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If you invested in the markets circa 1999, it is hard to observe the bitcoin mania and not experience the feeling that you’ve seen this movie before and know how it will end – in losses and tears. The internet was a great idea that convinced a lot of great minds to invest capital and energy into businesses that have transformed the world – Amazon, eBay, Cisco, PayPal … the list is very long (though in fairness the list of non-survivors is even longer – but they are not here to remind us of their nonexistence).
Rising stock prices of internet companies also brought the unscrupulous people out of the woodwork. In 1999, if a company added dotcom to its name it was an instant guarantee that its stock price would pop at least 20% (I am probably being too conservative) on this non-news. In a slightly later stage of the bubble when internet incubators were in vogue (after the astronomical surge of CMGI), thinly traded companies would announce that they were changing their business model – pizzerias would become “internet incubators” and their stocks would surge a few hundred percent in a day. What does a pizzeria know about the internet or incubating? Nobody knew or cared. Management cashed out on suckers who bought the pop in the stock price.
As I am writing this I just got an email from a friend who forwarded a press release: “Long Island Tea Corp Rebrand as “Long Island Blockchain.” This is what used to be a $20 million market-capitalization company, a $2 stock that is now up somewhere between $6–8 (300–400%) on this press release. I have seen half a dozen stories like this over the last few weeks.
This coin/blockchain mania is not much different than the Beanie Baby mania of the late 90s. Beanie Babies were released in a limited quantity (the key word), and thus the price kept going up. The Beanie Baby company kept making new, limited editions that sold for hundreds if not thousands of dollars (some were “collector’s items,” as though Vincent Van Gogh had graced them with his brush). Predictably, that fad ended just like thousands of others – it went from hot to cold. At some point someone realized that a $100 stuffed doll is not much different from the $2 one you can buy at a flea market.
The “coin” mania of today is not much different. I am not writing this just about bitcoin – people are shelling out billions of dollars to own other coins, too. At least with a Beanie Baby they got a garage sale item for next year’s spring cleaning – what do you get when you buy 1,200 coins? Really, I have no idea. As I discussed in my previous article on the subject, by owning a coin (bitcoin or any other), you don’t own the technology.
Also, the scarcity argument worked for Beanie Babies until it did not. At some point the number of people who want to cash in their gains exceeds the number of new suckers who want to buy in. Supply exceeds demand, the price declines, and just as price increases spawned more price increase on the way up, price declines snowball into further price declines – this is how a bubble bursts.
