First it was tulips. More recently it was tech stocks and then the housing market. Lately, it’s all about bitcoin.
All four share a common denominator: They suffered through financial bubbles, or bubble-like conditions. The first three ended badly. The jury is still out on what’s in store for bitcoin.
Yet the more the digital currency surges, the louder the debate grows around financial bubbles, which appear to be getting bigger and riskier than ever before.
Bubbles are investment manias, where prices jump so high that no fundamental analysis can rightly justify the surge. The price gains, usually sharp and quick, are typically followed by busts that tend to be just as severe.
The first known financial bubble is thought to have taken place in the 17th century, when Dutch tulip prices had a spectacular rise and fall. Recently, investment manias include the dot-com bubble of the late 1990s and the housing boom and bust in the 2000s, which paved the way for the 2008 global financial crisis.
Now, the debate centers on bitcoin. The digital currency topped $7,000 this month for the first time, a gain of more than 600% so far this year. Three years ago, bitcoin was at $300. Six years ago, it was at $2.
In the past 15 months, bitcoin has surged almost eight times as much as the tech-heavy Nasdaq Co mposite did in the final 15 months of the dot-com bubble. Analysts at Bank of America Merrill Lynch recently warned investors that financial bubbles are getting “more bubbly” than ever before.
Opinions vary on bitcoin’s sharp price moves. Bitcoin is the “very definition of a bubble,” Credit Suisse Group AG Chief Executive Tidjane Thiam said at a conference earlier this month. J.P. Morgan Chase & Co. Chief Executive Jamie Dimon called bitcoin a “fraud” that will “blow up.” Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein told CNBC that “maybe bitcoin is kind of a bubble.”
Evidence is mounting that the finance industry is warming to bitcoin. Goldman said last month it was considering setting up a trading operation for digital currencies. And exchange operator CME Group Inc. announced plans to begin offering a bitcoin futures contract. That would give Wall Street traders an avenue to bet on bitcoin prices and hedge against volatility, a crucial step in bitcoin’s move into institutional and retail markets.
Still, if past bubbles are any indication, bitcoin’s spectacular rise won’t last forever. And when it ends, look out below.
Write to Steven Russolillo at firstname.lastname@example.org