Without short selling, the current price of a speculative asset is the expected maximum valuation that will ever be given it by the non-forward looking: Noah Smith: Lessons on bubbles from Bitcoin

Without short selling, the current price of a speculative asset is the expected maximum valuation that will ever be given it by the non-forward looking. When the valuations by the non-forward looking become extrapolative, Katie bar the door!: Noah Smith: Lessons on Bubbles From Bitcoin: “Until there is a way to bet against an asset, its price will be set by the most upbeat buyer…

…The recent Bitcoin bubble wasn’t the first, and it might not be the last. Once in 2011 and twice in 2013, the price soared and then crashed… If you think there will be another, even bigger bubble somewhere down the line, then maybe any losses you took in the recent bubble may be made whole in time…. Basic finance theory says that if there’s no way to invest and profit from an asset’s decline, the price is determined by the most optimistic buyer…. This mechanism is a key part of almost every theory of financial bubbles…. Harrison and… Kreps… without short-selling, differing levels of optimism and pessimism would cause even r…Abreu and… Brunnermeier… Scheinkman and… Xiong…. Shleifer and… Vishny proposed to make this sort of constraint, which they grouped under the general heading of “limits to arbitrage,” a unifying theory of financial market failures…. Limits to arbitrage can help explain why Bitcoin has been so bubble-prone. Until recently, it was easy enough to take a long position, but expensive and risky to bet against the cryptocurrency. Things really changed in December, when U.S. regulators allowed the trading of Bitcoin futures…. Bitcoin’s price crashed….

Was this a coincidence? Maybe. The huge surge in demand for Bitcoin both inflated the bubble and caused a demand for a futures market. But the timing of the crash, right after the introduction of futures markets, is eerie…. This suggests that there’s a good and easy way for regulators to reduce the incidence of bubbles…. Allow more futures trading and other exchanges that let pessimists publicly register their pessimistic beliefs…. Keeping pessimists out of the market is a recipe for repeated bubbles and crashes, as overoptimistic speculators rampage unchecked. Given a level playing field, the bears can restrain the bulls.