In 1637, the tulip bulb investment mania peaked in Holland. It had made some people rich. Now it was about to make others poor.
Bulb prices rose steadily throughout the 1630s, as ever more speculators wedged into the market. Weavers and farmers mortgaged whatever they could to raise cash to begin trading. In 1633, a farmhouse in Hoorn changed hands for three rare bulbs. By 1636 any tulip–even bulbs recently considered garbage–could be sold off, often for hundreds of guilders. A futures market for bulbs existed, and tulip traders could be found conducting their business in hundreds of Dutch taverns. Tulip mania reached its peak during the winter of 1636-37, when some bulbs were changing hands ten times in a day. The zenith came early that winter, at an auction to benefit seven orphans whose only asset was 70 fine tulips left by their father. One, a rare Violetten Admirael van Enkhuizen bulb that was about to split in two, sold for 5,200 guilders, the all-time record. All told, the flowers brought in nearly 53,000 guilders.
Soon after, the tulip market crashed utterly, spectacularly. It began in Haarlem, at a routine bulb auction when, for the first time, the greater fool refused to show up and pay. Within days, the panic had spread across the country. Despite the efforts of traders to prop up demand, the market for tulips evaporated. Flowers that had commanded 5,000 guilders a few weeks before now fetched one-hundredth that amount.
The story is here.
What goes up comes down. Whatever offers fabulous riches for no good reason, then offers fabulous losses for a very good reason: no new buyers at higher prices, and then a wave of selling.
Bitcoins that sold for $2 two years ago were selling for $1,242 on Thursday, November 29. Then they fell by a third in three days. Then there was a rally.
Volatility? Like nothing ever seen before.
Would you bet your future on Bitcoins? Would you hold 90% of your wealth in Bitcoins instead of dollars? No? Neither will anyone else. That is why Bitcoins will not replace the dollar or any other currency. An asset that traded for $50 for 10,000 units in 2009 is just too volatile. Multiply $1,242 by 10,000; that is $12,420,000. If you asked the buyer, he would say this: “Bitcoins have been very, very good to me.”
Eat your heart out, Warren Buffett! It was all so easy. Just buy and hold.
That strategy is why Bitcoins will never become a replacement currency for the masses. Felix Salmon explains why.
This is something which should worry the bitcoin faithful, if they really want to see bitcoin become a broadly-used global currency. After all, press coverage of bitcoins runs in lockstep with the bitcoin price: it’s times like this, when the price is at its fluffiest, that bitcoin gets written about the most. (If it’s not physical bitcoins, it’s hard drives in landfills.) The largely unspoken assumption behind all such stories: bitcoin is an asset class, and people should get excited about it when (and, implicitly, only when) the price is going up. This is what I think of as the CNBC Premise: when an asset rises in price, that is necessarily a Good Thing, and when it falls in price, that is always a Bad Thing.
The CNBC Premise has never made much sense with respect to currencies, however. And with respect to bitcoin in particular, its most exciting aspect is not its value, but rather its status as an all-but-frictionless international payments mechanism. If you want bitcoin to really take off with respect to payments, you actually don’t want to see crazy price spikes — such things are the best possible way of stopping people from using bitcoins for payments. After all, if your bitcoins are doubling in value every few days, why on earth would you want to spend them?
(For the rest of my article, click the link.)