Past bubbles and how they relate to Bitcoin

Bitcoin is often referred to as a bubble, a modern day mania that is set to crash and burn. This argument is mostly fuelled by Bitcoins incredible propensity for going up and it’s ‘value’ not being easily defined. Along with their bubble statement follows a list of examples which include the Dot Com bubble of the 2000’s the financial crisis of 2008 and Tulip Mania?? The comparison between Bitcoin and the dot com bubble has the most credence but is not without it’s issues, the comparison with the financial crisis is just plain silly and the only other example they can come up with happened in the 1600’s.

Below is a list of all the major economic bubbles this side of WWII (and tulip mania as people seem to think it’s important). I’ll be honest this piece is ever so slightly biased but reading into what caused some of the bubbles in this list highlights why we need decentralisation and an economic model that can’t be manipulated by greed.

Tulip Mania (1637) — https://en.wikipedia.org/wiki/Tulip_maniaDue to the lack of economic data gathered back then, there isn’t even clear information about why the prices became so high. From what i’ve been able to find it seems like people over exaggerated the demand for Tulips which then lead to massive speculation. How this refers to Bitcoin is with the pure speculation on future prices based on little more than gossip. There are obviously investors into BTC who are speculating on the future price, but a large majority of BTC holders have an interest in crypto as a store of value and hedge against FIAT inflation. I’d like to think we have developed a little as a species since this and understand the risk reward of such investments to mitigate any mania behaviour.

Poseidon Bubble (1970) — https://en.wikipedia.org/wiki/Poseidon_bubbleThe Poseidon nickel bubble started after Poseidon NL mining company discovered a promising new nickel deposit. This coincided with a high demand for nickel due to the Vietnam War and lead to wide spread speculation based on future earnings. Once Poseidon actually started producing the nickel they realised the grade was lower than originally expected, resulting in higher extraction costs. This lead to a large correction for the price of nickel and after the new mine proved unprofitable the company was delisted in 1976.

Silver Thursday (1980) — https://en.wikipedia.org/wiki/Silver_ThursdayTwo brothers solely responsible for the rise and eventual fall of silver. Using their inherited Billions, the Hunt brothers calculated that inflation would result in silver becoming a safe haven as paper currency investments suffered a loss in value. They were ultimately proven wrong and facing a potential $1.7 Billion loss a consortium of US banks provided a $1.1 Billion bailout. Fast forward a few years and add in an SEC investigation and the two brothers eventually filed for bankruptcy.

Dot Com Bubble (2000) — https://en.wikipedia.org/wiki/Dot-com_bubbleThe Dot Com bubble is often epitomised by Pets dot com. In 1999 Pets dot com spent $11.8 million on advertising with revenue of $619,000. This kind of spending is unsustainable and so it is far from surprising that it failed. Their big mistake was running before they could walk, envisioning a wider adoption of internet shopping before there was enough demand for such a service. No doubt investors saw how much money they were spending on advertising and made a decision based on potential future earnings.Pets dot com is just one example, but compare their story with Amazon, who started humbly and scaled with demand, rather than scaling on speculation of demand.The Dot Com bubble has similarities with Cryptocurrencies however, with many trying to speculate on who the winners will be. As with the Dot Com bubble, which saw the rise of eBay and Amazon. The technology brought huge change, it’s just a case of getting the picks right.

Uranium Bubble (2007) — https://en.wikipedia.org/wiki/Uranium_bubble_of_2007After the largest undeveloped high-grade uranium mine was inadvertently flooded in 2006, uncertainty about the future supply of the element lead to a parabolic rise in price. This rise in price was followed by a dramatic increase in mining activity. The eternal laws of Supply and Demand kicked in leading to an eventual price equilibrium being achieved. This greed driven inflation of supply cannot happen with Bitcoin.

Financial & Property Crisis (~2008) — https://www.theguardian.com/business/2012/aug/07/credit-crunch-boom-bust-timelineArguably the most infamous on this list, the crisis spanned much of the western world resulting in a total of over $5 Trillion worth of bailouts spanning much of North America and Europe. Greece was bailed out twice! The catalyst was something called a CDO or Collateralised debt obligation which was essentially a package of sub-prime loads. Many banks and funds were leveraged against these CDO’s and in the case of Northern Rock they couldn’t gain enough liquidity to pay their ‘obligations’ which prompted the first run on a British bank in 150 years! Estimates are difficult to find but somewhere in the region of a million job and homes were lost as a result of the crisis.

It’s hard not to get overly emotional about the negligence the financial institutions displayed, yet no one person or institution was ever put on trial for the misery that was caused. This was ultimately the catalyst for Bitcoin, a refuge from the financial world that would allow citizens to take back (at least some) control over their financial future.

Too many of the examples in this list were the direct result of greed based on predictions. It’s this greed that we need to mitigate in Crypto. Unlike many I fear the institutional money moving into Bitcoin, I’m frightened by the ‘to the moon’ conversations that are all too prevalent in the space. Today Bitcoin is not a bubble, but in the future it may well become one. If we continue to be blinded by massive returns, and search for profit at all costs, we’ll pay the price.I’ll leave you with one thought: Institutions are here to benefit FROM Bitcoin, they are not here to benefit Bitcoin.

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