Are Tulips and Mississippi or Facebook and Google the Right Bitcoin Precedents?
Bitcoin a bubble? Its performing in-line, to below, recent major tech-driven disruptors
Comparing bitcoin to tulips or valuing it at zero seems to be the current article commentators write if they want to be syndicated across the global financial press. This one from Stefan Hofrichter is just the most recent in a long line that use simplistic charts and assumptions to make what is, apparently, an obvious point — bitcoin is a bubble that will end with its decline to a value of zero.
Whilst I have generally ignored these pieces, this one bothered me more than most — maybe it’s the posting of a “I told you so” financial prediction when an asset has already fallen 50% or maybe just the twisted logic and selective use of statistics — it’s the latter that's focussed on here.
A key centre point of the analysis in Stefan’s article, and most others on the same topic, is a comparative chart of some form showing bitcoin’s price growth versus other “bubbles” — his version of this chart is shown below:
The conclusion: bitcoin's returns are abnormal even when compared to a data set of supposedly abnormal returns.
From this bizarre grouping of what are apparently precedents I would suggest the “Tech Bubble (1995–2000)” is the only one potentially worthy of comparison. There is however a key problem with using the NASDAQ to try and highlight bitcoin's growth profile as unprecedented. Given regulatory requirements and end-investor preferences, the NASDAQ Composite typically only includes companies sufficiently mature and capitalised to pass the relatively stringent U.S. listing requirements.
A comparison of bitcoin’s valuation growth to more mature tech businesses that make up the majority of the NASDAQ Composite ignores a simple economic/business truth — very high percentage gains (and losses btw) are generated from investing in the founding or initial seed stages of a successful asset's life. I am not suggesting the returns from bitcoin are "normal", they most definitely are not ( then again its potential impact on the global economy is also far from normal), but it's misleading to quote comparative returns that use different maturity starting points.
Maybe a further issue here is that this initial return has traditionally been enjoyed by Silicon Valley VCs and cloaked from the broader public's eye — perhaps its frustrating to traditional commentators that bitcoin has been available to anyone, from day 1 (almost), with the initiative to contribute to the mining pool or, later, navigate the, admittedly different, trading platforms.
I think there are far better examples that put bitcoin’s performance into perspective and at least start a more informed dialogue about whether that performance is truly unique or not — the good news is that these examples also don't (as yet) end in a value of zero, as Stefen is predicting will happen to hapless bitcoin owners.
Lets compare Facebook and bitcoin but lets not wait until Facebook was listed (when it was around eight years old) to do so.
Facebook has been a revolutionary asset and it’s undeniable the social and economic impact it has had around the world. I also believe bitcoin, and its underlying technology, is a similarly revolutionary asset and the impact it will, and is starting to have, across broad swathes of today’s global economy will be profound. So we have two technology-driven assets, global in reach, and developing new business and incentive models — worthy of comparison in my opinion.
If we assume that Facebook, when the Winklevoss Twins (😐) originally came up with the idea in c.2004, had a value of say $1m, and give bitcoin the same starting value (which isn't too far away from it initial observed trading value in 2010), and then plot the relative total value growth, bitcoin’s growth profile suddenly looks less abnormal and “bubble-ish” and looks more like that of a highly disruptive tech asset:
Note on this measure, bitcoins recent fall now sees it underperforming Facebook.
Comparing two recent, technology leaders and basing them from a similar starting point, is surely a comparison far more worthy of analysis than trying to compare bitcoin to “Tulip Mania” in 1636/37 and “The Mississippi Bubble” of 1719/20 - it however clearly doesn’t fit the current mainstream narrative. It also demonstrates that growth rates, like those observed with bitcoin, don't necessitate a fall in value to zero.
Have I been selective in the above comparison? Absolutely — I have chosen a clear success story as a comparison to bitcoin but that is what a highly liquid and active global market tells us they currently believe bitcoin will be (given its relative size and dominance of the digital asset sector).
Facebook however is not the only example, the chart below adds Google/Alphabet:
Again, a similar growth (and value creation) profile if we remove the distortion of the period from start-up to IPO, and ring-fence the comparison to high-growth tech assets in a somewhat similar era (as opposed to flowers almost 400 years ago).
Will bitcoin follow the same growth trajectory of these two businesses over the next decade? That is not the point these charts are trying to make — they simply illustrate bitcoins growth is not unprecedented, and relevant precedents don't necessitate a fall to zero.
Finally, I admit there are clearly issues in this analysis — one of which is it is comparing cashflow-driven, traditionally structured companies to a decentralised digital asset but Stefan, nor other articles I have read, ever bother to make this distinction — I wish they did as it would be a far more interesting conversation than comparing bitcoin, tulips and Mississippi land development.