From time immemorial people have searched for easy money. In mediaeval times alchemists searched for ways to turn base metals into gold, and in the 17th century there was tulipmania, in which the boom reached such proportions that some people sold their houses for just one tulip bulb. In fact, bubbles and busts have been so common that in my library is a three-volume set entitled “Great Bubbles”.
The pattern of behaviour is the same in every bubble. An “asset” starts to jump in price, it receives publicity, and all those hopeful of making a quick buck start to jump in lest they miss out. FOMO (fear of missing out) is certainly not a new concept in investment. Of course, the increased buying power forces prices up, which attracts more investors – inevitably the top of the boom is reached, prices tumble and the majority miss out.
If you want a great example, google the recent garlic bubble in China. To quote one news source, it left many speculators with a “bad taste in their mouths”.
If the conversation at a recent barbecue is any indicator, the current bubble commodity is Bitcoin. A medico mate I’ll call Fred loves to dabble, and right now he is spruiking the value of Bitcoin to anybody who will listen.
For the uninitiated, let me explain that Bitcoin is a form of “cryptocurrency” that has been around since only 2009. Its founders claim it has the unique benefit of being in limited supply. Fred tells me you simply have to go to the bank, make a deposit of say $5000 to the account of a “Bitcoin exchange”, and receive a unique 20-digit number. You then email this to the Bitcoin exchange with a copy of your drivers licence photograph and you are off and running. But there is a big caveat: if you lose that number it cannot be replaced, and any money you have “invested” in Bitcoin is lost for good.
In my opinion, Bitcoin fails every investment test. If you buy government bonds, you receive a guaranteed income plus principal repayment at the end of the term. If you buy shares you can make a decision based on the financial statements and profitability of the company. If you buy real estate there should be a nexus between the land value, the cost of improvements, and any potential rental income. In other words, you are making the decision on concrete information.
Bitcoin works on the greater fool theory: a fool buys today in the hope of on-selling to a greater fool tomorrow. It’s more like the allegory of the box of strawberries sold from person to person at ever-increasing prices. Finally, the buyer who had paid $100 for a box of strawberries that had cost only $5 a few buyers ago, stopped the cycle by opening the box. To his dismay he found the strawberries were rotten! When he complained, the response was, “but these strawberries were meant to be sold – they were never meant to be eaten”. Each buyer had bought with one aim – to resell for a higher price to a fool who still believed in the impossible dream. At least your Bitcoins can’t rot. They never really existed.