Scott Sumner: When bitcoin crashes . . .

Scott Sumner captioned his somewhat technical “no bubble” argument “When bitcoin crashes . . .”

. . . .I predict people will say it was a bubble, even though it wasn’t. The term ‘bubble’ can mean many things, but the sine qua non of definitions includes “rejection of the EMH.” But the EMH says that bitcoin is very likely to crash. Why is this so, and why don’t people know this?

1. We know that market volatility is serially correlated. Markets that have been highly volatile are likely to remain highly volatile.

2. Bitcoin prices are super volatile.

3. The EMH predicts that expected returns are near zero. Combined with high volatility, this mean the EMH predicts that bitcoin will exhibit large price increases and large price decreases at various times in the future.


1 thought on “Scott Sumner: When bitcoin crashes . . .

  1. That argument makes no sense. The whole point of EMH is that extreme volatility doesn’t happen unless there is corresponding changes in information. Markets that exponentially rise and then spectacularly crash cannot be called efficient.

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