On Tulips and Hockey Sticks

 

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Bitcoin price chart through June 12, 2017. Until today December 15, 2017, Bitcoin continued its meteoric rise to $17,700. 

The comparisons of Bitcoin to the tulip mania of 17th century Holland  or  Bitcoin’s price to a classic Economics 101 hockey stick are wearing thin.

 

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The classic hockey stick chart

If what we are looking at is truly a bubble then if we are at that point where institutional investors are coming into the market in droves, we should see them being accompanied by media attention, unbridled bitcoin enthusiasm, and greed.  After that, a period of delusion, fear, and despair.  The Naysayers would love that to be the case.

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Chart of the classic market bubble showing valuation against time.  As time passes valuations rises to euphoric heights followed by a crash.

But what we are looking at is something more akin to a chart of Facebook membership enrollment which goes up and levels off rather than a rise and fall.  Of course, Facebook didn’t have an eight year warmup period like Bitcoin but once it started to catch on with users, Facebook doubled and tripled in almost every year for the next nine years.

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If Bitcoin is the new currency to replace US dollars then what we’re witnessing is people accumulating Bitcoin as they would cash.

How much cash do you have on hand? If you’re like me you have enough cash in your wallet for a few days and enough cash in the bank for about a month’s worth of expenses.  More than that isn’t necessary since the supply of cash is replenished with a salary check or a dividend [ayment.  If everyone is in the process of accumulating a month’s worth of spendable cryptocurrencies, then the market cap of cryptocurrencies used as cash should go to a trillion dollars.  That’s the amount of money that American’s keep in checking accounts, on average.

At present, the Bitcoin investments can be characterized as speculative. Investors aren’t using Bitcoin yet.  They simply want to own some in the hopes that the price rises.  This will quickly change as folks find ways to spend Bitcoin as they would dollars.

 

171201 Not All Dot-com Companies Failed

webvanIf you’re old enough to remember the dot-com bubble you might remember what was going on at the time that gave rise to the fever.  The Internet was brand new.  Companies were popping up left and right.  All they needed was a value proposition and a domain name and off they went.  There were stories of instant, overnight millionaires who took a simple idea and turned it into a fortune.  Before you knew what was happening, many a famous actress or TV personality would be promoting his or her new dot-com idea and funded an initial public offering (IPO).  Hundreds of IPOs were streaming onto the market every day.  Suddenly, thirty million dollars in an IPO, for a website whose famous celebrity founder/owner was an expert in fashion advice and thought her website which would give advice to others would be an instant success.  It took several months but when these hotshot startups started bleeding money, no amount of funding was going to make them work.

In every industry sector, there were many bright ideas. There were well-funded websites for selling beauty products like iBeauty.com, Beauty.com, Reflect.com, and Eve.com. They all failed. One famous fail was Boo.com, a would-be pioneer in the e-commerce space. It was founded in ’98, started selling branded fashion apparel in ’99, and ended burning through $135 million by the end of the second year. Webvan was founded in ’99 as an online grocery store, delivering groceries (including perishables) to doorsteps across the US much like FreshDirect does today.  Webvan went from being a $1.2bn company to being liquidated in under two years.

The digital forerunner of Bitcoin, in 1999, was sold like a gift card without a store to back its value. The overall consumer reaction was “why?” Have you ever heard of eToys.com and Pets.com. Both failures but not for lack of a good idea.

But what did we know? Gwen Stefani gives fashion advice as a Wall Street investment?  Who knows? No one knows.  Well… the bubble burst.  Those dot-com dreams disappeared and Wall Street got much more realistic about Internet riches.  That doesn’t mean that no one made money.  Many companies got started then with very good ideas and made lots of money the old-fashioned way. Amazon, Yahoo, Google, Facebook, LinkedIn, and eBay are amongst those, for example.  They earned it.

There’s talk right now about a cryptocurrency bubble, fueled by Bitcoin’s valuation.  Everyone mentions the tulip bubble and talks about outlandish prices going up in smoke for a virtual commodity no one can describe or understand.  What is happening at the moment has many similarities to the dot-com bubble.  Every nerdy programmer with a micron of an idea for a new cryptocurrency is creating an ICO (Initial Cryptocurrency Offering).  Most are sketchy ideas that have not been thoroughly fleshed out and lend themselves to scams and fraud.  ICOs have been outlawed in many countries.  Some of the ideas sound plausible.  Some don’t. Of the top ten cryptocurrencies, most of them will thrive.  Of the bottom ten cryptocurrencies, most won’t.