Tuesday 10th October 2017
What kind of bubble is bitcoin?
Not all bubbles are built the same way. Not all bubbles behave the same way.
And not all bubbles turn out the same way….
Some end with a bang. Others deflate but turn into something else….
Each new speculation bubble that comes along has its own set of drivers, its own unique quirks and its own specific destiny….
- The first recorded speculation bubble….
In the 17th Century, the Dutch Republic was the world’s foremost economic power….
Tulip bulbs first appeared there in the late 16th Century. The tulip was different than any other flower in Europe at the time. There were multiple varieties and the intensely colorful petals bewitched people. Tulips became popular.
Ownership of tulips rapidly became a status symbol. Pretty soon, tulips were considered a luxury item. Such was the demand for tulips in the 1630s, that traders bid up contract prices to absurd levels.
At peak, some tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. Others for the price of a river-front house in Amsterdam.
In 1635, 40 bulbs sold for 100,000 florins (a ton of butter cost 100 florins). One investor offered 12 acres of land for a Semper Augustus bulb. One bulb – that you might pay pence for today!
- A buying frenzy turns into a selling panic….
It was a full-blown mania – in which consumer and investor actions were driven by an irrational and collective euphoria….
But the euphoria wore off. People, no longer prepared to pay the high prices, stopped buying tulips. Those who owned tulip bulbs began to sell.
That selling activity quickly became a panic as everybody sought to get rid of bulbs nobody wanted.
By February 1637 the price of tulip bulbs had dropped to near-zero. People lost fortunes….
Investors were left holding contracts to purchase tulips at prices well beyond open market prices….
Others were left in possession of bulbs worth a fraction of what they’d cost….
And tulip prices never recovered….
- The dot.com bubble….
More recently, we experienced the dot.com bubble of the late 1990s and early 2000s….
You’ll probably recall that the Internet took the world by storm during that period….
So much so, investors couldn’t invest enough money quickly enough in any business that had a dot.com in its name….
The consensus at the time was that the Internet was going to change the world….
So seductive was this new reality, that businesses were deemed to have enormous market value even in the absence of a rational business model or a single penny in revenue earned….
Many online businesses were entirely focused on attracting users – without any idea what to do with them or how to monetize them….
- High profile casualties….
Venture capitalists and initial public offerings produced so much capital for these fledging businesses that they didn’t need to worry about producing profit from the get-go. They were awash with cash….
But eventually the capital ran out. And with no real business behind the dot.com façade, many of these operations went bump – crashing the NASDAQ (the exchange on which many such stocks were listed)….
The pet food and supplies company was initially listed at $11 a share and rose to a high of $14. But the company lost $147 million in the first nine months of 2000 and shares swiftly fell below $1. The company folded in November 2000.
How about flooz.com?
Flooz sold an online voucher you could spend in participating online stores like Tower Records or Barnes & Noble bookshops.
Flooz raised $35 million from investors, spent $8 million on an advertisement drive featuring Whoopi Goldberg and then went bankrupt in August 2001 – less than two years after start-up….
How about webvan.com?
The grocery delivery service’s 1999 IPO raised $375 million. Shares traded at around $30. The company was valued at $1.2 billion.
But investors soon realized the company’s customer base and margins weren’t sufficient to support planned expansions. Stock quickly fell to 6 cents. The company went bust in July 2001….
Just three examples. There were many more.
- Obscurity and mass adoption….
As with the tulip mania, investors lost a lot of money in the dot.com bubble of the late 90s/early 00s….
But the Internet didn’t disappear….
The NASDAQ recovered to record new all-time highs….
Big Tech companies now tower above the rest of the market and have played a big part in stock indices recording an on-going sequence of all-time highs over the last decade….
The internet didn’t go the way of the tulip bulb – plummeting into obscurity, never to return to prominence….
The Internet provided its fair share of failure stories back in those early days – and will no doubt produce more….
But, in the intervening years, it has continued to develop to the point where it has achieved mass adoption and become an intrinsic part of private, public and commercial life….
- Real benefits – not just perceptions….
And that really is the fundamental difference between the speculation bubbles in tulip bulbs and dot.com businesses….
The former was driven by hype. It had nothing more solid than perceptions to sustain prices and momentum across the long-term….
The Internet, on the other hand, was a real technology with concrete benefits to offer businesses and customers.
It connected buyers, sellers, producers, consumers, service providers and users in ways that had not been possible previously.
The technology was adopted on a mass scale. And it became home to operations like Amazon, Facebook, PayPal & countless others
The technology offered unmatched potential for growth to these real businesses, with real values, meeting real needs and providing real services to real customers….
- Where does bitcoin sit?
Bitcoin is in a speculation bubble. It has been a year of unprecedented growth. There have been blips and corrections along the way. But the general direction of travel is sharply up.
This time last year, bitcoin was trading at $617.42. On Monday morning a bitcoin unit was trading at $4,605.10. That’s an increase of almost 750% in 12-months.
Is bitcoin going to go the way of the tulip bulb – a big boom followed by a greater bust?
Or is bitcoin more likely to follow a similar trajectory to the dot.com scenario outlined above – short-term ups and downs but a long-term upward trend as the technology moves towards mass adoption?
Bitcoin is certainly no tulip bulb. It is the world’s first decentralized and truly global currency – and one that operates outside of any government control.
And bitcoin represents a payment system that has the potential to change the way business is conducted over the Internet….
Bitcoin might very well be over-priced at this stage of its development. It has not yet been widely adopted. But that time could come.
In between times, we will see ups and downs. Maybe a full-blown deflation of the bitcoin price. But long-term, bitcoin looks more like the Internet than a tulip bulb.
There’s more to bitcoin than hype and euphoria. It’s more than just a passing fad. Bitcoin is real. It as something real and of value to offer. Where future values go will hinge on how widely it is adopted….
We will watch all this play out with interest….
Meantime, there is still money to be made on the way up. On Friday, I’ll have more for you on that.
That’s how it looks from here….
All the best,