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A classic bubble

The numbers are incredible but are they sustainable?

Some comparisons are in order when looking at the new cryptocurrencies and their value. 

Every week a few people ask me questions about it, and some try to sell me a currency or training or “understanding or the bitcoin lifestyle”.

About 20 years ago, someone here in SA sold an old lady of 70-something Nasdaq, as this was the new growth story and was safe as new technology and innovation were the best things ever. Well, a year or two later, that lady was in trouble and the financial advisor nowhere to be seen.

The Nasdaq MarketSite stands in the Times Square area of New York, US. Picture: Eric Thayer/Bloomberg

I learnt something then; that many people are good at telling you great things when markets go up, but they disappear when the market goes boom. You buy things you understand, and you buy things for investment that have an understandable way of making money. But most importantly, one also looks at history as this repeats itself often in investments.

It took the Nasdaq composite 20 years to go from 200 index points to 5 000 or increase 25 times in value. Then the bubble burst as many firms in the Nasdaq did not have the earnings to warrant the valuations. It took another 15 years to break that milestone of 5 000.

Early this year, the Nasdaq was worth 28 times of what it was in 1980. It took the Nasdaq 38 years to increase 28 fold from 1981 to 2017! (the Nasdaq had by then increased to over 200 companies in the early 1980s).

The world’s biggest company by value, Apple, is part of this index, and many of the most famous companies, from Google to Facebook, are part of this fast-growing equity market.

Pedestrians walk past an Apple store at the Third Street Promenade in Santa Monica, California, US. Picture: Patrick Fallon/Bloomberg

The Market Cap Index, as measured by the IMF of the main equity market in the US, took 53 years from 1960 to 2013 to show a 28 fold increase in value. Yes, the values of companies such as GE, Ford and IBM took a very long time to increase 28 times! They have seen many products and managers come and go in that time.

The Japanese equity market saw a market cap increase of 18 times from 1970 to 1989 and never came back after that bubble deflated. In essence, it did not increase 28 times and looking back, the Nikkei 225 was one of the biggest equity bubbles in world history.

According to the IMF, SA equity increased 28 times from 1978 to 2007. Twenty nine years for a 28 fold increase in prices. Since then it has, on an annual average, dropped to flat and will probably only recover this year. But remember too that SA inflation has been far higher, and UBS states that SA equity has in the past been the best-performing equity market in the world.

Cryptocurrencies have increased more than 28 fold since December 8 2016. The market cap of cryptocurrencies has shown the same increase that major and fast-growing stock markets took decades to do.

These cryptocurrencies increased faster than any major stock exchange. I have looked at the fastest growing ones and cannot find a 28 times increase in one year or even half that.

The number of currencies listed has increased from 620 (of which some are no longer traded) to 1 334 in one year. It took the Nasdaq more than 20 years to list that many. Remember too that the number of companies peaked at 4 574 in 2000 and dropped to less than 2 500 in 2010. Now, the Nasdaq has just over 3 100 companies again. Certainly, no exchanges listed 710 companies in one year.

The total cryptocurrencies market cap increase from $14.3 billion to $404 billion in a matter of a year is incredible. For example, the whole SA GDP – which took hundreds of years to get to $339 billion – was overtaken by the cryptocurrency market on December 5. 

Today, the market cap of cryptocurrencies has gone from the 116th largest country on earth to the 26th largest in the space of a year.

The comparison between the only bitcoin and Apple Inc, the largest company by market cap in history, is worth noting. It took Apple 31 years to get to a market cap of $215 billion. By then, it had sold 42 million iPhones; 120 million iPods and just started selling iPads (about 3 million). Never mind the iMacs and music sales, as well as software.

Yes, after reaching $500 billion in 2014 for the second time, it increased $400 billion in four years but is trading slightly below that now. So about $50 billion per year was added, but the Apple Inc revenue is $140 billion a year and with net income of $48 billion. A net income of 5.5% on the current share price.

