The Digital Tulip Bulb
For the last 2-3 years, I have found a very unlikely and unbelievably precise barometer to gauge the rise and fall of Bitcoin: the level of activity in my Facebook “Friend Request” queue. When Bitcoin is amid one of its meteoric rises, my queue is inundated with friend requests from supposed Bitcoin experts and prognosticators, promising to “double” my hard- earned dollars in a matter of days or weeks. Conversely, when the price of Bitcoin is dropping faster than a bad habit, suddenly my queue of friend requests dries and shrivels up like a prune. I am willing to place a friendly wager that I am not alone in this ludicrous phenomenon. Show of hands, please…
By the way, I do not have to tell you that anyone promising to double your money in days or weeks is a scam, right…right?? In fact, anyone promising to double your money at all, at any point in time, is likely to be a scam. No money manager or advisor worth his salt would “promise” any specified return, because he/she understands how elusive such returns can be, given the natural vicissitudes or temperamental disposition of “Mr.Market.” Specifically, Bitcoin has created the kind of atmosphere scammers drool over, leaving them scratching at the door of opportunity like an antsy dog begging to get outside to urinate. According to the Federal Trade Commission, from October 2020-March 2021, U.S. consumers reported losing approximately $82 million to crypto scams (the losses are likely much higher, due to the unwillingness and embarrassment of investors when it comes to self-reporting), which was 10 times the amount from the same six-month period a year earlier. The fact that Bitcoin rallied 450% during the October 2020-March 2021 period does not offer a prima facie case of doubling your money (if investing were only that simple) but, instead, proves the dangerously volatile nature of Bitcoin and offers insight into how much scammers potentially pocketed…not investors.
“Bad guys are always going to follow the money.” (J. Christopher Giancarlo, former Chairman of the Commodity Futures Trading Commission)
I do admire the persistent salesmanship of scammers, however (alas, I wish I could employ such salespeople). Even after informing them of my status as an experienced player in the investment arena and insisting it is a waste of time, they continue to pound away at their sales pitch. They are not dissuaded by lofty-sounding titles or investment finance experience. And why should they be? Supposedly sophisticated investors have been taken for a ride, too. I imagine it has something to do with greed, an exceedingly powerful, judgment-clouding force.
Contextually, speculative crazes are nothing new; they are about as old as man. Jon Hilsenrath of the Wall Street Journal put it this way: “History shows that investment crazes are often associated with financial innovation, new instruments created by Wall Street middlemen, surrounded by mystery and fueled by expectations of big future profits.” The award for the Most Infamous of these crazes goes, of course, to the Dutch tulip bulb mania of the seventeenth century. In 1636-37, exotic Dutch tulip bulbs were prized for their variety and ability to regrow. At one point, one Viceroy bulb, was worth “two bundles of wheat, four bundles of rye, four oxen, eight swine, [twelve] sheep, two hogsheads of wine, beer, butter, cheese, a bed, a suit and a silver drinking cup” (Mackey, Charles; Extraordinary Popular Delusions and Madness of Crowds). Unfortunately, I was not around during this time, to provide a sense of what the referenced items were worth collectively…but I suspect it was an awful lot. With the way commodity prices are rising today, it is still worth a lot.
Then, there was the South Sea Bubble of the early eighteenth century. The South Sea Company was formed in 1711, mainly to trade slaves with Spanish America, on the assumption the War of the Spanish Succession would end with a treaty permitting such trade. The company’s stock came with a guaranteed 6% interest rate, which soon skyrocketed to 100%. When the subsequent treaty permitted only limited trade and levied a tax on slaves, the company produced only moderate results. However, the company’s proposal to take over the national debt—premised on a foreseen rise in the value of its shares—was accepted by Parliament, leading to an unjustifiably incredible boom in South Sea stock. Everyone wanted a piece of the South Sea Company…and unscrupulous promoters (some in government) and swindlers took note. In the ensuing collapse, many investors were wiped out.
So, yes, there is precedent (these and many others) for the Bitcoin mania.
As for its value or usefulness as a currency, Bitcoin leaves much to be desired. Anytime an asset’s value derives solely from the fact that others believe it has value, it should never be confused with an investment. Bitcoin has no underlying value. Except for a very few large-scale items (Tesla used to be one of those items, but even Elon Musk, a Bitcoin advocate, saw the light), Bitcoin is severely limited in its value as a medium of exchange. Sorry, Bitcoin diehards…we will not be buying sh*t paper in droves from Walmart using Bitcoin during the next pandemic. In addition, its well-documented extreme volatility suggests it lacks the stability to serve as a national or international currency. Lastly, many believe the process of “mining” (new Bitcoins are created by high-powered computers solving complex computational puzzles) Bitcoin consumes too much energy.
In the final analysis, let us not conflates Bitcoin’s lack of value with the value in the technology underlying Bitcoin, or Blockchain, which has tremendous potential and value. Blockchain, in its simplest definition, is a type of database which, unlike a typical database, stores data in blocks that are then chained together. As new data comes in it is entered into a fresh block that, once filled with data, is chained onto the previous block, chaining the data together in chronological order. A key feature of blockchain is its decentralization and immutability (i.e., transactions are permanently recorded and viewable to anyone), which enhances the security of transactions. Banking, Finance, and Healthcare are just a few of the industries eyeing blockchain as a secure avenue for future transactions and record-keeping.
One afternoon, while stopping at my local BP for gas I discovered signage displaying Bitcoin, or slices thereof, for sale. That is right: you can now purchase Bitcoin right alongside your lottery tickets and cigarettes. If that is not a tell-tale sign of a bubble, I do not know what is.
I.D. Amandah