Bitcoin is approaching the $20,000 mark. Is this a new round of tulip bubble?

In 1637, the tenth year of Emperor Chongzhen of the Ming Dynasty, the Frenchman Descartes formalized the geometric coordinate system and founded analytic geometry; in Beijing, thousands of miles away from France, Song Yingxing had just completed the immortal work "The Exploitation of the Works of Nature" in the history of Chinese science; the Dutch were in the Dutch Golden Age and established a complete market and banking system and the world's first stock exchange.

In such an era of rapid development in global science and technology, culture and economy, the world's first economic bubble was born: tulip mania.

In the early 17th century, the Netherlands gained independence in a series of wars with neighboring countries, and used its status as a trade center to become a European power, ushering in the Golden Age. Merchants from all over the world continued to transport rare treasures to Amsterdam. Spices from India, silk from China, and specialties from all over the world were concentrated in this most eye-catching city in Europe. But no matter what treasures, they were not as beautiful as the flowers from Ottoman Turkey: tulips. 100 years ago, the Austrian emperor's ambassador brought this flower to Europe, which triggered the pursuit of all walks of life.

Dutch merchants were attracted by the dazzling stripes of tulips and saw the value of these flowers, so they began to buy a large number of tulip bulbs. However, the fact that tulips need three years to bloom limited the number of tulips on the market, and the price of bulbs gradually began to rise.

Starting in 1634, the price of tulip bulbs gradually deviated from their actual value. Some people spent huge sums of money on them. At that time, there was even a record of exchanging a high-quality bulb for a mansion. The high price of tulips at that time can be seen from the units purchased. High-quality varieties were weighed and priced in a unit called aas (1 aas = 0.05 grams).

In the book "Tulip Mania" written by M. Dash, there is the following description: "In 1636, a tulip worth 3,000 Dutch guilders could be exchanged for eight fat pigs, four fat bulls, two tons of butter, one thousand pounds of cheese, a silver cup, a bag of clothes, a bed with a mattress, and a boat."

The nascent stock exchanges also contributed to this: year-round trading and futures trading became the mainstream of the market, and anyone could buy a note for delivery "next April" and then wait for the bulb price to double before selling it.

In early February 1637, the price of tulip bulbs suddenly plummeted, leaving only one percent of the peak price. Cities across the Netherlands fell into chaos, and many investors were both creditors and debtors. The parliament and the city government then took action and finally decided to "keep the tulip transaction until the investigation is completed." This decision made the bill invalid, but quickly solved the problem, leaving a few bankrupts and nouveau riche, and the tulip mania era ended. This incident, along with the South Sea Bubble in Britain and the Mississippi Company in France, is known as one of the three major bubbles in modern Europe.

Nearly 400 years after the tulip bubble burst, in 2013, former Dutch Central Bank President Nout Wellink described Bitcoin as “worse than tulip mania,” adding: “With tulip mania at least you got tulips, with Bitcoin you get nothing.”

In November 2020, the price of Bitcoin approached the $20,000 mark, nearly 100 times higher than in 2013.

So, is Bitcoin a “tulip bubble”?

Deng Wei, lecturer and master's tutor at the School of Accounting of Zhongnan University of Economics and Law, believes that Bitcoin is a global virtual currency with the same intrinsic value worldwide, which provides a natural convenience for testing its price bubble using the normal distribution test. This is because if there is no price bubble, the market prices of Bitcoin on different trading platforms will consistently reflect the common intrinsic value, and the prices of different trading platforms will converge to the common intrinsic value.

In other words, there should not be significant long-term differences in prices between different trading platforms, that is, the price deviation rate should obey a normal distribution with a mean of 0. On the contrary, when there is a price bubble in Bitcoin, the market prices of different trading platforms will deviate from the common intrinsic value due to the existence of bubble components, resulting in long-term significant deviations, and the price deviation rate will not obey a normal distribution with a mean of 0.

Using this method to verify, it is obvious that there was a lot of bubble in the Bitcoin market before 2017. However, after 2017, as the secondary market gradually improved, Bitcoin liquidity actually increased, and the market prices on different trading platforms became infinitely close. The bubble actually shrank after the surge.

It can be said that Bitcoin is a perfect financial speculation object, and speculation is the main reason for the Bitcoin price bubble. As an Internet financial product, Bitcoin can be legally traded in many countries, mainly including the United States, China, Japan, the European Union and other countries. Bitcoin is traded in multiple currencies on many trading platforms, and the procedures for opening an account, transferring funds in and out, etc. are all done online, which is very convenient. At the same time, Bitcoin is traded 24 hours a day, and there is no limit on the price increase or decrease.

In addition, Bitcoin can not only be bought and sold between traders similar to stock trading, but also be transferred between different traders around the world similar to bank account transfers. In a few countries, Bitcoin can even be used to pay for goods. In addition, as a novel investment product, the potential value of Internet financial products such as Bitcoin is highly uncertain, which is very attractive to speculators. These factors make Bitcoin have the dual attributes of financial assets and currency, and it is a perfect speculative object with extremely strong liquidity.

So why did the bubble shrink before 2017 compared to after 2017? The author believes that this is due to the gradual maturity of the blockchain market and the gradual penetration of blockchain technology into the Internet industry.

Classical financial theory holds that under the efficient capital market hypothesis, the market price of financial assets represented by stocks reflects their intrinsic value, and market prices fluctuate around the intrinsic value. In other words, market prices will not deviate significantly from their intrinsic value over the long term, otherwise there will be an asset price bubble.

Compared to 2017, the cryptocurrency market in 2020 is no longer the same.

On the one hand, as the cryptocurrency market matures, Bitcoin now has a well-functioning derivatives market and custody services provided by established financial institutions. The perfect derivatives market and custody services have reduced the investment risk of cryptocurrencies while also expanding the market size of cryptocurrencies. Taking the BTC China platform with the largest trading volume in 2015 as an example, the total transaction volume in August 2015 was approximately US$823 million, and the average daily trading volume was less than 30 million yuan. From the perspective of market share of trading volume, Bitcoin transactions in 2016 were completely dominated by the Chinese market, and China's Bitcoin trading volume accounted for 99.9% of the global trading volume. On November 25, 2020, the single-day trading volume reached US$51.1 billion, nearly 40 times that of five years ago, and it is difficult to say that it is dominated by a certain market.

On the other hand, regulation has also developed. Although the cryptocurrency sector is still mostly lightly regulated or unregulated, global standards in areas such as anti-money laundering have emerged, opening the way for investors. Mainstream companies and governments are embracing the blockchain technology behind digital currencies. Whether it is the 1025 learning speech or entering the national strategy, the application scope of blockchain technology is getting wider and wider, which also makes the intrinsic value of Bitcoin rise.

Therefore, the fact that the price of Bitcoin is approaching the $20,000 mark does not mean that the Bitcoin bubble is getting worse, but rather reflects that the intrinsic value of Bitcoin has increased again in the past few years. Against the backdrop of increasing global financial and political risks, it is completely reasonable for Bitcoin to be favored as a high-quality asset.