Bitcoin has no income. Bitcoin has increased nearly as fast as the tulips did and perhaps as fast as the exotic wild animals in SA did. We all know what happened in both.

The numbers are incredible but are they sustainable? I would argue no. History says this is too fast and much too volatile.

In my opinion, this is a classic bubble. Be warned. Be careful and remember salespeople have agendas.

Mike Schüssler is an economist at economists.co.za.

COMMENTS   43

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Very brave, given that it is school holidays and the Bitcoin Warriors will have no homework. I suggest you put your tin hat on.

Funny? But perhaps just try to inform those school children that are busy learning during the school holidays that the lesson may be expensive.

I think when 1 or 2 countries start regulating it, the bubble will pop

Interesting tweet making the rounds “Bitcoin isnt the bubble, it is the pin”.

So many ridiculous comparisons in this article I dont know where to start.

Best of luck betting against an industry with huge network effects, mass adoption, huge monetary and human capital flowing into development, Governments and businesses scrambling to understand. Yes, the dotcom bubble popped, but did we log off??

Another interesting observation, how many millenials you know that own Kruger Rands? How many do you know that own BTC? Paradigm shift?

No thanks, Il keep my coins, far away from government exchange control, BEE, zuptas, communism and other freeloading SA parasites. You welcome to stay away from the bitcoin ponzi and keep your funds in trusted, years long vetted JSE companies. Oh wait…Steinhoff

This guy gets it: “Yes the dotcom bubble popped, but did we log off??”

The difference is BitCoin is a commodity not an actual entity. So we didn’t log off because the services provided by some were provided by new and better suppliers. BitCoin can crash just like the gold price.

I think saying the entire JSE one of the most progressive and transparent exchanges in the world is entirely shady is exaggerated. That aside BitCoin isn’t an investment avenue. It’s sole purpose is to create safe and cheap transacting. It’s a proof of concept of block chain. Block chain applied to Steinhoff actually prevents all the irregularities that occurred. BitCoin can crash because it’s a commodity their value fluctuates

Can someone help me,what happent to reinet share price?

It was a technical change: Depository receipts (which SA shareholders held) were converted into Reinet shares at a ratio of ten to one.

Thanks for a very interesting article Mike. It takes one back the fundamentals of investment management.
Bitcoin does not seem nearly as “Safe” as everyone makes it out to be, and with very little regulation, one thus has very little recourse should things go wrong.

https://www.coindesk.com/62-million-gone-cryptocurrency-mining-market-nicehash-hacked/

Yeah and when things go wrong with Steinhoff what recourse do you have??? When companies get suspended on the JSE and you lose everything what recourse do you have?? Don’t bring me that…”well I can sue them” nonsense! You have ZERO recourse!!!

Which is why one must have a well diversified portfolio of local and overseas unit trusts/ETF/shares or even of cryptocurrencies if that’s your thing. If you’re just in Bitcoin you are as much in risk as someone who was just in Steinhoff or Naspers or Gold or the Rand…

But Mike, what if we are seeing the start of the greatest economic paradigm shift in 1000 years – as centralised fiat / physical money is being replaced with cryptocurrencies. What if this is the beginning – and we are fortunate enough to be here at this moment during early stage adoption. If so, BTC might go down in history as a forerunner – with a limited quantity sought by collectors such as we see with fine art collectors. BTC is a long-term hold – pretty soon a single coin will be out of the reach of most of us. Hell, a single coin already costs 1/4 Rm. What will one cost in 10 years time? Expect dramatic falls – especially once CME etc start shorting at institutional level – but but long-term trajectory is only up.

and I do not believe that BTC – or any crypto – holds inherent value in its ability to side-step central govts or banks. Not going to happen – eventually they will all be regulated or they will simply be banned and die off – how that is going to be done is anyones guess – but it will happen. Govts are not going to allow crpto’s to exists in isolation parallel to the ‘formal’ economy. Sooner it happens, the quicker it gets adopted, the better for their long-term viability.

