Bitcoin Bubble Bubble

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Toil and Trouble Tantrum

No one alive, outside of the Canadian Senate, lived through The Tulip Mania bubble of the 1600s. These bulbs were newly introduced into Europe and commanded exorbitant prices. As more people bought into the scheme, the higher the price. A rare type of tulip went for 1000 guilders in the 1620s and for 10000 guilders just before the bubble burst in 1627. This was enough to purchase one of the grandest homes along the most fashionable canal in Amsterdam and 10 times as much as the annual salary of a skilled craftsman.

A typical bubble runs counter to normal economics. Whenever the price of an object goes up, traditional theory suggests that the demand should go down. But with a bubble, the price only continues to go up with demand. The asset price deviates from the intrinsic value. The main criteria feeding this price increase is the feeling that the price will only continue to go up. Even back in the 1600s, FOMO, the fear of missing out, reigned supreme.

Closer to the last few decades, you don’t have to look farther than the dotcom era or the financial crisis to see examples of what was referred  to as irrational exuberance. This term was coined by Edward Greenspan in a 1996 speech and later used by Robert Shiller as a title for his book. The 2005 edition warned of the housing bubble burst.

This brings us to the latest potential bubble. Bitcoin. Unlike houses which can produce rents, stocks that can produce dividends and bonds that can calf off coupons, this cryptocurrency does not have any intrinsic value since it does not claim to the assets of any company or government and does not generate income.. And unlike bitcoin, you could actually handle a tulip bulb and grow a flower. If you didn’t mind expending all the value of your investment in the hopes of growing more bulbs after several years.

Bitcoin’s value appears to be in situations where people think, or hope, it will increase in value. And as we all recall, from Rudy Giuliani, hope is not a strategy. For our purposes, hope is not a sound financial strategy.

More people share the notion that Bitcoin is a fraudulent bubble. And others, who likely have a major stake in the game, say that that a million dollar bitcoin is not out of the question. There are only a limited number of bitcoins that can be mined, so its rarity will drive value. Apparently New York taxi cabs used to be worth a million, but with the advent of Uber, the value has dropped down to something over $300,000. So there are other cryptocurrencies that can come on stream as there is no real impassable economic moat preventing other currencies coming on stream at some point.

Bubbles have been likened to a type of virus. People get infected and the virus can then spread at an exponential rate, until everyone develops an immunity. That immunity is when there is no one else to sell to and the price drops. Sometimes radically.

So we have seen the value of bitcoin rise up 2000 per cent in the past 12 months to $25,000 CDN and drop down to close to $8000 and recover to almost $12,000. Apparently bitcoin ticks all of the boxes for a bubble including a fivefold surge in trading volumes over the last five years, lack of financial regulation and the launch of related financial instruments such as futures.

You can see the five stage of the bubble when you look at any bitcoin chart; displacement, boom, euphoria (the greater fool theory), profit taking and a bit of panic. History does show the occasional bull trap. This is where prices start to slightly increase and people buying the dip, or those experiencing FOMO begin to pile back in. With declining volumes as the price increases, it seems a lot of people are now operating under the ‘fool me once, shame on you. Fool me twice, well I’m just an idiot’ principle. Or something like that.

If you have made your money on the way up, good on you. Personally, I don’t think this will end well for those coming in late.
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Daily Prompt: Tantrum

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<a href=”https://dailypost.wordpress.com/prompts/bubble/”>Bubble</a&gt;

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