This month’s missive is about the “B” word I’m afraid.
I have tried to avoid mentioning it but to be honest it is now impossible. For the last couple of years the “believers” have been telling us we would be entering a new and better world and once everyone was on board and the old rule book torn up everything in the garden would be rosy. However what has happened in the past twelve months means even they must be having serious doubts now.
Yes, I am referring to Bitcoin. It is coming up to a year since the price of Bitcoin peaked at $19,665 whereas at the time of writing it is sitting at just under $4,000. For those less able at arithmetic this equates to a fall of nearly 80%, and it is fair to say the bubble has well and truly burst.
In the early days of Bitcoin it became popular with those of a criminal persuasion as a way to hide and launder cash. It became the currency of choice for those dealing in the “dark web” and in fact it was by reading an article about these criminal activities that I first became aware of Bitcoin and cryptocurrencies in general.
The truth is like all bubbles some people got very rich and those late to the party lost their shirts. In this respect it is little different from previous bubbles. What is widely regarded as the first financial bubble was in the 1630’s in Dutch Tulip Bulbs. This reached such frenzy that at its peak in the winter of 1636 individual bulbs were being traded at a price equivalent to seven years earnings for a skilled worker. Three months after the peak the price of bulbs had fallen by over 99%.
What causes such mania is heavily debated but we all lived through the dot-com bubble and can probably remember what that felt like. It starts with a gradual increase in an asset’s price which creates a snowball effect which encourages more investors to join in. This pushes the price up further reinforcing the belief that the investment can’t fail and that old rules, such as valuations, don’t apply.
At its peak investors become almost evangelical in their beliefs spouting about how the world has changed and that those disagreeing with them “just don’t get it”. The continuing increase in prices puts pressure on those who believe the emperor has no clothes and in the late 1990’s led to claims that the likes of Warren Buffet and Neil Woodford, both dot-com doubters, had lost it and were “dinosaurs”.
We saw the same with cryptocurrencies with articles stating in the future we would all be paid in Bitcoin and the current banking system was going to disappear. We have also seen the introduction of nearly 200 cryptocurrency “cash machines”, mainly in convenience stores, which must have proved very handy for those wanting to launder their ill-gotten gains as they can get cigarettes and a bottle of wine at the same time.
Ironically on almost the same day as the price of Bitcoin peaked, MoneyWeek (my favourite contrary indicator) had a drawing of Santa on the cover with a sack of Bitcoin and the headline “The gift that keeps giving”. It also included a two page article espousing Bitcoin and saying the doubters didn’t understand the world had changed and you should jump on as it could be “the greatest bubble in history”. I will avoid naming the writer (a chief investment officer at a fund management group no less) to avoid embarrassment, but if you changed the words Bitcoin for dot-com the article could have been written eighteen years ago.
So what is the point of this history lesson? Well apart from making you feel good that you didn’t get sucked into the hype (hopefully) it is also to give you reassurance that the recent stock market falls are definitely not the start of a bubble bursting (you need euphoria before that happens and I haven’t seen that since 2000). Instead they are typical market movements that probably are overdue and nothing for a long term investor to worry about.