Just an update. I wrote this less than 24 hours ago. The market Cap has gone to $432! An increase of $28 billion in less 24 hours. Over a billion dollars an hour added. This remains a classic bubble and I believe will pop soon more likely days or weeks than months.

Yep … and to the people holding the view that BC is a cryptocurrency – implying that you use it to exchange goods and services, because that’s why currencies exist, from sea shells to chunks of metal, how do you pay a supplier or get paid within a workable range of exchange?

Yesterday I got BC .0001 per hour but today I get BC .005 per hour? And when I eventually convert that into fiat currency, because Woolies is not on BC (yes, yes, the converted tell us the world will be on BC) to buy my groceries will I be a winner or a loser?

And if you are a loser, (even there is “only” a 20% “correction”) there goes your business, house and family.

As in legislation, the only winners are the lawyers, in BC the only winners are the commission taking platform managers.

sure it will pop, – but are you saying you dont think it will rise beyond these prices again? It will.

“The comparison between bitcoin and Apple Inc…”
ok , so people dont get it?
btc is not an asset , is not a currency, is not a share on the JSE(thank god, no board members with suitcases packed full of paper backed by a centralized untrustworthy third party , in their greed… )
bitcoin is code written on a blockchain with value attached to it
perhaps Mike, you must follow some of the thinkers like Nick Szabo , Naval .Pick a few decent twitter accounts. Read Sovereign Individual , Wealth of Nations , latest book of Kevin Kelly
Browse hackernoon , MIT technology review , Wire , Techcrunch
watch this back flip
https://www.youtube.com/watch?v=knoOXBLFQ-s
and be amazed , not frightened.Life is exciting and the staid will wither
Understand that dollar is 150 years old, before that currencies were issued privately in America
Understand that we are moving into an age of total AI , life will change , jobs will be lost, secure reaping of other peoples money by “managing” will become obsolete as will self drive cars
The world in 5-10 years time will be dramatically different.
The parabolic curve is an “adoption ” curve, implying that more and more people understand that the 4th industrial revolution needs a different type of value transfer , machine money for a new age
Certainly …..there will be issues , will be addressed as time goes by
And lastly perhaps , the need to understand that the world is now standing at the same junction as in the 1500s , when the common people found out that the unholy church-state was ripping them off.Currently it is the megalomaniacs of corporate greed , the state has been captured years ago(here and everywhere.The Gupta–WMC eg is just a sideshow for the real phucks hiding and manipulating
To get some real perspective at the accelerating/parabolic future then read this, and part 2 of it
https://waitbutwhy.com/2015/01/artificial-intelligence-revolution-1.html
A friend of mine can be described as a “designer of molecules”
This was anticipated 1959, perhaps roundabout the time you were born
http://calteches.library.caltech.edu/47/2/1960Bottom.pdf
I am afraid the “Dead Economists Society” may well miss the boat , if not now then later

Repeat of dotcom, big bubble/bust coming, but doesn’t mean the tech doesn’t have value. Like every gold rush, some people will make money some will lose it all, the bust will affect everyone though.

There’s two ways to profit from speculation in general without getting wiped out, 1 is to hold your main assets as you always have and allocate 5% of networth to speculation. 2 is to invest into lower risk assets and use the dividends and interest earned to speculate. Either way you should be able to preserve your principal and keep your retirement plans on track – if things work out you re-balance, if not it’s a small drag on your overall returns.

Someone else mentioned though that if you’re looking for excitement in life, perhaps avoid financial/gambling and rather just take up skydiving or shark-cage diving as it’s cheaper for the same thrill.

Nope, the bust will not affect everyone. Crypto cattle are on their own. For once financial institutions and equities exchanges are not part of this mania.

Fear and Greed – the two things driving markets – guess which one is driving BTC….

