In a mid-September interview with CNBC, JP Morgan Chairman and CEO Jamie Dimon referred to bitcoin as a fraud and said it was in a bubble. Dimon compared it to the Tulip Mania of the mid-16th century. The news here isn’t that Jamie Dimon thinks bitcoin is a fraud or in a bubble, it is that Dimon, head of the largest investment bank in the world, was on CNBC talking about bitcoin. 

The 2017 explosive rally in bitcoin is most likely a bubble—few markets grow by a factor of 5x in nine months without having a serious correction (see “A nice run,” below). But many people not knowledgeable about investing misunderstand the word “bubble.” Some people hear the word bubble and think fad, but a bubble simply means a euphoric rise in an asset. 

A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.  There is no question that the value of  bitcoin at some point will go down—most likely dramatically, given its sudden rise (it already has started)—but what we are seeing in the fall of 2017 is greater attention paid to an asset class, cryptocurrencies, that has grown from a novelty to front page news. 

As we noted in the open, the head of the largest investment bank in the world felt the need to address the rise in bitcoin. And it is not just JP Morgan. In late August, the People’s Republic of China announced a ban on initial coin offerings (ICOs). The Chinese ban on ICOs caused a dip in bitcoin and a caution for short-term players who may have jumped in at the wrong time. 

So the question isn’t whether bitcoin is in a bubble, it is more about Dimon’s analogy to the Tulip Mania. Many institutional investors are not willing to take that chance and are dipping their toe in the cryptocurrency world.