Crypto-Tulips — Have we witnessed the bursting of the bubble?
You don’t have to be a celebrated stock market historian to grasp the background behind what was probably the most infamous bubble and bust of the last millennium.
In the matter of 26 months between December 1634 and February 1637, something truly remarkable occurred with the prices of Gouda Tulip (not cheese) Bulbs. By January 1637 some very exuberant Dutchmen and other Europeans who came to Amsterdam to participate in the sales process were prepared to pay 120 times more than in December 1634 per bulb!! Said bulb would hopefully transform into a single tulip flower, thus gracing a vase only for a matter of days.
Fortunes were made and many were lost as they chased the prices ever higher in fits of supreme irrational exuberance. At its peak, houses were being exchanged for the price of a single bulb. In a matter of several weeks, the market proceeded to plummet by a staggering 99.9983%! By March 1637, a bulb was trading at a fifth of where it was in November 1634.
The South Sea Bubble of 1720 is probably the most famous bubble to have impacted solely the UK, whilst the history books cannot cite anymore such times of extreme asymmetric herd behaviour to create such cycles of boom and bust until over 250 years later, during the very last years of the last millennium when tech stocks on both sides of the Atlantic traded up to crazy valuations before (mostly) collapsing into bankruptcies.
It is unlikely that anyone could have said that they experienced both the Tulip and South Sea Bubbles in one lifetime. However, those of us born the between the 1930s and 1970s seem likely to have lived through two such bubbles:- The Tech Bubble of 1995–2000 and now seemingly the Crytocurrency Bubble of 2017.
They say that Financial Bubbles come in three phrases…
“Free Money”
This is when the price seems to do nothing but keep on rising, with wily investors sitting on multiple factors of return, but hold the belief that fundamentals and demand can justify the steady, constant increase in prices.
“Hold onto your Seats”
This is when the market suddenly goes into turbo-drive and delivers multiple factors of return in a matter of days. Outsiders gasp in disbelief and warn of an impending crash, whilst the braver investor dives in hoping to turn a quick profit.
“Where’s the Emergency Exit?!”
Oh dear, it’s blocked by everyone else trying the leave the party and selling the assets that no one else wants.
Well, the crypto-currency bulls would say that this time is different — They always do!
They would say that the blockchain is here to stay and will transform humanity into a better, more optimised and efficient species.
A market needs to fall by 20% over a two month period for it to the term ‘bear market’ to come into effect.
A quick glance at some of the major crypto-currencies’ recent performance shows that they are now very much in bear territory. Ethereum is down 60% in a month, Ripple is down 53% over the same period, whilst Litecoin is down 27% in 2 weeks. The most famous member of this illustrious club, Bitcoin has given up only 35% in the past month.
Whatever way you dress this up, you cannot escape from using the phrase “Major Bear Market” and when you look at the fact that Bitcoin, Ripple and Ethereum have risen respectively by 13 times (since 2015), 63 times (in 2017 alone!!) and 759 times (since 2015), I very much believe that we are at the “Run for the Emergency Exit” phase for this “asset” class, if you can actually label it as an asset!!!! Ripple and Ethereum are making Tulip-mania seem like a mild bull market in comparison.
Bitcoin
Ripple
Ethereum
John D Rockefeller’s (or maybe Joe Kennedy’s depending on who you believe) famous reaction to a stock tip from a shoeshine boy in 1929 was to sell his entire stock market portfolio. Maybe my moment came last week when I overheard two heavily tattooed graphic designers in an East London café talking about the merits of Ethereum. One was assuring the other that ‘investing’ in Ethereum when it was trading at $220 on Thursday morning was tantamount to free money as he reckoned that it would be at $2000 by the end of the year. He then asked where to buy some. No matter how bearish one is of the stable of crypto-currencies, one would never have predicted that Ethereum would have fall 30% by the end of the following day! At one stage it had fallen just under 40% in 24 hours! I only hope that she didn’t manage to buy any and that he takes some money off the table lest Ethereum return to single digits in the coming months.
Another adage oft-repeated in a bear market, is that one should never try to catch a falling knife. Well, Ethereum may well have fallen 60% from its highs, but it is still up a mind-blowing 290 times from where it was 24 months ago!!
Those trendy designers may well have been talking as though it was still in the 1st phase of a bubble with the ‘Free Money’ chat, but it feels to me as if we are that 3rd phase of a full-blown ‘Run for the Emergency Exit’ phase of the bubble cycle.
The question is what will be the impact on the most celebrated crypto-currency, Bitcoin? It was at $2400 briefly on Thursday. It is now at $1927 as I write this on Sunday evening. That’s 20% in a matter of days.
Will it be dragged down further with the current demise of the more recent entrants or can it withstand the turbulence in the wider, yet still incredibly niche, market…?
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