Is the gigantic Bitcoin bubble about to become one of the biggest busts in history? The digital currency has had an incredible year. At last count, Bitcoin was up over 1,400%–but according to people like Warren Buffett, the digital currency’s meteoric rise has all the trademark hallmarks that come with a huge speculative bubble.
While investing in Bitcoin has become the thing to do, are all investors destined to become Bitcoin billionaires? Unlikely. Not to mention that if the bubble does burst, the fallout is likely to be just as incredible as the rise. After all, what goes up must come down, but does this apply to the dynamic digital currency?
So is Bitcoin destined to be one of the largest bubble-pops in history? According to an economist at ANZ, it might. Sharon Zoller says that “bubble history” suggests that the end of the expansion will be with a bang over a whimper– and she doesn’t think that this time will be the exception to the bubble rule.
What were some other famous financial bubbles that popped in history? Tulip mania comes to mind. In the 17th-century tulips were all the rage and became so in demand in the Netherlands that the price there skyrocketed to unheard of levels. Everyone wanted to display this beautiful flower whose bulbs had been imported from Turkey to the point where they were leveraging their homes as collateral, according to Amsterdam’s Museum of the Netherlands.
The bubble grew quickly to the point where speculators were buying tremendous amounts of the tulip bulbs hoping to resell them even higher. This worked for a time until a domino effect collapsed the bubble and the prices collapsed along with it.
Stephen Innes is the head of Asian trading at Oanda, a currency broker. He thinks that the Bitcoin bubble could end up being much the same as Tulip Mania was, with prices becoming “so out of reach” to the average person that demand will fade.
Another historical bubble to burst was the famed South Sea bubble. When shares in a British trading firm soared in the eighteenth century, the expectation was that the South Sea Company would go on to gain even bigger profits through South American trade–but the cash never came.
Spain controlled South America at the time and was simultaneously warring with the British Empire. Creating a British trading monopoly in that area would have been unlikely. But the stock had risen 900% in the course of a year, with plenty of investors buying up stock in the South Sea Company. Speculators sold, and shares began to plunge as the bubble collapsed and left many investors bankrupt.
The most famous bubble burst of history has to have been the 1929 Wall Street Crash. But you would have never expected it at the time, as stocks had gone up 500% in the five years prior to the crash. Bullish investors in the roaring twenties kept investing, but when cracks became craters among several large Dow plunges, things took a turn for the worse. The Great Depression began, with Wall Street bottoming out two years after the initial collapse.
Could this be the fate of Bitcoin? If you believe history, the signs don’t look good. But who knows–the digital currency may simply remain stable after a fantastic year of performance. Investors can only hope!