Bitcoin Bubble? Who Knows

Do you remember the Dutch Tulip Bubble in the 1930s? What about the infamous South Sea Bubble of 1720 when even one of the most intelligent minds, Sir Isaac Newton, got caught up in the madness of the crowds and lost his shirt, so to say?

Well, it’s also probably not a good sign for an “investment” when its largest clearing firm takes out an advertisement in the Wall Street Journal asking for more regulatory oversight and warning investors that its investment category is so volatile that futures contracts could create devastating losses. Yet this is exactly what has happened recently when Interactive Brokers, the clearing firm for the bitcoin cryptocurrency, responded to the Chicago Mercantile Exchange’s plans to start listing bitcoin futures on Sunday. And what kind of a signal is it when my son, in his mid-twenties, who has NEVER contacted me to discuss a specific investment idea, reached out to me yesterday inquiring if he should consider “investing” in bitcoin?

The dustup is significant for a variety of reasons. First, you can hardly turn anywhere today without reading or hearing about the remarkable run-up in bitcoin prices, and seeing a plethora of advertisements telling you how you, too, can get in on the action. This, of course, is exactly what one sees during euphoric manias, and indeed bitcoins are now trading at around $15,000 —up more than 1,000% year to date, compared with a mere 19% for a pedestrian investment known as the S&P 500 index. However, if you owned bitcoin over the last several years, you would have experienced crashes of at least 80% or more about five times.

Second, there are serious questions—despite the “come-ons” and advertisements—about whether bitcoins should be considered investments in the first place. I, for one, emphatically say that at this time it is NOT an investment, but rather a truly dangerous speculation. An investment has intrinsic value – at a minimum, earnings and potential dividends. Bitcoin, like gold and tulips, has neither.

The proposed futures contract is the cryptocurrency’s first foray into the mainstream investment world, and some bitcoin owners are now wondering what, exactly, one does with an unregulated, digital “currency” that is nothing more than blips in a distributed computer database, whose primary purchase vectors so far have been illegal drugs and illicit weaponry, and has already been hacked into.

Bitcoin owners, meanwhile, are doubtless experiencing some of the same feelings that a Dutch farmer would have gone through in the early 1600s, when the tulip bulb he held in his hand—worth far less than a guilder two years before—could now, in the teeth of a mania, be sold for a nice house or ten times the annual income of a skilled craftsworker. The wise move then would have been to cash out before the collapse. The same may be true today.

My recommendation? Unless you have monies you usually take to Vegas and gamble with, knowing and willing to potentially lose it, just sit back and enjoy observing perhaps one of the most euphoric manias, and potential bubbles, of our lifetime since the Dotcom Bubble of the early 2000s.

Finally, if you’re interested, an excellent read on historical manias and bubbles is a book by Edward Chancellor titled Devil Take the Hindmost. I highly recommend it.


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