If you lived in Holland at the beginning of 1637 you could have purchased a luxury estate with a single tulip bulb. Actually, I should rephrase that and remove the opportunistic sentiment. If you lived in Holland at the beginning of 1637 you would have sold your home for a single tulip bulb. Had you done so, by the end of 1637 you would have the equivalent of a few dollars today.
Fast forward almost one century later. In 1711, a British company known as the South Sea Company was believed to have a monopoly on all trade with South America. Investors bought up the stock of the company as fast as it was offered in order to own a piece of the monopoly. The investment success of the South Sea Company, along with others such as the Mississippi Company, led British investors to believe that British companies couldn’t fail. IPO’s were bought up as quickly as they could be offered and investors didn’t seem to care that companies, such as the South Sea Company and Mississippi Company, didn’t really make much money. By the beginning of 1720, inflation was greater than 20% per month (not a typo…per month) and the stock price of the Mississippi Company had grown 1900% in the year prior to 10,000 livres. The stock price of the South Sea Company peaked in June of 1720 at more than 1,000 British pounds. By September 1720, shares of the Mississippi Company had plunged to 500 livres, where they originally started, and the South Sea Company shares had fallen to a mere 150 pounds.
Similar events unfolded during the “Roaring 20’s” in Florida when speculation fueled a real estate boom that saw prices increase over 500% in one year, and properties get bought and sold at auction up to ten times in a single day. Sadly, what goes up must come down, and the Florida real estate boom began to bust in 1927, just a couple of years before the Stock Market Crash of 1929 and ensuing Great Depression.
In 2017, Bitcoin, the world’s first decentralized digital currency, increased in value more than 1,600%. This cryptocurrency (meaning, “hidden money”) was developed by an unknown person, and while it is believed that only 21 million Bitcoins will ever exist, no one has any certainty regarding how many are currently in circulation. In fact, there is no certainty on how safe it is to own a cryptocurrency either.
According to The New York Times article “How the Winklevoss Twins Found Vindication in a Bitcoin Fortune,” billions of dollars’ worth of Bitcoin has been stolen already and it is essentially impossible to retrieve it once it is taken.
Despite the fact that cryptocurrencies are difficult to secure against a cyber threat and don’t meet the properties of real currency, speculators have flocked to them as if the developed economies have already announced that they are adopting the digital currencies. New cryptocurrencies are quickly being developed and offered in what has been termed Initial Coin Offerings, or ICO’s. Similar to what happened with British companies in the early 1700’s, investors have been buying up ICO’s as quickly as they come to market. Here is an excerpt from and email that I received on 1/10/2018 from Wall Street Breakfast at Seeking Alpha:
On Wednesday, January 10th: (from Seeking Alpha) A crypto moment... Shares of Eastman Kodak (NYSE:KODK) more than doubled on Tuesday and are now up another 50% premarket after the company became the latest to jump on the cryptocurrency bandwagon. Kodak is partnering on a blockchain platform for photographers to "democratize" photography. It will also launch an ICO, called "KODAKCoin," on Jan. 31.
I can’t say with any certainty what the outcome for a Bitcoin investor (or any other cryptocurrency investor) will be. But I would be foolish not to heed the words of George Santayana, “Those who cannot remember the past are condemned to repeat it.” The idea that a digital token is worth thousands, or even hundreds of thousands as some have suggested, seems eerily similar to the belief that a tulip bulb is a fair price for a luxury estate. At least you had the tulip bulb when the craze ended.
Kevin Warman, CIMA®
Update: Hackers just stole another $530 million in cryptocurrency from Coincheck.
Related: Still Thinking about 'Investing' in Cryptocurrency?
(Last Updated 1/31/2018)