Financial History Issue 125 (Spring 2018) - Page 15

The Bitcoin Premonition By Edward Chancellor Last December, the acting head of New Zealand’s central bank, Grant Spencer, said that the most famous of crypto- currencies resembled a “classic” bubble. Bubbles aren’t just about the madness of crowds — nor are they simply mani- festations of loose monetary conditions. Although both of these factors have been present in the extraordinary rise and fall of bitcoin over recent months, every bubble also involves an anticipation of the future. The trouble is that the speculators’ vision turns out to be deeply flawed. It’s true that bitcoin has much in common with great historic speculative manias. First, there’s the telltale super- exponential price rise. The South Sea Company stock soared 10-fold in 1720. By late last year, the red-hot cryptocurrency was up more than 20-fold over the previ- ous 12 months, peaking before Christ- mas just short of $20,000. Bubbles also exhibit tremendous volatility during their so-called “blow off”stage. Bitcoin’s recent price oscillations suggest as much. Then, there are the host of other crypto- currencies, conjured up by eager promot- ers to take advantage of the hype: Litecoin, Ethereum, Dash and Ripple, and spin-offs, or “forks,” from the original, Bitcoin Cash and Bitcoin Gold. By the end of last year, there had been nearly 1,400 “initial coin offerings.” These lesser-known cryptos call to mind the famous “bubble companies” of 1720 which followed in the wake of the South Sea Company. These speculative ventures covered a variety of activities from insurance to fish transportation, the most famous being “A company for carry- ing on an undertaking of great advantage, but nobody to know what it is.” Great bubbles attract speculators from far and wide. At the high point of France’s Mississippi Bubble, also of 1720, tens of Dutch satire engraved cartoon depicting the failure of the South Sea Company, the Mississippi Company and the bubble schemes of John Law and others, 1720.  |  Spring 2018  |  FINANCIAL HISTORY  13