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.