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Bitcoin Is Nothing Like the South Sea Bubble 12/3/2021

But what the last few decades of research in finance has taught us is that it‘s not so easy to spot financial bubbles, at least not until after they collapse. The very fact that we don’t have “successful” bubbles tells us that our definition of bubbles is backward-looking, excluding once-lofty assets that actually made it.To get more news about WikiFX, you can visit wikifx.com official website.

The Teslas of the world (and the Squares and the Apples and the Nvidias) all have parabolic price rises with valuations that cannot reasonably be justified by our traditional investing tools. Gold has allegedly been a bubble for 6,000 years, making a grand mockery of the meaning of the word. At some point, a “bubbling” new venture turns into something else: a valuable asset.

Where does that leave bitcoin?

BTC is routinely slapped with the B-word and skeptics have called for its imminent death hundreds of times. What goes up, standard reasoning suggests, must come down – especially if we can‘t see an overwhelmingly clear reason for why it should rise. Critics are quick to invoke the South Sea Bubble of 1720 or the Tulip bubble in 1637, but it’s not clear they know enough about our financial past to make those episodes relevant for today.

It‘s easy to see why comparing bitcoin to the South Sea Company’s meteoric rise in the spring and summer of 1720 is so tempting. Here is a chart tracking the price of bitcoin and SSCs stock:Bitcoin closing prices from CoinDesk and SSC stock via the European State Finance Database. Bitcoins closing price on July 25 is indexed to the SSC price of £116,88 on Nov. 7, 1719, so that daily changes in bitcoin prices are comparable to historical movements in SSC stock.(Joakim Book)

While bubbles of the past explode only to later collapse and never to return to their previous glory, bitcoin is known for its “two-steps-forward-one-step-back” moves. If I plot its latest seven-month explosion from around $10,000 to over $50,000 against the relevant time period for the South Sea Companys stock in 1719-1720, we realize what the bitcoin skeptics think they see – an unsustainable bubble waiting to deflate.

But they shouldn‘t be too hasty. Bitcoin of 2021 doesn’t have an entrenched political elite trying to consolidate and make manageable a bloated government debt. If anything, Bitcoin is fighting elites that are trying to oppose it and denounce it every step of the way. While exchanges have been hacked and privacy details leaked, bitcoin insiders haven‘t unscrupulously bribed half the House of Commons with assets sold at below market-price. Bitcoin insiders haven’t – as far as we know – assuaged government officials by giving them fictitious bitcoin in exchange for favorable legislation. This all happened during South Sea mania.

Political insiders haven‘t passed a “Bubble Act” to ban the issuance of other competing schemes to funnel market demand to their preferred asset. Spot trading of bitcoin hasn’t been paused for two months at the height of a price boom to process a dividend the SSC directors haphazardly arranged so a semblance of fundamental value could be had.

New bitcoins are predictably mined and willingly sold in open and relatively transparent markets. In the case of the SSC, the company issued new shares in rounds of higher and higher subscription prices with ever-loftier promises of future riches.

Bitcoins arent purchased on a partially paid payment plan where investors put down 10% or 20% of issuing price with the rest payable in equal installments every three or four months – essentially transforming the stock into a levered derivative product. If anything, bitcoin is purchased with investor equity or with over-collateralized loans.

The Bitcoin network is not extending loans to its “investors” or allowing its directors to lend aggressively on the security of their holdings. While crypto banks today do offer lending services, they are well-capitalized and their loans are made with plenty of collateral. This damps the risk to the overall financial system rather than fueling the fire like the South Sea directors did in the spring and summer of 1720.

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