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.
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.
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.