Is Bitcoin a Bubble? Does It Really Matter?

The word bubble has always been with Bitcoin. When Bitcoin was worth one dollar, some economists accused Bitcoin of being a bubble. When it reached $10, $100, $1,000, and then $20,000, the bubble burst was heard everywhere. If Bitcoin is a bubble, it is impossible for it to burst and then be inflated again. Besides, the bubble is not as big as the outside world says.

The entire digital currency market value is less than 1.2 trillion yuan, which is just a drop in the bucket for an economy.

There is no doubt that there is indeed an element of hype in Bitcoin. In fact, there is hype in any asset, simply because the assets they are hyping have been hyped by predecessors for so long that people tend to think that they are not bubbles but value investments, such as gold, silver and oil.

As to whether Bitcoin is a bubble, opinions vary widely.

Robert Shiller, Nobel Prize winner in economics, once said: Bitcoin may be a bubble, but that doesn't mean it will burst or disappear forever. Bitcoin is a typical example of human fashion behavior and is very "charming". He said: "I am very interested in Bitcoin because it is a bubble, but it doesn't mean it will disappear. Bitcoin will always burst and may always be with us."

He also stressed that he knew some "smart people" had invested in cryptocurrencies, even many of his students. But Shiller added that cryptocurrency is a story, and the extension of this story is no longer limited to the merits involved in its concept.

According to Shiller, part of the cryptocurrency "fad" or "bubble" is political, as people who don't trust governments may be tempted to invest in Bitcoin.

However, Tim Draper, a well-known Bitcoin enthusiast and well-known Silicon Valley investor, boldly predicted that the price of Bitcoin may reach $250,000 in 2022.

Various big names have different views on Bitcoin, which is precisely the charm of Bitcoin. Bitcoin is an asset with a strong story, just like the creation story in religion, and then the preachers and the popular stories of getting rich quickly, which makes Bitcoin even more fascinating.

Bubbles have existed in all periods of history, the most famous of which are the Dutch tulip bubble, the French Mississippi River bubble and the South Sea bubble. It is said that the Cambridge Economic History has not found any conclusive evidence to prove that the tulip bubble existed in the Netherlands, and it is just a rumor spread by the public.

The Mississippi Bubble and the South Sea Bubble did exist. Since they happened close in time, today we will talk about the South Sea Bubble that made Newton lose all his money.

Build a tall building

In late 1719, the slave trade slowed down due to a brief suspension of trade with Spanish-controlled areas, but the South Sea Company's stocks were still very popular, with almost everyone investing in stocks.

In order to raise more than £1 million of government debt, the South Sea Company chose to issue subscription shares again. Bondholders could exchange their illiquid and difficult-to-trade bonds for South Sea Company shares that had dividend income and receive future expected profits from transatlantic trade.

Banquet for guests

The fund was functioning well in 1719, but the crisis came in 1720.

At the beginning of the year, the South Sea Company promised to accept all treasury bonds by exchanging company stocks for treasury bonds, and allowed customers to purchase new stocks issued by the company in installments. During just half a year, the share price of the South Sea Company rose rapidly like a wild horse, soaring from 116 pounds in September 1719 to 310 pounds in March 1720, and then reached an exaggerated 950 pounds by the end of June, which is even more than Bitcoin.

Scammers sell air

The skyrocketing Nanhai stocks naturally attracted the attention of scammers, and the scammers' financial sense never fails.

One of the scammers registered a shell company called Nanhai Investment and wrote in his prospectus: "The company has an attractive investment project in Latin America and needs financing now. The specific details of the project cannot be disclosed for the time being." The next day, when he opened the door of the company, it was crowded with shareholders who sent him checks. He sold 2,000 pounds of stocks within 6 hours. On the third day, the scammer disappeared and absconded with the money.

This scenario also happened in the cryptocurrency circle in 2017. The most typical example was Li Xiaolai’s claim that there was no white paper for PRESS ONE: the ICO started on July 12, 2017, and crowdfunding began on ICOINFO with a target of US$200 million.

Mr. Li directly and publicly stated: "The white paper provides something that not many people can understand, and even few people read it." In his eyes, everyone is an idiot. Anyway, idiots never read white papers when investing in projects, and the fraud is so blatant.

Even so, participants continued to give money to Li Xiaolai, and the PressOne project raised $185 million in just five days, which can be described as crazy.

The building collapsed

Let’s get back to the South China Sea Company.

Due to the rampant fraudulent companies, the British Parliament passed a "Bubble Act" requiring all companies to obtain a royal charter. However, the biggest risk was the South Sea Company stock, or rather the advancement of the bill, which exposed the South Sea bubble and ruthlessly burst it.

The registration of Nanhai’s equity lasted for two months, and the stock price went down all the way, falling below 800 pounds per share. Newton, the former director of the Mint and the creator of the “gold standard” system, had sold his stocks in April, and then he was left with empty pockets. Finally, he couldn’t bear the temptation to chase the rise, and was directly trapped at a high position, which was very close to his opening price. Should he cut his losses and leave or invest in value?

It turns out that Newton is a value investor. He has been holding Nanhai shares. During the plunge, Newton lost nearly 20,000 pounds. You should know that his annual salary at that time was 2,000 pounds, which was equivalent to ten years of income being wiped out in an instant. He lost everything.

Hence his famous comment: "I can calculate the trajectory of celestial bodies, but I can hardly predict people's madness."

Perhaps, he could not predict the madness of the masses, and even less could he predict his own greedy nature in the midst of the madness.

The final outcome was the bursting of the bubble. Countless people suffered heavy losses, and the British government was able to forgive millions of pounds of debt through equity. In the South Sea Bubble, the government made money, the South Sea Company made money, and the general public became the biggest victims.

The biggest winner, however, was the Bank of England.

The fall of the South Sea Company gave way to the rise of the Bank of England, which dominated the financial industry for the next few hundred years.

With the lessons of the South China Sea, we can conclude that it doesn’t matter whether Bitcoin is a bubble or not. Finance has always been ruthless. Even if there is no Bitcoin, there are other currencies to replace Bitcoin. The most important thing is consensus. Consensus is the most important "currency", and the core of Bitcoin lies in this.

Economics Prize winner Brian Kelly also expressed his views on Bitcoin: The quality of Bitcoin's story attracts people's interest in it.

Storytelling is the source of consensus. As to whether it is a grand dream or a grand ambition, only time can prove it. As long as we live long enough, we can see it. If we don’t live long enough, it doesn’t matter. It will have nothing to do with you anyway.