Bitcoins, the first international digital currency, were kind of a joke when they debuted in 2009. But just eight years later, they’ve grown so lucrative that historian Niall Ferguson is mad at himself for not buying them sooner.
In the Boston Globe, Ferguson writes that the value of a bitcoin in December 2017—$15,992—is roughly 45 times higher than it was in October 2014. Because of this, Ferguson and others warn that the bitcoin bubble could grow so much that it bursts, as happened with previous investment manias.
Tulips in Lisse, Netherlands, 1994. (Credit: Marc DeVille/Gamma-Rapho via Getty Images)
Tulipmania (or not)
One of the most widely known stories of investment mania is Tulipmania, a 1630s phenomenon in the Netherlands that was also the subject of the 2017 film Tulip Fever.
According to the story economists have been telling for several decades, high demand for certain types of tulips increased their prices to astonishing heights. People of all economic levels began to buy tulips at an already steep price and then sell them for even more. Very quickly, this economic bubble burst, throwing the fortunes of tulip traders asunder.
Yet today, scholars dispute the scale of this story. Historian Anne Goldgar, author of Tulipmania, told Smithsonian that there “weren’t that many people involved and the economic repercussions were pretty minor.” When researching the bubble, she says she “couldn’t find anybody that went bankrupt.”
Likely, the Tulipmania story grew larger and more exaggerated through the centuries as it became a kind of morality tale in Christian literature. Which means that it’s not the best example to use when talking about modern bubbles.
The economic disaster in France due to the collapse of the Mississippi Company, which many people invested in heavily. The company was based on the commercial exploitation and colonization of Louisiana. (Credit: Corbis via Getty Images)
The Mississippi Bubble
More relevant to today is the Mississippi Bubble, a financial frenzy in France in the early 18th century. This bubble gets it name from the French Mississippi Company (known at different points as the “Company of the West” and the “Company of the Indies”) that traded with colonies in North America and the West Indies.
By 1719, the company had a monopoly on trading rights with French colonies, which mean that the demand for shares was high. It was so high that the price of shares quickly grew from 500 to 18,000 livres, the French currency at the time. This was far beyond the profits that the company could actually bring in, and the disparity resulted in severe inflation that, by the end of 1720, rendered shares in the company pretty much worthless.
A satirical illustration of the South Sea Bubble. This, the first major crash of the English stock market, involved fraud, speculation and greed and, when the Bubble burst in 1720, financial ruin for many. (Credit: Ann Ronan Pictures/Print Collector/Getty Images)
The South Sea Bubble
During the same time that France was going through the Mississippi bubble, Britain was going through its own investment mania. Similarly to the Mississippi Company, the British South Seas company had a monopoly on trade with South America that drove demand for shares way up.
People began buying shares for much more than they were worth, which led to a market crash, just like in France. But as Ferguson points out, the fact that the concept of a company share survived beyond these crashes suggests that if the bitcoin bubble does burst, it doesn’t necessarily mean that bitcoins will go away.
“As the South Sea Bubble of 1719-1721 revealed, financial innovations are often accompanied in their initial stages by bubbles,” Ferguson writes. “[T]he inevitable bust doesn’t necessarily kill the innovation.” In other words, a bubble burst won’t necessarily kill bitcoins.
Stock Market Of Tokyo, 1992. (Credit: Kurita KAKU/Gamma-Rapho via Getty Images)
Japanese Asset Price Bubble
In the late 1980s and early ‘90s, Japan went through an economic bubble that, when it burst, caused stagnation for the rest of the ‘90s (this is often known as the “Lost Decade”).
During the bubble, Japan found itself in “a vicious cycle in which land was used as collateral” to get loans, according to The Japan Times. These loans “were then used to speculate on the stock market or to purchase more land.” Basically, it caused a situation where banks were granting loans by using overvalued land as collateral.
Japan was able to get back on its feet, and has actually played a central role in bitcoins’ recent surge. According to The Washington Post, the country is one of the top five markets for bitcoin trading.
Which means that Japan once again has a lot of stake in whether this particular bubble bursts.
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