thousands of foreigners flocked to Paris. The Internet provides a global dragnet to scoop up cryptocurrency enthusiasts. Coinbase, which offers bitcoin wallets, boasted some 12 million accounts last December— a three-fold increase over the course of the year. While the Mississippi boom minted the first paper“ millionaires,” bitcoin appeared to be conjuring up digital billionaires— including reportedly the Winklevoss twins of Facebook notoriety.
Speculative Tales
Every great bubble produces great anecdotes. Charles Mackay’ s famous account of the early bubbles, Extraordinary Popular Delusions and the Madness of Crowds( 1841), is stuffed with memorable, if rather fanciful, tales. The Dutch tulip mania of the 1630s inspired several legends, including that of the black tulip( which inspired Alexandre Dumas’ s eponymous novel). Mackay narrates a story of a sailor inadvertently eating a priceless tulip bulb after mistaking it for an onion. Even the stories of broken speculators throwing themselves off skyscrapers after the October 1929 crash turn out to be urban legends.
Bitcoin has already produced a number of wonderful yarns. There’ s the computer programmer who used bitcoin to buy pizzas back in May 2010. At 2017, peak prices this snack was estimated to have cost more than $ 150 million. Another story relates how a British IT worker threw away an old computer hard drive which stored a number of bitcoins. A few years later, this digital fortune was valued at more than $ 125 million and the hapless techie was said to be planning to dig up a landfill site to salvage his lost fortune. When the Long Island Iced Tea Corporation, an unprofitable purveyor of soft drinks, changed its name late last year to the Long Blockchain Corporation, its share price soared nearly 300 %.
George Soros argues that a“ super-bubble” only forms after it has survived a severe test, imbuing speculators with a sense of invincibility. Bitcoin has weathered a number of such trials. After peaking at close to $ 1,000 in late 2013, it shed more than 75 % of its value over the following 18 months, before starting its more recent, epic ascent. Bitcoin has also survived a number of outright scandals, including grand larceny at the Mt. Gox exchange when billions of dollars’ worth of bitcoins( at current value, anyway) vanished into the ether.
1754 drawing of Scottish-born financier John Law. The bubble created by Law’ s Mississippi Company is relevant to recent events in the cryptocurrency world.
Easy Money
Great bubbles occur during periods of easy money, when interest rates are low, or falling, and liquidity is super-abundant. The Dutch tulip mania, for instance, appeared in the mid-1630s at a time of large foreign capital inflows into Holland, which spurred money printing by Amsterdam’ s Wisselbank, Europe’ s first central bank. Dutch interest rates were also far below their past average levels at the time.
Recent monetary conditions have much in common with the 1630s. At the beginning of 2017, the world’ s largest central banks were expanding their balance sheets like never before. At the time of bitcoin’ s blow-off, some $ 11 trillion worth of bonds worldwide were offering negative yields. The American stock market was more expensive than at any time save for the dotcom peak in early 2000. This left savers with an uncomfortable dilemma, either speculate or starve.
The ideal speculative object is one which provides no yield and is therefore impossible to value. Think of those tulip bulbs, gold in late 1970s or contemporary art in recent years. Bitcoin, which produces no income, has a restricted new supply and whose ownership is concentrated in
MPI / Stringer
14 FINANCIAL HISTORY | Spring 2018 | www. MoAF. org