Getty/AFP/File / Ethan Miller After years of speculation on the identity of the crypto-currency Bitcoin's founder, Craig Wright, an Australian entrepreneur, has revealed himself as its creator
Getty/AFP/File / Ethan Miller After years of speculation on the identity of the crypto-currency Bitcoin's founder, Craig Wright, an Australian entrepreneur, has revealed himself as its creator

The Extraordinary Popular Delusion and madness of a crowd re-birth 1637, 1929, 1987, and 2001 (2018 or 2019?)

Tulip mania (1637), Stock market crush (1929), stock market crush (1987), dot-com bubble (2001) and now Cryptocurrency crush (2018/2019).

We are in the digital age and hence it is appropriate to think that if there should be any speculative scheme, it should revolve around digital items. Crypto currency is a digital currency created to replace fiat money. The concept is brilliant but the speculative moves around it makes it nothing less than a bubble. Bitcoin, the mother of all crypto currencies took its bullish run in the third quarter of 2017 and has since plummeted from January. From a speculative price of around $19,000, bitcoin price currently stands around $4400.

Nonetheless, this isn’t the first time there has been a “delusion and madness of a crowd”. The tulip mania is considered the first speculative bubble in history. Tulip mania was a period in the Dutch Golden Age during which contract prices for some flower bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed in February 1637. The tulip was different from every other flower known to Europe at that time, with a saturated intense petal color that no other plant had. As a result, tulips rapidly became a coveted luxury item, and a profusion of varieties followed. By 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings and cheese.

The price of tulips skyrocketed because of speculation in tulip futures among people who never saw the bulbs. Many men made and lost fortunes overnight. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day. No deliveries were ever made to fulfil any of these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. This is a clear indication of how value can be created out of something of no value. The astonishing part is the price of the tulip bulb rose to a point where it could be exchanged for a 40 hectors of land.

Again in the 1980’s, we had what was called “blind pools”. Blind pools were used to create the biggest scams ever. Blind pools were stock offerings with no stated investment goals for the funds that are raised from investor. With the blind pool era, what happened was you raised money from investors, and you issued them with a paper. And there is a limited amount and so it’s finite. This paper becomes so valuable at hand but worthless in real sense. A promise is usually made to investors that someday, it will be worth something more and they can sell it for a massive return, but this never happens. That scheme made stocks on the NYSE had a bullish run leading to the stock market crush in 1987.

Soon after the 1987 stock market crash, global stock markets resumed their previous bull market trend, led by computer and other technology-related stocks that were traded on the new electronic NASDAQ stock exchange. During the mid-1990s, the internet had evolved as a way for people to communicate via email, use chat rooms and browse websites. Almost immediately, businesses saw the internet as a significant profit opportunity. America Online (AOL) made the internet available to the general public on a large scale. The Yahoo! search engine and internet portal was started in 1994 as a directory of websites. The retailer Amazon.com became the first online book retailer in 1994.

EBay was started in 1995 as an online auction site. As the internet became increasingly commercialized, many online businesses and their founders grew fantastically wealthy. Technology stocks continued to soar and created a very strong incentive for more technology companies to become publicly traded. Many early tech company shareholders, including employees, became millionaires overnight when their companies IPO’d.

The booming economy and stock market of the late 1990s inspired some economists to speculate that we were in a “New Economy” in which inflation was virtually nonexistent and where recessions were a relic of the past. According to this logic, the “Old Economy” represented traditional brick-and-morter businesses, which included sectors such as natural resources and retail stores. Some analysts even believed that corporate earnings and other financial data were not relevant for analyzing and investing in technology and internet-related stocks.

From 1996 to 2000, the NASDAQ stock index exploded from 600 to 5,000 points. “Dot-com” companies run by people who were barely out of college were going public and raising hundreds of millions of dollars of capital. Many of these companies lacked clear business plans and even more had no earnings whatsoever to speak of. For example, Pets.com, which had intended to become an online pet products retailer, was losing money before it went public and raised billions of dollars. Numerous dot-com companies wasted millions of dollars on frivolous parties to celebrate their IPOs. There are even stories of dot-com employees who walked around their offices barefoot and played football and video games during the work day. At the peak of the dot-com bubble in 1999, it was said that a new millionaire was created every 60 seconds in Silicon Valley.

By early 2000, reality started to sink in. Investors soon realized that the dot-com dream had devolved into a classic speculative bubble. Within months, the NASDAQ stock index crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which once had multi-billion dollar market capitalizations, were off the map as quickly as they appeared. Panic selling ensued as the stock market’s value plunged by trillions of dollars. The NASDAQ further plunged to 800 by 2002. One former high-flier, Microstrategy, slid from a lofty $3500 per share to a pitiful $4 per share. Hundreds of thousands of technology professionals lost their jobs and, if they had invested in tech stocks, lost a significant portion of their life savings.

Needless to say, the New Economy theory was proven wrong and traditional economic principles still hold. The same can be said of people that want to replace crypto’s with the traditional fiat money. In my own biased analyses, bitcoin will drop below $1000 in the second quarter of 2019 or earlier. What is sadly interesting is how bubbles will continue to occur in the future, like it is happening with bitcoin and all the other “shitcoins” now. When they do occur, foolish investors will continue to convince themselves that “this time is different!

Author; Bright Kojo Onipayede

Financial Trader & Currency Analyst (Bsc Admin- Accounting, GSE, CGIA)

(Email; [email protected])

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