Ah yes Bitcoin, the ‘elites/globalists’ brain child.

Convince everyone by hyping it up, let everyone sell their homes and take loans to buy some BTC. Convince everyone to put their life savings in BTC…then POP!!!

There goes everyone’s wealth, and we are all indebted and depended on the elite, thus more enslaved.

We become their property.

There goes our freedom.

Yep …. traditionally it’s called “pump ‘n dump”

Well, everyone who bought into the BS. If I didn’t buy into the BS does that make me part of the elite? hehe

What’s being pushed by investment banks is to dump gold and pile up into BTC. Yeah, and who is being buying down gold while this is happening, the very same investment banks.

Well I buying gold, physical gold.

In away this is a huge anti establishment anti regulation vote by the connected masses.

A proverbial middle finger to central bank regulated financial world

a revolution of sorts

same as brexit same as Trump phenomenon.

Imagine a currency/ asset that does not represent a creed, culture religion or goverment unaffected/unmanipulated by war or political influence?

Many well known economist/world bankers have criticized Bitcoin (and other crypto phenomenon), having been caught off guard (doesn’t understand the workings / scoff at its potential / struggle to comes to grips with the concept). Likewise, many tech geeks, have similar little idea how the world of finance work (and along with that human nature / fear vs greed, etc)

My personal opinion is to EMBRACE future technology, as it’s here to stay. Buy some Bitcoin through an Exchange (like Luno.com) and see how it works. Have fun. BUT ONLY “invest” money that you’re prepared to lose. Comes down to speculation.

One of the best (balanced) articles about cryptocurrency I’ve read is from a local CFP, Kobus Kleyn (fin advisor who wrote 3 books already). It’s long…but insightful. He views BOTH SIDES of the “coin”.

https://www.linkedin.com/pulse/superior-case-blockchain-bit-thecoin-kobus-kleyn-cfp-/

Am even more enthusiastic about Ethereum which has “smart contract” (desentralised apps) possibility…..but why has it’s value (by now) not overtaken the over-hyped Bitcoin.

A few things to consider (while the reader enjoys playing Bitcoin, and others hacking away):
* The original design of blockchain-tech (by developer entity “Satoshi Nakamoto”) was to be a peer-to-peer global payment or wealth-transfer system, at a fraction of cost of ‘fiat’ currency. Was never the idea to “invest” into altcoins, i.e. to be a “store of wealth”….and for the price thus to escalate as the whole globe seems to invest/speculate into Bitcoin.
* Bitcoin (and any Altcoins) still need the formal/traditional banking system….have everyone wondered WHERE YOUR MONEY GOES(?) when you buy Bitcoin? It goes to the ordinary ‘fiat’ bank account of the “exchange”. In return to receive your few “satoshis” or a whole Bitcoin (for the wealthier among us / or the riskier person 😉 as electronic token with your electronic key for your wallet.
* So all those people that may’be misplaced/lost their (hopefully offline) access keys….who won’t even get your Bitcoin back…but remember, the ZAR or USD money that went out your bank account….is in the bank account of the exchange.
* So the real danger is through REGULATION (that is expected to come) as crypto become more mainstream, and Govt’s losing control of centralised money / their economic policy watered down / tax-revenue evading them….all it needs for the banking system to close all the crypto exchange’s catual bank accounts, or freeze them. Big shit.
* In Bitcoin’s case, the more coins are mined, the closer the 21 million is reached, the more expensive the mining process becomes (by those large groups that can afford the superior tech required & low cost of electricity). Already we see Bitcoin transaction costs coming closer to actual cost of international bank-transfers, and in order for it to remain profitable, the crypto-system needs more people to enter/”invest” in it….otherwise, as soon as the first group of people realise the cost of mining outweigh the gain, they will start selling. The rest of globe will scare and will follow. Evaporation ensues.
* Blockchain is a fantastic tech discovery, and IS NOT a pyramid scheme. But the way it caught onto everyone (having still no idea of what it is) with the wonderful technology being ABUSED by pumping money into it (i.e. “investing” as a store of wealth & not as a peer-to-peer transfer system) pushing coin price higher…..THAT people, is IN EFFECT operates like a pyramid.

