The Tribune

ACTIVTRADES WEEKLY

By RICARDO EVANGELISTA

www.activtrades.bs

THE 1600s were undoubtedly the Dutch golden age, a period during which the European country became a leading arts, science and military global power. As Holland became rich and powerful so did its citizens, with many using growing disposable incomes to invest and speculate, creating a thriving financial market where concepts such as future contracts were first traded. It was around this time that occurred one of the most famous and bizarre episodes in the history of finance: The tulip bubble.

Tulips are native to central Asia, having reached the Netherlands during the seventeenth century, immediately becoming extremely popular. Demand was such that sellers began to stockpile, driving prices to increasingly high levels. Bulbs took seven years to grow, so merchants saw an opportunity to cash-in in advance by selling contracts entitling holders to the future purchase of the mature flowers. This was how the concept of future contract was born. These contracts changed hands several times, at ever increasing prices and, at the peak of tulip-mania, the value of a single flower reached 10,000 guilders, which at the time was enough to buy a townhouse in the most desirable quarter of Amsterdam.

However, when something seems too good to be true, it often is. Some traders started to feel uncomfortable with the risk and eventually auctions failed to attract any buyers, forcing desperate merchants to sell remaining stocks at increasingly lower prices. In the end, the market collapsed, and countless ill-advised investors ended up ruined, having invested all they had in tulips. The episode became known as the tulip “bubble”, an expression still used today to describe an unnaturally inflated financial market.

If we fast forward to 2021, another financial asset is taking the markets by storm. Bitcoin is causing a demand fever that is inflating its price beyond what would perhaps be reasonable to expect. The belief that the cryptocurrency is the new digital gold is generating wild price fluctuations, that some see as fitting the description of a bubble.

In 2017 the price of one coin rose from $1,000 to $20,000, to then collapse, less than a year later, to $3000. Bitcoin has no intrinsic value, unless we factor in the environmental cost of the energy hungry mining process, in which case the value would be negative, and doesn’t generate any yield. Very few things are priced in Bitcoin, and the fact that only five transactions per second can be processed (compared for example with VISA’s 24,000) means it will ever become a mainstream way of payment. Besides, the volatility of its price could wipe out any merchant margins in a matter of seconds.

So, if Bitcoin generates no income, has very little utility and even the anonymity some believe it provides is easily overcome, as blockchain technology makes it easy to trace back any payment, why is its price soaring to, at the time of writing, around $48,000 per coin? It could indeed be that the crypto really is the new digital gold, and demand will continue to propel its price to ever-higher levels; or, we may be witnessing a speculative bubble, perhaps even more absurd than the tulips, as the flowers at least had some intrinsic value, while bitcoin is nothing more than lines of code, worth only the value placed in it by speculators’ anticipation of being able to sell later at a higher price.