First things first, I am not a bitcoin expert. Far from that, I am a fence-sitter who eavesdrops on his colleagues and friends when they get into chest-thumping mode about their crypto-investments.
What is happening right now reminds me of the heady dot-com bubble days of 1997-2002 and maniacal times that preceded the 2008 meltdown. Both events ended in a bloodbath for investors, and so might the one we are in right now. The common theme throughout has been the investors’ herd behaviour.
All things dot com (1997-2001)
In the late 90s, if you had barebone operations, but a .com attached to the end of your name, you’d be in business. And, not just that, you could do your IPO, take the investors money and fly to the Bahamas for a luxury vacation.
Such was the reigning stupidity, investors made a beeline to buy anything with a semblance of tech or .com. In 1999, the stock of a company called Mannantech shot up by 368% in the first two days of public listing on NASDAQ.
There was no method to this madness, however. It was just that a sea of investors mistook the company for a tech stock, whereas, in reality, it was a nutritional-supplement maker. Yeah, let that sink in.
The Blindfold of Greed (2007-08)
In 2007, right before the stock markets worldwide nosedived, it was the same wild party, the same euphoria. While banks in the US were busy lending mortgages to those with doubtful credit profiles, here in India, financial commentators had started calling the period ‘the mother of all bull runs’.
I remember a close acquaintance of mine sold off his wife’s gold jewellery to invest in Reliance Power IPO. The company raised over $3 billion, and the IPO got oversubscribed 69 times.
The stock tanked on the first day of listing, however, and never recovered until this day. On a dispassionate note, investors had it coming. All the madness was for a company which had no track record, no assets and no cash flow whatsoever.
This underlines the blindfoldedness which prevails amongst even well-informed investors at the heights of market mania.
Bitcoin frenzy (2017- )
Unless you are living in a cave or meditating in the Himalayas, there is no way you won’t have heard of Bitcoin (BTC). It’s the cryptocurrency the world is going crazy over. Everyone wants a piece of it.
The birth of bitcoin is every bit as political as it is economic. Its decentralized nature is an answer to the greed of the storeyed financial institutions which led to the 2007-08 crisis.
Since its birth in 2008, bitcoin had been inching upwards with a few stumbles on the way. It was trading at less than $1000 in January this year.
But since January, its demand has just exploded out of the gates. Everyone who wants to get rich quick is after it. The whole scene has turned into a piratical frenzy. People are mortgaging their homes to buy bitcoins. It is the news like these that should scare the small investors shitless. But, you know, in times of sheer greed, the voice of reason carries no weight.
One of my friends broke into his savings and bought the fractions of a bitcoin. Here’s someone who has not invested in a mutual fund or a stock his whole life, and now he is a bitcoin investor. When I asked him if he understands the heads and tails of what he is investing into. His reply: “I need not. I guess you didn’t hear the buzz. People are becoming millionaires. You should invest, too.” I decided to walk away from the conversation.
As I write this post, 1 Bitcoin is equivalent to $16500. It was $18690 last night. A drop of 10% overnight! It is a humble reflection on the fizzy nature of the cryptocurrency.
Look I am not anti-bitcoin. I think cryptocurrencies would be a great alternative to the fiat money. Alec Ross in his book ‘The Industries of the Future‘ foresees a world with 6 dominant currencies – USD, Yen, Renminbi, Euro, Pound and BTC.
But until bitcoin and other cryptocurrencies find stability, gain purchasing power and genuinely become a medium of exchange, all the euphoria about them is meaningless. Anyone who thinks otherwise is living in a bubble I am afraid.