Yes, buy BTC, ETH, but be aware what you’re “investing” in. The exchanges DO NOT have enough money in ‘fiat’ currency to pay everyone when cashing out, if there’s a “run” on the coin.

A point will be reached where it will be easier to hack than to mine…

…also bear in mind:

* Cryptos (like Bitcoin) is toted as a “decentralized” currency, without control by a single government (like Gold has for centuries). Really?

The most wealthy (or group of people/company/entity) that is able to afford megabucks to cost-effectively mine coins (i.e. to keep verifying the system’s integrity) may be a group of 8-10 entities globally. They have most control over Bitcoin. So much for being truly “decentralized”…

The few very large miners globally control it, and the various “exchanges” operate (like a bank) earning “fees & commissions” (like any business would) in earning bitcoin/”mining”.

Human nature is strange in that very few people on the planet seem to trust their own Govt or their own politicians…buy we have no problem in trusting cryptos(?) Part of reason is the open-blockchain, where transactions are for all to verify.

* Even how exciting cryptos are to me, I doubt if it will replace actual “fiat” currency controlled by Govts. At present, the world has 180 currencies….and in excess of 1,000 cryptocurrencies (even Orania has the e-Ora). Which crypto currency will the world use? Which one will be universally accepted? (Bitcoin is caught up in a hype of new excitement, but the next crypto will bump if off the stage. It’s simply how IT progresses.)
Now….IF all the nations (with all their cultural & strategic differences) come to the SAME agreement….YES, we can say goodbye to ‘fiat’ currency. Various new cryptos will rise & others vanish just as easy. Got to understand human nature/psychology.

Embrace the change, but understand what you’re getting into. I think Bitcoin (and other crypto) will be the start of greater things to come, and will morph into something else maybe more useful. Just like SMS morphed into Whatsapp. Who still uses a facsimile/fax machine today?

Nice summary – apparently there are still people who believe in a free lunch… which you only get if you are famous enough to be taken to lunch by the Financial Times 😉

I would love to hear from the Bitcoin guys what the cost is to mine an additional Bitcoin. The cost of the hardware, the internet connection, the rent of the building that houses the computers, the air conditioning, salaries etc. The cost to mine an additional unit, reflects the inherent value of a Bitcoin.

We could all be missing the point entirely when we say it is overvalued. Not long ago I read that Bitcoin miners are complaining that the margins are very thin because of the high cost of mining. We could be wrong in our assumption that Bitcoin is a bubble. Maybe it is actually undervalued!

I can tell you this with great certainty, fiat currencies are in a bubble because it cost nothing to produce. All fiat currencies are nothing but “bouncing cheques”. A Rand is a “promise to pay” and you receive payment in other “promises to pay”. Fiat currencies are all one giant heap of false promises that everybody knows can never be fulfilled.

While we speculate whether Bitcoin is a bubble, we know for sure that fiat currencies are. The only difference is that we can be sure that Central Banks will protect fiat currencies, and keep inflating the bubble. There is nobody to protect the value of Bitcoin when/if the tide turns.

A Rand is a “promise to pay” – that’s NOT true anymore. You can check any rand note. The words “I promise to pay the bearer on demand” does not appear there anymore.

The rand is not a promissory note anymore. It is just a piece of PAPER with a number on it! It maintains its value as long as you believe it is worth that number!

Seriously Mike do you honestly expect us to rather trust the mess and corruption of companies on the JSE instead, e.g. Steinhoff and soon to be NASPERS?
You are now more likely to lose money on the JSE than buying bitcoins!!!! In fact I dare anyone to buy on the JSE. You WILL lose your money. FACT! JSE is too risky. At least with bitcoins we do not have to contend with fraudulent accounting, corruption and bribery. And how many companies have been suspended on the JSE the past few years causing us investors to lose EVERYTHING!!!!

