Research in finance over the past few decades has taught us that financial bubbles are not easy to spot, at least until they crash. The fact that we don’t have the “success” bubble suggests that the definition of the bubble is obsolete, excluding the noble assets that actually created it.
Teslas (and Squares, Apples and Nvidias) all have parabolic gains with valuations that cannot be reasonably justified by traditional investment tools. Gold is said to have been a bubble for 6,000 years, making a huge mockery of the word’s meaning. At some point, the new “bubble” project will turn into something else: valuable assets.
So where is Bitcoin in that definition?
BTC is regularly stoned from skeptics. They have hundreds of times asserted that Bitcoin is about to be destroyed. In standard logic, what goes up must go down – especially if we can’t see a clear reason why it goes up. Critics are quick to refer to the 1720 South Sea Bubble or the 1637 tulip, but is it unclear if they have a full understanding of their financial past to compare it with today?
It’s easy to see why comparing Bitcoin to the rapid rise of the South Sea Company in the spring and summer of 1720 is so compelling. Below is a chart tracking the price of Bitcoin and shares of the SSC:
Bitcoin’s closing price on July 25, 2020 was indexed with the SSC price of £ 116.88 on November 6, 1719 so that the daily changes in Bitcoin price could be compared with historical movements in SSC shares.
While bubbles of the past only exploded to then collapse and never return to their former glory, Bitcoin is known for its “two steps forward, one step back.” If charting a boom over the last 7 months from about $ 10,000 to more than $ 50,000 compared with the relevant time period for South Sea Company shares in 1719-1720, we can spot these What skeptics see Bitcoin: an unsustainable bubble waiting to fall.
But don’t be too hasty. Bitcoin of the year 2021 is not being held back by political elites and makes government debt manageable. If anything, Bitcoin is fighting the elite trying to fight it and denounce it step by step. While exchanges were hacked and many privacy details leaked, Bitcoin’s insiders did not unjustifiably bribe half of the House with assets sold at below market prices and don’t reassure government officials by handing them fictitious BTC in exchange for favorable legislation. All of this happened during the South Sea mania.
Political insiders have not passed the “Bubble Act” to prohibit the enactment of other competition plans to boost market demand to their preferred property. Bitcoin spot trading has not been paused for 2 months at the height of the price boom to handle dividends arbitrarily arranged by SSC directors to match the underlying value.
New Bitcoin can be mined and ready for sale on open, relatively transparent markets. In the case of SSC, the company has issued new shares in batches with increasing subscription prices and ‘flying’ promises of future wealth.
Bitcoin is not purchased under a partial payment method, in which investors place 10 or 20% of the issue price and the remainder is paid in equal installments every 3 or 4 months – essentially turning stock. votes into a level derivative product. If so, Bitcoin is purchased with investor equity or with excessively collateralized loans.
The Bitcoin network does not extend loans to “investors” or allow managers to lend heavily to secure their holdings. Although today’s crypto banks offer lending services, they are well capitalized and loans are made with a wide variety of collateral. This reduces the risk to the overall financial system instead of ‘fueling the fire’ as the South Sea directors did in the spring and summer of 1720.
Bitcoin’s 2021 looks nothing like the South Sea Company back in 1720. But what’s the difference?
Howard Marks of Oaktree Capital thinks about this: Perhaps the era of tech network effects and aggressive central banks is really different from the past that we think we already know. Other longtime crypto critics like Ray Dalio recently said that they may have been wrong about Bitcoin. Many others agree with what the first cryptocurrency has to offer: historian Niall Ferguson or investor Stanley Druckenmiller.
If Bitcoin is indeed a bubble waiting to collapse, it doesn’t look like many of the iconic historical bubbles we know of. The references made less and less sense: tulip trading in particular was not so crazy, trading without money to change hands while the light bulb remained underground in the winter of 1637. On the success of “ The dot-com bubble, while having only minor effects on the real economy, has laid the foundation for the thriving e-commerce we enjoy.
What financial historians have discovered is that many collapses related to banking leverage, such as the US subprime collapse of 2007-2008, cause panic attacks that actually lead to losses. Harm needs attention. Companies that were largely financed by their equity and brought in new technology – like the dot-com craze of the 1990s and the British cycling craze a century ago – were much less ominous.
Even if the detractors are true and Bitcoin follows the path South Sea Company outlined 300 years ago, we should not be wary. “Bubble” is simple, but the history of finance is very complicated. “Historians are not capable of foresight,” D’Maris Coffman of University College London eloquently points out. But we know a thing or two about people in the present who abuse the past. And no, Bitcoin has very little in common with its past big bubbles.