My favourite cousin Samantha is a wonderful human being. A devoted mother and one of the most generous souls you’ll ever meet, she often empties her purse for strangers who in apparently greater need of her money. One time she and a friend walked 1 400km from Cape Town to Johannesburg to raise awareness about abused women and children.
While the admirable Sam is expert in many life skills, finance is not among them. She often needs to stretch her cash to the next payday. Not surprisingly, investing is not among her areas of interest. So when she dropped me a note about Bitcoin, it sparked a new avenue of inquiry for me.
Sam was clearly excited about the next best thing, wanting to know whether Bitcoin is “legit or a no-no….there are so many conflicting viewpoints.” Her note set off the kind of alarm bells I hadn’t heard ringing since the run-up to the 2008 and 1997 stock market crashes. In volume, the alarms reminded me of the 1987 Crash, the worst I’d seen ahead of which my 20-something financial journalist self was given more soapboxes than was healthy.
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Sam’s sudden curiosity about Bitcoin shows how the surging price of the cyber currency is capturing the public’s imagination. But it also warns us that a classic bubble is expanding. One with all the hallmarks of predecessors, ranging from Holland’s tulip bubble of 1637 through to the contemporary QE-created bond market accident-in-waiting.
The trouble with financial bubbles is the only sensible approach is to stay away from them even though, for a period at least, doing so makes you look silly. So dutiful Samantha and I are doubtless going to be the butt of some braai-time in-jokes during the next little while as Bitcoin enthusiasts brag about their money-making prowess.
But these three stories offer the rational mind some solace.
The first involves the pre-eminent economist of the last century, John Maynard Keynes, who bet heavily against the Weimar Republic’s Deutschmark in the early 1920s. He was right, of course, because the DM eventually imploded in the hyper-inflation forerunner to the one which killed the Zimbabwe Dollar. But before the bubble burst, Keynes lost everything, except his sense of humour and a memorable quip that “The market can stay irrational longer than you can stay solvent.”
The second tale, with a happier ending, came a little later. Joseph P Kennedy, patriarch of America’s since hugely influential clan, was a famous and rare winner of the 1929 Wall Street bubble. As the fateful Black Monday in October approached, on his way to the trading floor, Joe he was offered a share tip by the lad who buffed his shoes.
Kennedy immediately sold out, cashing in the huge profits generated by the lax regulations that allowed for speculation on margin backed by little security. Weeks later when everything fell in a heap, the Kennedy dynasty was secure, including the legacy of Joe’s famous quote: “When the shoeshine boys have tips, the stock market is too popular for its own good.”
The third story is a more personal. Back in the late 1990s, I was close to a young professional who had made a fortune in big-ticket trading. He confided one day that he’d taken the bet of his life, going short of the dot.com boom, aggressively selling futures in the overpriced NASDAQ index ahead of the inevitable bursting of its bubble.
His logic was sound. An index which had taken 23 years to get from its base of 100 to 1 000, took a modest three more years (end-1998) to double again. It then started to really cook, adding the third 1 000 points by November 1999. The NASDAQ Composite Index then rose in a virtual straight line, surging a further 2 000 points in four months.
The last blast, however, was too much for even this professional trader’s famed iron nerve and once substantial resources. He was wiped out, forced to liquidate his position just before the March 2000 peak – and then watched in horror as his view was finally vindicated when the bubble finally burst. The index halved within a year and kept sliding to its trough of just over 1100 by late 2002, down a staggering 80% from the peak.
If you’re caught by them, as most tend to be, bubbles can be massively wealth destructive. But staying away requires enormous discipline. Especially when prices continue to expand once you’ve consciously decided to stay away from the play.
And while it is always the best approach in the end, remember, also, that the eventual victims of bubbles never thank those who warned them. Your best option, when approached by an enthusiast, is to offer something bland like “sorry, too rich for my blood”.
If you really want to help, you might go one better and show them the graph below which tracks Bitcoin’s nine-fold surge in the past year. Makes even the Nasdaq look positively pedestrian, doesn’t it? Will it end in tears? You betcha. But trying to predict whether that will happen in a week, month or year is a fool’s errand no rational being should engage in. So I won’t, and neither should you. – Alec Hogg
