Bitcoin’s recent wobbles have given fresh urgency to a question that’s gripped market observers for much of the past year: will the cryptocurrency go down as one of history’s most infamous bubbles, alongside tulip mania and the dot-com craze?
The magnitude of bitcoin’s boom (before it lost as much as 48% from its 18 December high) suggests investors have reason to be worried.
As the chart shows, the cryptocurrency’s nearly 60-fold increase during the past three years was truly extraordinary.
It dwarfed the Nasdaq Composite Index’s gain during the headiest days of the 1990s. Going further back, it comfortably outstripped the Mississippi and South Sea bubbles of the 1700s.
It even topped the Dutch tulip mania of the 1630s, though that last comparison should be taken with a grain of salt given the scarcity of recorded tulip values.
Bulls say bitcoin’s boom is far from over, and that there’s more to analysing a market than just measuring price gains. While the recent tumble has alarmed some investors, the cryptocurrency has bounced back from several previous swoons exceeding 50%. If Bitcoin did become a widely accepted form of digital gold, as predicted by Cameron Winklevoss of Facebook fame, it could have a lot further to surge.
There’s also more than one way to slice a rally. On an annualised basis, bitcoin’s three-year rise has been slower than the gains seen during several of history’s biggest manias — most notably the Mississippi and South Sea bubbles.
Still, sceptics abound. Howard Wang of New York-based Convoy Investments and Jeremy Grantham of GMO have analysed bitcoin’s advance relative to past frenzies and concluded that it’s unsustainable. Grantham, who helps oversee about US$74bn as GMO’s chief investment strategist, summed up his concerns in a 3 January letter to investors:
Having no clear fundamental value and largely unregulated markets, coupled with a story line conducive to delusions of grandeur, makes this more than anything we can find in the history books the very essence of a bubble.
The strategist has a mixed record of success with such warnings. While Grantham was correct to call the 1990s surge in tech stocks a bubble, he exited too soon and missed out of some of the market’s biggest gains.
Only time will tell whether Grantham and other bears are right, wrong, or just too early when it comes to Bitcoin. — Reported by Eric Lam, Mathieu Benhamou and Adrian Leung, (c) 2018 Bloomberg LP
