Cyber Space


Every decade there are instances when financial markets react brainlessly to fads and swags. Investors go grazing passively from one place to another, following a leader, without scouting out the grass themselves. This is called herding.

History has recorded three most irrational herding phenomena that are unknown to many – the Dutch Tulip mania, the Mississippi Bubble and the South Sea Bubble.

The pre-modern definition of a bubble, according to Dictionary of Political Economy (1926) is “any unsound undertaking accompanied by a high degree of speculation.”

Drawing it simplistically, a bubble is an upward price movement over an extended range which later implodes in the future. The reasons of a bubble development are herding, irrational exuberance, self-delusion and blindness. Here, market sentiment acts as a driving force and not the mental state of an investor.

Now, whether these definitions can be applied to bitcoin is a million-dollar question. It is imperative to look at the history of early bubbles to track down what they actually implied about the behaviour of the private capital in financial markets.

One such epitome of market stress occurred in 1634-1637, called The Dutch Tulip mania. Till now, it stands as the decisive example of insanity and irrationality that materializes in the asset market. At the time of the tulip speculation, the Netherlands was a highly commercialised country with innovative financial markets.

Its participation in innumerable risky ventures had proven so successful that the era was considered the golden age of the Netherlands. During that time, non-professionals and novices entered the tulip trade in large numbers.

Currently, the same is being witnessed in the bitcoin market. A rising demand for tulip bulbs in France apparently drove the speculation. Soon enough, individual tulip bulb prices reached enormous levels. People from all classes hurriedly liquidated other assets to participate in the tulip market.

Elite population adopted wearing tulips as a sign of affluence; elegantly stuffed on suit pockets and various hairdos. It was in their view, a kind of anarchy show, but in doing so, all the conventions and rules for virtuous and sober commercial conduct had been thrown into the wind.

And just when the rising demand faded in the first week of February 1637, the tulip speculation collapsed and the tulip bulbs could not surpass the 10 per cent mark of their peak prices.

For example, Roi de Fleurs (Rare tulip) was sold at fl. 1000 in 1637 the peak of mania, but was available at fl. 10 by 1722 (fl. is the Dutch guilder, currency of the Netherlands from the 17th century until 2002). It was no longer considered rare. If we analyse crypto-currencies, there are so many names alternatively to bitocin that are now available in the market, the rarity is over.

If we dissect the facts further, one tulip bulb was equivalent to all of the combined: 2 bags of wheat, 4 lasts of rye, 4 well-fed oxens and pigs, 12 well-fed sheep, 4 tons of 8 guilder beer, 2 tons butter, 1000 pounds of cheese, 1 bed with accessories, 1 stack of clothes and 1 silver chalice.

It’s unbelievable to accept this figure but it’s true. Today one bitcoin can probably buy all of the above and much more.
The bitcoin bubble has been created due to excessive demand in the market and rising prices. It has created frenzy across the world and has driven people obnoxiously greedy. Also it’s quite legit to say that there are chances that the government will want to control the monetary policy “manually”, which gives them the power to willfully control the wealth distribution system.
No government would give away the monetary power to some tech ingenuity. However, one should know that bitcoins use more electricity per year than the whole of Nigeria, furthermore, the supply of bitcoins is finite, capped at 21 million, which is self-explanatory that soon enough supply will come from miners across the world.

If mining crypto-currencies makes one rich, who will not want to be? Once this happens, miners will rain the market with crypto-currencies by whatever names called and this phenomenon has already begun in a big way.

The bubble has already peaked, and people have started panic selling, bitcoin will inevitably crash. After all, bitcoin’s price is determined by demand vs. price.

One similar incident which took place in the early 1700s was the Mississippi and the South Sea Bubble. A monetary theorist named John Law created a system to lower down the bankruptcy rate in France during 1715. Law came out with an idea of paper currency that would expand real commerce permanently, thereby increasing the demand for the new currency sufficiently to preclude pressure on prices. Without any delay, Mr John opened up a note-issuing bank called Banque General and started minting new coinages, similar to bitcoins, that soon brought in a surge of demand. The prices of the shares of the bank rose so high that it left France in a state of inflation.

Precisely within five years of constructing a powerful currency generating system, Mr John failed drastically when shareholders started converting their shares to the concrete form of gold. And that was the end of it.

Similar scenes were visible in Britain around the same time of 1720s. These two incidents clearly highlight the volatility of new surging demand. The Dutch Tulip mania, the South Sea bubble in England, and the collapse of the Mississippi Company in France are three well-documented cases of speculative insanity.

It is evident that bitcoin will be met with such a fate, when the mania will subside, prices will fall dramatically. The biggest disruptive side of bitcoin is the underlying blockchain technology. The great new era of bitcoin may not last, but it certainly will make the blockchain technology available for quick adoption across the world.

Bitcoin won’t be putting banks out of businesses. And when global investors need a safe haven of currency for their money in uncertain times, it will likely be the yellow metal, and not a digital version of it.

Up until recently, different versions of crypto-currency like litecoin has been making news after the creator, Charlie Lee, sold off all his holdings. Such a factor is important to note, which particularly highlights its true worth to its creator. When the promoter of a company sells off his shares in the market, it means for investors, the time has come to move on. This analogy holds true for bitcoin, too. It’s time to move on.

Sanjay Gade

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