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Even after it soared a million percent, cryptocurrency boosters denied it was a bubble—and they weren’t wrong.
By Spencer Jakab - The Wall Street Journal
Dec. 14, 2018
When Lambo?
It was around the peak of bitcoin’s value a year ago at just below $20,000 that this obnoxious question entered the Urban Dictionary: How long would it take to amass enough cryptowealth to buy a Lamborghini? Now, those bitcoin owners still holding on for dear life after an 82% decline are putting on a brave face, but there is no more denying that we have witnessed the popping of a classic bubble.
Some believers in blockchain’s vast potential agree and rue the gold-rush mentality. Others are in denial, characterizing the current rout as just another bump in the road for a transformative technology. They point to multiple parabolic peaks and valleys over the years and actually have—or rather had—a point.
A speculative craze isn’t defined by its frequency or even its amplitude, which makes defining a bubble tricky. When bitcoin had appreciated by more than 1 million percent, an expert in manias said it didn’t meet his criteria for a bubble. Months later, bitcoin finally ticked nearly all of his boxes.
Harvard University lecturer Vikram Mansharamani, author of “Boombustology: Spotting Financial Bubbles Before They Burst,” put his money where his mouth was.
In March 2017, when he was hearing that bitcoin was a mania, he disagreed and bought some for around $1,000 each. By last December, when bitcoin was racing toward $20,000, he sold “enough to pocket a very handsome return.”
What changed? Mr. Mansharamani has several bubble criteria. One missing ingredient at first was widespread participation. Technical hurdles for buying cryptocurrencies are higher than for tech stocks, houses or tulips, but there arguably were still many potential converts on the sidelines in early 2017.
That changed late in the year. Media mentions and Google searches reached a crescendo that almost exactly mirrored bitcoin’s peak. Mr. Mansharamani relies on another classic, if clichéd, litmus test: “When taxi cab drivers start asking about it, then you know it’s a bubble.”
The use of leverage is another of his telltale signs. Stories of people selling all of their possessions to invest in cryptocurrencies or buying with credit cards cropped up around the peak. Futures contracts, a traditional way to make a bet with even more bang for the buck, also took off. In fact, researchers from the San Francisco Federal Reserve believe it is no coincidence that bitcoin, which soared ahead of the launch of futures trading, peaked the day the Chicago Mercantile Exchange listed contracts on it. Futures finally gave skeptics a way to bet on its decline.
“Reflexivity,” the term financier George Soros uses for prices going up simply because they are going up without an anchor in objective reality, is another of Mr. Mansharamani’s bubble indicators. By late 2017, credulous investors were willing to buy cryptorelated investments that weren’t even pretending to be a store of value.
On the day after bitcoin peaked, The Wall Street Journal published a story about the sale of a digital token described by the people selling it as having “no purpose.” The venture, which eventually raised $4 billion, was reminiscent of the offering for “a company for carrying out an undertaking of great advantage, but nobody to know what it is” that appeared during Britain’s South Sea Bubble of 1720, one of the earliest financial manias.
Similar to the tech bubble, financially marginal companies could multiply their value through cryptocurrency association. Take Long Island Iced Tea Corp. The money-losing firm’s shares briefly surged by nearly 300% after it changed its name to Long Blockchain Corp. at the height of the frenzy last December.
Buyers of bitcoin near the top weren’t just overconfident—a hallmark of bubbles—but were dismissive of skeptics as Luddites who just didn’t get it. Bulls said the same thing in 1999 during the tech boom. The bitcoin bubble, following the housing bubble and the tech bubble, is the third in less than 20 years. Clearly, bursting bubbles don’t inoculate us against falling for another one.
Yet skeptics basking in bitcoinfreude shouldn’t forget that early froth doesn’t necessarily mean an asset is flawed. The infamous “Amazon $400” call 20 years ago—it eventually rose an additional 30-fold adjusting for stock splits—would have heralded a fantastic investment. Amazon.com really did become “the everything store” and the internet really did transform our lives despite the stock market losses in the tech bust.