JSE is always risky, like any share exchange.

Much safer to invest in ‘fiat’ currency products, like any Money Market or Fixed Deposit plans, where your capital is ‘guaranteed’ as offeredd by any of our local “junk-status/non-investment” grade banks 😉

You see there’s a big difference between a commodity and a company. BitCoin isn’t block chain. If BitCoin were a product of a block chain business then it’s a much better investment but at this stage it’s just cash, in terms of applications for safe and cheap transaction it’s amazing but investing in cash isn’t something that makes sense. Block chain applications will most probably make JSE firms even more secure and transparent making them stronger choices.

I wont be stopping my debit orders into unit trusts that have many JSE companies in them, so I indeed accept your dare.

Only MORONS that bought only ABIL, or similarly put everything on one horse, lost everything. In just the past months my one RA grew 15%. Diversification is the key, not putting your eggs in one basket.

Steinhoff has barely affected me and I have money in Coronation Top 20, Coronation Industrial, 10X High Equity, Satrix To 40 Equally Weighted (and more), due to diversification Steinhoff made up less than 2% of my portfolio BEFORE the crash.

I think you do not know what you are talking about in terms of the JSE, and hopefully you have a well diversified basket of cryptocurrencies (but when, not if, bitcoin pops, I suspect many other will be worthless too).

if I understand it right….the bubble will burst when people start selling their Bitcoins to make huge profits. This means only the early birds will score just like a pyramid scheme…right?

Mr Mike,
I don’t think you’ll have to wait too long to write that “I told you so” article 🙂 .
I said before that Bitcoin is NOT an investment. Like any currency – be it US $ or Zim $ – it only has value because people THINK it has. Except that real currencies are backed by their local governments.

Actually I say “good luck” to people who are investing in these “things”. In Aus if bitcoin fell over- the effect would be minimal – unlike the Sydney housing market. Yeah I also read abt investing in these you understand – so what – go for it. The wealth managers hate them – cause they get NO fees! Just make sure someone knows where your personal key is in case you not around to cash in your zillions.

According to the IMF, SA equity increased 28 times from 1978 to 2007. Twenty nine years for a 28 fold increase in prices. Since then it has, on an annual average, dropped to flat and will probably only recover this year.

IN DOLLARS MAYBE.SELECTIVE USE OF FACTS

Yes, if Bitcoin was a stock it would definitely be in a massive bubble. But Bitcoin is something completely different. It is much closer to physical gold than equity in a company. In my personal opinion it is a new asset class. Never has there been anything like this, so we are in uncharted waters. No-one knows how a new asset class should grow at this point in it’s adoption phase.

Yes, normal fiat currencies are backed by governments. Bitcoin is backed by a piece of code of which it’s virtually impossible to change the rules for. Governments can change the rules whenever they wish. Need more money? Just print more rands and dollars. If you want to see a bigger bubble, just look at how many dollars have been printed over the past couple of years. This is what gives Bitcoin it’s value.

Yes Bitcoin will crash. It always has. It will recover though. long-term I think odds are it will change he world.

Greed drives it and nothing is produced to show .It is like art .No real fundamental value except the greed drive .It won,t go away but the value will be determined once everybody has a Bitcoin and nobody wants to buy yours

Do any of you clever people know how to send a large amount of money across the world in minutes? I think something that could make that possible would be really, really useful and even really, really valuable. Serious Question.

it took 75years to get to 50 mil landline phone subscribers
38 years to get to 50mil radio listeners
13 years 50 mil tv viewers
www 4 years
Facebook 3,5years
Mobile phones 3 years
AOL 2,5years
Draw something 50 days
Spyke 35days
Adopting technology that will eventually replace the current banking system – it will happen and we do not care how long it will take – priceless

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