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Some bubbles, from tulip to bitcoin

What a common point between a sudden craze for tulips in the Netherlands of the XVIIe century and the growing interest in a cryptocurrency like bitcoin four century later? In both cases, a situation where the price of an asset increases unreasonably and reaches levels deemed, often a posteriori, to be excessive in relation to its real value. Until the burst: sudden and sudden collapse of the price of the asset.

Craze for the tulip

The first major international crisis known to date dates from 1637, affects the Netherlands and Europe, and causes a frenzy around the bulb of the tulip "Semper Augustus". The craze for the flower attracts rich and more modest, to the point that in February 1637, at the height of the crisis, a bulb costs the price of a house ($ 67,000, inflation deducted), the equivalent of twenty years of salary for a worker of the time. Faced with increasingly exorbitant prices, people end up becoming more and more rare. The value of the asset drops to 95%, ruining many families.

explanations

The bubble mechanism, modeled by Hyman Minsky in XXe century, is relatively similar from one event to another. Five main stages characterize it: excess of optimism, boom, euphoria, profit generation and panic.

The appearance of a new economic good with significant profit prospects generates an excess of enthusiasm, which leads to the euphoria of the markets. This phenomenon is found at the beginning of the XVIIIe century, in the French crisis related to the actions of the Mississippi Company, when the Scottish John Law promotes products from Louisiana. Or even less than a century later, when the railways arouse the general interest of English companies. Faced with the prospect of rapid gains, investors are flocking, raising the price of assets due to a demand far greater than supply. The wave of speculation that follows leads to an unreasonable increase in the price of the asset, until the disconnect between the market price and its real value becomes evident. The euphoria turns into general panic, until the burst.

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A bubble can take only a few months to form, then burst – this is the case of tulipomania. But it can also spread over several years: the value of the Japanese Nikkei rose from 6,850 in October 1982 to nearly 39,000 in December 1989, a cumulative increase of more than 450% in eight years. The month of January 1990 marked the beginning of the deflation of the bubble and the collapse of the Japanese real estate market.

Last example of craze before the arrival of cryptocurrencies: rare earths. In 2010, these materials were presented as "the winning investment of the century– a formula that every investor should reasonably be wary of. These minerals, essential for the production of many electronics industries, were produced only in China. When the country announces a further decline in its export quotas, and therefore a drastic increase in prices, some consuming countries (essentially the United States) are launching mineral exploration programs. The demand is strong, the price of materials flames. The share price of Molycorp, the main US producer, quintupled in the year, reaching a peak of 74 dollars in 2011. At the same time, other countries such as South Korea and Japan manage to overcome Chinese dependence by practicing proactive policies to recycle their industrial waste. Since then, ore prices have steadily fallen, losing 40 to 80 percent of their value. Three years later, the course of Molycorp skim the absolute zero.

Bitcoin, bubble based on vacuum

There is however a difference between these different bubbles: their underlying. The Nikkei, for example, based on the highest capitalizations of the Tokyo Stock Exchange, will never be worth zero. It is virtually impossible that all major Japanese companies start to have zero value.

While it is very likely that the bitcoin falls one day to zero. A reminder: his initial ambition was to become a currency. Today, it is very difficult to fulfill this role: very slow and very expensive transactions, high risk of fraud, strong variation of prices during the day. As a result, with the exception of illegal transactions, purchases of real property in bitcoin are now virtually zero. And with regard to illegal transactions, the interest in bitcoin seems to have decreased considerably. Techniques exist indeed to decrypt the blockchain and trace the history. Also, since a ceiling of five average transactions per second in December 2017, we have come down to four today and most of these transactions are speculative.

If it is not a currency, bitcoin is today generally regarded as a speculative asset, with no other use than to be an expectation of earnings for those who have bet on its rise. Its value, once all speculators have lost confidence, will likely converge to zero. Which would be good news for the climate.

Savinien de Rivet


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Lina Kortobi

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