinton was definitely a classical politician that aimed to capture the interests of the median groups, like what the theorem suggests; however, on the other hand, Donald Trump was and still is not such classical politician, his supporters are often considered to be the extremist groups and he did not win the majority of the voters either. His success was of course contributed by the US electoral system but also was contributed by his unusual campaign strategy as well ( which I think was more crucial).

Voters’ interests are multi-dimensional and they are aiming to put weights on their different interests and choose their favoured politicians based on their sums of weighted interests. However, since people are emotional, their weights on different interests can vary when their tempers change. The two politicians have many policies and goals; due to different priorities, policies can vary. Trump was successful of making people put more weights on his priorities rather than Clinton’s priorities by very aggressive speeches and rallies. When people put more weights on Trump’s priorities, their sums of weighted interests shifted in favour of Trump and more of them tended to vote for Trump. This was I think a very important reason for Trump to get enough votes to become the US president. Also, this is a common strategy for some radical political parties to gain so much attention, as they are trying to make people get more emotional and agree on their political priorities.

To conclude, to win an election is not necessary to get close to the median (as suggested by Median Voter Theorem), it is possible to make voters emotional and more likely to put more weights on your political goals rather than your competitors’.

Could similar platforms compete with each other?

 There are many platforms, especially in the digital world. In the digital world, similar platforms provide almost homogenous products. For example, GooglePlay and App Store are two smartphone application stores providing people with smartphone applications, and the smartphone applications are almost identical, the majority of the applications you can find on App Store are also available on GooglePlay. Because the numbers of similar platforms are relatively small, it is really easy for these platforms to collude with each other.

The power between customers and platforms is imbalanced, since customers cannot find anywhere to get what they want without these platforms. Of course, this would make some people think about entering the market; but newly established platforms are not able to compete with the existing players in the sector because they have different amounts of resources. However, the power between platforms and actual product suppliers is not as imbalanced as the power between customers and platforms. Without the support of suppliers, platforms themselves cannot survive. The problem of the suppliers' side is there are so many suppliers that it is almost impossible to let them agree on the same issue.

However, there is one occasion that platforms may start to compete. When the suppliers are unable to supply products to all platforms due to technological limitations and (or) other types of limitations. The platforms attract their users by providing the products they want; however, if the suppliers are unable to supply to all platforms, the platforms have to attract good quality suppliers, this will lead to competitions between platforms.