Of course, not being normal is part of bitcoin’s appeal. Bitcoin has redefined money and created the hitherto non-existent concept of a scarce digital asset. It’s hard to hold it to the standards of “normal” assets.
But as someone who spent decades watching financial markets go through repeated patterns of exuberance and retrenchment, I’m quite uneasy with bitcoin’s latest runup. A 20% gain over the weekend left it up 60% over two weeks and up an eye-popping 900% year-to-date.
Record-breaking gains are irrelevant in isolation. The important question is “compared to what?” And the search for an apples-to-apples comparison is especially tricky for an asset class whose binary set of outcomes might lie in an all-or-nothing range of $0 to $1 million.
Cryptocurrencies don’t have any real precedent from which to establish benchmarks. That makes them hard to value.
But being hard to value doesn’t get us off the hook. Investors must at least try to assign numbers to the assets they buy. And any rational assessment of something’s value must, by definition, compare it to the value of something else. Value is an inherently relative concept.
Tulips… there, I said it
Here’s a value comparison worth thinking about.
Three long weeks ago, when bitcoin was only worth $7,000, Convoy Investments pointed out that, throughout history, the only other price performance for an asset class that exceeded bitcoin’s was the Netherlands’ infamous Tulip Mania of 1619-1622.
As most students of finance know, that one didn’t end so well.
Bitcoin compared to other bubbles. There is only one which surpasses it: the Dutch tulip mania.
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— The Long View (@HayekAndKeynes) November 8, 2017
While it’s true that resorting to the Tulip Bubble analogy has been a somewhat hackneyed, knee-jerk tool for many bitcoin critics, I think the instinct among many bitcoin bulls to mock them for resorting to it is often similarly simplistic.
William Mallers did it last week in an impassioned rebuttal of financial blogger John Lothian’s criticism of the CME Group’s plan to introduce bitcoin futures.
The problem is that such rebuttals often resort to strawman portrayals of the critic as someone who misunderstands bitcoin’s far-reaching societal potential, as an ignoramus who thinks it’s as worthless as a tulip bulb. This misses the point.
The problem with the tulip bubble wasn’t that the tulip bulbs were worth nothing, it was that a cycle of mania, speculation and FOMO (fear of missing out) pushed their price far out of line with their realizable value. It’s not unreasonable to argue that a similar phenomenon is pushing bitcoin’s price far beyond what’s justified by its unproven potential, conceivably powerful as that might be…
Read Full: To the Moon? Time to Grow Up, Bitcoin