“There must certainly be a vast fund of stupidity in human nature, else men would not be caught as they are, a thousand times over, by the same snare; and while they yet remember their past misfortunes, go on to court and encourage the causes to which they were owing, and which will again produce them.”
-Cato’s Letters, January 1721
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Since the dawn of civilization, mankind has on occasion caught a fever so rife with speculative euphoria so as to have become the period’s defining event. Nor has mankind ever become inoculated against such conditions.
Yet mankind remains a slow learner, at best.
In the Dutch Republic of the 1630s, such conditions were omnipotent. Simply screaming for an outburst of speculative mania. Amid a period of rising commercial optimism. The fading specter of war following the defeat of the Spanish Armada. And a booming Dutch textile trade. Seemingly a rising tide that would lift all boats.
Understand, if you might, that the geography of the Netherlands provided a flat, soil-rich terrain. Perfect for the cultivation of flower bulbs. But space was limited. And though the Dutch loved flowers, there was little space to tend to more than the most modest gardens.
Of all flowers, the Dutch most intensely prized the Tulip. A lovely bulb that had been brought from Turkey in the mid-sixteenth century. Largely confined in its early years to the gardens of the Dutch nobility. Where they were afforded emphatic, militaristic names like Semper Augustus, Viceroys, Admirals and Generals.
Before long, possession of Tulips began to be associated with wealth and extravagance. Bringing a Semper Augustus to fetch a sum equal to a small-town home in Amsterdam in 1624.
The tulip was the perfect vehicle for speculation. As there was great uncertainty over the coloration and patterns in its leaves. And the flower’s seemingly random lifespan lent itself to what became a game of chance. Soon, those who could not afford to purchase the expensive shares of some of the great joint-stock companies (ex. the East India Company) could instead wager on the value of a tulip bulb. Which led to their being traded throughout the year.
By 1634, word of Tulipmania reached Paris and Northern France. Bringing in a great many new speculative enthusiasts. Even as wealthy Dutch investors steered their profits into other pursuits. Like town homes. East India stock. And bill of exchange. Realizing, as they did, that tulips remained merely an expression of wealth. Not a means to that end.
Before long, a futures market had developed. Collecting money for special-order tulips to be delivered next spring. Which served to further jettison prices ever higher. With the average annual Dutch wage equaling 200 to 400 guilders, the average tulip price hit 1,200 – or five year’s wages. With the Semper Augustus bulbs selling for 2,000 guilders. Hitting 6,000 at the height of the boom.
Pamphlets began to circulate doubting the viability of the tulip markets. And speculating upon its eventual collapse. And in February 1637, the tulip market crashed. A clear reason was lacking. But for rumors that the spring supply would not meet the demand. Which caused demand to completely wither. Suddenly leaving the once-precious bulbs unsaleable at any price. While rendering thousands of former speculators cash strapped, out of luck and mired in years of litigation.
All of which sound eerily reminiscent of so many other financial manias and speculative fervors. Financial wildfires driven by avarice and deceit. Born amid great promise. Attracting a handful of curious, courageous, risk-seeking early investors. Before the floodgates burst. Providing entrance to the greedy, often uninformed collective. Burning bright. Then burning out. A forest fire reduced back to a few, smoldering embers.
Nor is the rise and decline of crypto currencies any different.
A year ago, consensus opinion held that bitcoin and cryptocurrencies were going to change the world. Today, not so much.
The digital currency fell below $3,750 this week. Down 25 percent during the last week. 80 percent off its January high of $20,000. Other crypto currencies are collapsing, as well.
Investors saw this coming. It was obvious. Tulipmania. The Mississippi Bubble. The South Sea Bubble. The Roaring 20s Bull Market. The Japanese Economic Miracle. The Dot-Com Bubble. The Housing Bubble. And Cryptomania. Each like the last.
Last week the developers and miners of Bitcoin Cash failed to agree on the future of the digital token. So, they split it into two competing cryptos. Bitcoin ABC and Bitcoin Satoshi’s Vision (SV).
Seem like a bad idea?
It was. Yet, investors should have seen it coming. Bitcoin is an open source project. Leaving developers to duplicate the base code and create cryptocurrencies as they wish. Which they have.
As of last month, there were 2,502 cryptocurrencies, according to Investing.com. The cumulative market capitalization of these tokens was $142 billion. Though it had been much higher.
So many options. Representing so much market value. For something that, arguably, has little economic utility and represents no real store of value. Fact is, developers should not be able to create currency, at all.
Many things represent a store of value. Collectibles like art, baseball cards, automobiles, jewelry and signed memorabilia come to mind. But most cryptocurrencies will never do the same.
Recently, the former chief executive officer at PayPal, Bill Harris, made headlines when he wrote, “Okay, I’ll say it: bitcoin is a scam.” Harris argues bitcoin is a pump and dump scheme in which promoters hype and push up the value of questionable investments. As prices surge and enthusiasm increases, they dump everything. Leaving unsuspecting investors holding worthless securities. Just like Tulipmania.
Wish I had a tulip for every time a client had asked about an “initial coin offering,” the IPO events for crypto currencies. Which have attracted speculative investors like cowboys to a rodeo. But have usually provide little to no value to investors, or the marketplace. Investors jump into these highly anticipated events and participate in massive price volatility amid plenty of empty promises. Only to represent little investment value thereafter. With no chance for meaningful price recovery.
No, we don’t believe that all cryptos are worthless. A pure digital currency could be an excellent societal advancement. Eroding power away from a central authority. And providing anonymity to the consumer collective. The problem becomes oversupply. Too many coins. Too many hucksters. Not enough value.
Eventually, the Securities and Exchange Commission will clean up the fraudsters. Which will bring some legitimacy to the industry. Though most ICOs will go to zero as they wither under the scrutiny of legitimate government oversight.
Which will likely leave bitcoin as the last crypto standing. Increasing its demand and value. But before that occurs, there will be plenty of pain ahead.
The real crypto currency play for investors remains blockchain. Which represents Bitcoin’s cryptographic infrastructure. Eventually, this digital ledger system will find its way into global supply chains and financial services. As it systematically removes the agents currently needed for verification, auditing and trust provision. Inevitably, rendering legions of accountants, lawyers and back office personnel redundant. In a tsunami of technological adoption
IDC, a global information technology research firm, views blockchain as part of a larger digital transformation. The shift could be worth $7 trillion by 2022.
Therein lies the real opportunity. One that will be less sexy. Though much safer. And devoid of any whiff of manic speculative fervor. Although such opportunities will reappear soon enough.