Tulip Mania, Again? Bitcoin Mania
I’m not sure history repeats itself, but oh boy, I think I recognize the melody. What do tulips and Bitcoin have in common?
Human behavior. In my opinion.
It’s 1637, February, you’re in Amsterdam. The Dutch Republic is at its peak of economic and financial power: Tulip prices reach an all-time high – the peak has been made, some tulip bulbs sold for more than ten times the annual income of a skilled craftsman.
Beginning in 1636 tulips were traded on the exchanges of numerous towns and cities: “Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, ….Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.”**
And, now Bitcoin…. Let’s see, a year ago the price for one Bitcoin was $770.41. As of this writing (Friday, December 8th @ 11 AM), the price is $15,678.38 that’s after giving back nearly $1,500 early this morning.***
Early next week the Chicago Board Options Exchange starts allowing investors to trade bitcoin futures, sound familiar?
Bitcoin is a cryptocurrency. It is a digital currency. And serves as a worldwide payment system. Unlike central banks, bitcoins are created as payment (transaction fees) for a process known as mining. Mining is a recordkeeping service designed keep the transaction’s history known as the blockchain, a public ledger, validating each transaction and keeping a record of the entire chain of transactions of each bitcoin.
Traditional currencies are valued based on the strength of their economies which establishes the demand for the currency, it’s attractiveness as an exchange mechanism, and its stability. If folks want to buy U.S. goods, stocks, and what have you, then the dollar relative to other currencies increases.
Is bitcoin worth today’s price? I’m not even sure how it should be valued. But like a tulip in the 17th century in Amsterdam, it’s worth what someone will pay for it.
Unlike our dollar, which the treasury can print more of, bitcoin has a limit of 21 million bitcoins. If you believe the transactional demand using bitcoin is real, the valuation may be credible. Possible? Certainly. Plausible? Probably not – Tulips most likely.
Currently, our portfolios overweighted domestic and foreign equities.
Carlos Dominguez – Portfolio Manager, RJFS
*Thompson, Earl (2007), “The tulipmania: Fact or artifact?” (PDF),Public Choice, 130 (1–2): 99–114, doi:10.1007/s11127-006-9074-4, retrieved 2008-08-15 https://en.wikipedia.org/wiki/Tulip_mania#CITEREFThompson2007
** “The Tulipomania”, Chapter 3, in Mackay 1841
The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.
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