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  • The Yale professor and Nobel laureate Robert Shiller says the true-or-false narratives that are spread about assets are the underlying drivers of bubbles.
  • In an exclusive interview with Business Insider, Shiller explained the lessons for the future that could be derived from bitcoin's boom in 2017 and its subsequent crash.
  • Click here for more BI Prime stories.

The most powerful force that propels an asset's price higher is the accurate or inaccurate narrative that droves of investors buy into.

Before the housing crisis, it was the idea that home prices never fall. Leading up to the dot-com bubble, people argued that internet companies had created such new, transformative paradigms that old models for predicting business cycles were obsolete.

The man who saw both busts coming and wrote "Irrational Exuberance," arguably the textbook on both crises, is the Yale University professor Robert Shiller. Besides his forecasting prowess, he invented several methodologies to track asset valuations — the most popular being the S&P 500 Shiller CAPE Ratio — and won the 2013 Nobel Memorial Prize in Economic Sciences for his work in this area.

And so when Shiller talks about market bubbles, investors listen.

In a recent interview with Business Insider, Shiller pinpointed long-term Treasurys as the marketplace he's watching for irrational behavior today.

Read more: Nobel laureate Robert Shiller forewarned investors about the dot-com and housing bubbles. Now he tells us which irrational market behaviors have him most worried.

He also applied his learnings on past market exuberance to provide a cautionary tale on another asset that recently soared into bubble territory: bitcoin.

"For bitcoin's advocates, labeling bitcoin as a speculative bubble is the ultimate insult," Shiller wrote in his new book "Narrative Economics."

Putting their feelings aside, he told Business Insider the lessons that investors could learn from 2017, when bitcoin's price increased more than twentyfold before crashing. All the quotes below are attributable to him and the emphasis is added:

  • "Really thinking about how narratives drive prices will encourage someone to be diversified. Don't put everything into one glamorous investment."
  • "There's some smart people who believe in [bitcoin]. But if you look at the nature of their evidence, it looks to me that the intense excitement is vulnerable, and it's kind of fad-ish."
  • "Satoshi Nakamoto is a smart guy if he ever existed. Whoever wrote the paper is smart. But it doesn't mean that it holds water completely. It depends on valuation of bitcoin, and the problem with bitcoin is that anybody can start a cryptocurrency, and they can claim a superior cryptocurrency. So who thinks any given one of them maintains value?"
  • "The value of bitcoin is related to a narrative that it was the first — first-mover advantage — and something about the genius of Satoshi Nakamoto. But now there's thousands of cryptocurrencies. It just doesn't seem like it's a safe hunting ground for investing anymore."
  • "Since the interest was so dispersed, that helped propel the price up. It's starting to look like a has-been. Now we have the new Libra, for example. There's a lot of powerful backers. Where is bitcoin going to go in that mix?" 
  • "One has to be careful investing. You're playing a game against some people who are pretty smart. So don't expect outsized returns automatically. And generally, I think, you want to lean against bubbles. If something doesn't sound right — if it's being pushed by a crazy narrative — don't go there."
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