Welcome to Authers’ Note, in which I will attempt to provide some context and analysis on the world of investment each day, and provide you with a handy guide to the best coverage on offer, both here in the FT and elsewhere. All feedback is welcome, particularly of the constructive variety, as we try to get this right. (Email to firstname.lastname@example.org).
Bitcoin nearly broke the $10,000 barrier on Monday, having only broken $2,000 for the first time earlier this year. This is quite something, but still, claims that the bitcoin boom of the past year is in some way a repeat of the Nasdaq Bubble which finally popped in March 2000 are well wide of the mark. Here is a comparison of the two:
This is not just a short-term phenomenon. Bitcoin may have gone into orbit this year, but you may recall that many of us thought that bitcoin prices were crazy a year ago. Its average annual real return since people started trading it in 2010 is 411 per cent. This is unlike anything seen in any stock market in the modern era.
The following chart compares bitcoin returns (as calculated by Bloomberg) with returns on global stock markets since 1900, as calculated for the Credit Suisse Global Investment Returns Yearbook by Elroy Dimson, Paul Marsh and Mike Staunton. Bitcoin has made money for its backers in a way never enjoyed by stock investors:
Bitcoin's best year was 2013. The best return logged by a single country's stock market in one calendar year was Norway's in 1979. For those interested, here is the Dimson Marsh Staunton list, which should make clear that what is going on with bitcoin is nothing like what can be expected from a stock market.
The art market has done some extraordinary things lately, but nothing to compare with bitcoin — and in any case artworks are more genuinely scarce than Bitcoins.
Going further back in history, however, there do seem to have been some investment manias that went even further. Let us start, inevitably, with the Netherlands' Tulip Mania, now a major Hollywood movie.
My favourite source on the tulip mania is the book Tulipomania by Mike Dash, which I thoroughly recommend. Dutch records were not precise enough for us to create daily price charts to match bitcoin. Also, not all tulip bulbs were comparable — the rarer and, to a lesser extent, the more beautiful, the more you would pay. The maximum price reliably recorded for a tulip bulb during the mania was 5,200 guilders. As this was more than triple the 1,600 guilders that Rembrandt charged for his masterpiece the Night Watch at about the same time, this sounds excessive. For a better comparison, a 12lbs loaf would at the time have cost 0.4 guilders. So at the very top, you could have exchanged one tulip bulb for approximately 156,000lbs of bread, or, according to Mr Dash's figures, for exactly 400 tons of Dutch herring.
Nowadays a packet of 100 tulip bulbs can be bought on Amazon for $32.98, while a 1.25lbs loaf of Sara Lee white bread will cost $1.98, so you can get roughly 5 bulbs per pound of bread. As the ratio at the top was 156,000lbs of bread per bulb, it does look as though the Dutch tulip mania deserves its historical status as the most absurd example of overvaluation in history. But note that a bulb physically exists, and that its price can be compared with other physical objects. It is not clear that any such fundamental valuation is possible for bitcoin which is vulnerable to the risk of action by governments.
Was the acceleration in tulip prices comparable to the recent rally in bitcoin? The data are not very good, but one example in Mr Dash's book does suggest that bitcoin is ahead. This is a Bizarden tulip:
(The illustration is from a fascinating online presentation by Mr Dash that can be found here). For my money, it is a very pretty tulip. I would happily pay several dollars a packet of Bizarden bulbs. But Bizarden were not greatly coveted, according to Mr Dash:
Thankfully we do have comparable prices for a pound of Bizarden bulbs through the last four months of the mania, which ended very abruptly in the first week of February, 1637:
That is an increase in four months of a little over 2,200 per cent. Over the past four months, bitcoin has only gained 253 per cent. So cryptocurrencies are still not as crazily overbought as tulip bulbs used to be — although tulip bulbs do of course have the advantage that they could grow into very pretty flowers in your garden.
Another example of a mania which in its final stages outstripped even bitcoin was the South Sea Bubble, which suckered in many Britons in 1721. Note, however, that this mania involved outright fraud — those buying had been told basic lies about the assets on offer. Note also that the Bubble did not last as long as the boom in bitcoin has lasted to date. But in the last few months of madness, South Sea stock managed to appreciate by 800 per cent. And famously, it was not just idiots who were caught by this. Isaac Newton, one of history's greatest geniuses, was ruined by his decision to buy South Sea stock near the top.
This chart comes from the Slope of Hope blog:
A broader lesson is that bitcoin as an investment or speculation phenomenon is unlike anything that has been seen in a long time. It is behaving even more dramatically than most of the best documented bubbles, although it has not yet reached the excesses of the tulip bubble.
This could be taken as a sign that bitcoin simply is not comparable to other investment manias. That would be the line taken by many crypto-enthusiasts, who would call the current rise in price an "adoption curve". The underlying problem that Bitcoin's rise in value makes it harder to use as a currency remains. On recent evidence it is easy to see why someone might want to buy some bitcoin as a bet, but rather harder to see why anyone would choose it as a currency to denominate a transaction.
But as for the lessons of history, we are almost literally off the charts. History as interpreted by many of us (including me) suggests that prices will eventually come down to earth with a bump. But it gives us no steer on how much further this could go on, or on timing. Maybe bitcoin could yet match Bizarden tulip bulbs before it is done.
But from Bizarden to bitcoin, one comment remains: How bizarre.
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