Even so, the odds that someone will buy a Lamborghini with their bitcoin profits now are awfully slim.
https://www.wsj.com/articles/bitcoin...d=hp_lead_pos4
By Spencer Jakab - The Wall Street Journal
Dec. 14, 2018
When Lambo?
It was around the peak of bitcoin’s value a year ago at just below $20,000 that this obnoxious question entered the Urban Dictionary: How long would it take to amass enough cryptowealth to buy a Lamborghini? Now, those bitcoin owners still holding on for dear life after an 82% decline are putting on a brave face, but there is no more denying that we have witnessed the popping of a classic bubble.
Some believers in blockchain’s vast potential agree and rue the gold-rush mentality. Others are in denial, characterizing the current rout as just another bump in the road for a transformative technology. They point to multiple parabolic peaks and valleys over the years and actually have—or rather had—a point.
A speculative craze isn’t defined by its frequency or even its amplitude, which makes defining a bubble tricky. When bitcoin had appreciated by more than 1 million percent, an expert in manias said it didn’t meet his criteria for a bubble. Months later, bitcoin finally ticked nearly all of his boxes.
Harvard University lecturer Vikram Mansharamani, author of “Boombustology: Spotting Financial Bubbles Before They Burst,” put his money where his mouth was.
In March 2017, when he was hearing that bitcoin was a mania, he disagreed and bought some for around $1,000 each. By last December, when bitcoin was racing toward $20,000, he sold “enough to pocket a very handsome return.”
What changed? Mr. Mansharamani has several bubble criteria. One missing ingredient at first was widespread participation. Technical hurdles for buying cryptocurrencies are higher than for tech stocks, houses or tulips, but there arguably were still many potential converts on the sidelines in early 2017.
That changed late in the year. Media mentions and Google searches reached a crescendo that almost exactly mirrored bitcoin’s peak. Mr. Mansharamani relies on another classic, if clichéd, litmus test: “When taxi cab drivers start asking about it, then you know it’s a bubble.”
The use of leverage is another of his telltale signs. Stories of people selling all of their possessions to invest in cryptocurrencies or buying with credit cards cropped up around the peak. Futures contracts, a traditional way to make a bet with even more bang for the buck, also took off. In fact, researchers from the San Francisco Federal Reserve believe it is no coincidence that bitcoin, which soared ahead of the launch of futures trading, peaked the day the Chicago Mercantile Exchange listed contracts on it. Futures finally gave skeptics a way to bet on its decline.
“Reflexivity,” the term financier George Soros uses for prices going up simply because they are going up without an anchor in objective reality, is another of Mr. Mansharamani’s bubble indicators. By late 2017, credulous investors were willing to buy cryptorelated investments that weren’t even pretending to be a store of value.
On the day after bitcoin peaked, The Wall Street Journal published a story about the sale of a digital token described by the people selling it as having “no purpose.” The venture, which eventually raised $4 billion, was reminiscent of the offering for “a company for carrying out an undertaking of great advantage, but nobody to know what it is” that appeared during Britain’s South Sea Bubble of 1720, one of the earliest financial manias.
Similar to the tech bubble, financially marginal companies could multiply their value through cryptocurrency association. Take Long Island Iced Tea Corp. The money-losing firm’s shares briefly surged by nearly 300% after it changed its name to Long Blockchain Corp. at the height of the frenzy last December.
Buyers of bitcoin near the top weren’t just overconfident—a hallmark of bubbles—but were dismissive of skeptics as Luddites who just didn’t get it. Bulls said the same thing in 1999 during the tech boom. The bitcoin bubble, following the housing bubble and the tech bubble, is the third in less than 20 years. Clearly, bursting bubbles don’t inoculate us against falling for another one.
Yet skeptics basking in bitcoinfreude shouldn’t forget that early froth doesn’t necessarily mean an asset is flawed. The infamous “Amazon $400” call 20 years ago—it eventually rose an additional 30-fold adjusting for stock splits—would have heralded a fantastic investment. Amazon.com really did become “the everything store” and the internet really did transform our lives despite the stock market losses in the tech bust.
Even so, the odds that someone will buy a Lamborghini with their bitcoin profits now are awfully slim.
https://www.wsj.com/articles/bitcoin...d=hp_lead_pos4
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