Is Bitcoin the new Tulipmania?

The price of a bitcoin has surged beyond the USD 100,000 mark drawing parallels with Holland’s tulip bulb asset bubble way back in the 17th century.

Madness of crowds

Tulips are not native to Holland. They were introduced in the 1590s and fast became a status symbol among the emerging middle class of merchants.

During the period 1634 to 1637 the market for tulip bulbs skyrocketed in what proved to be an unprecedented speculative bubble. The prices disconnected from the intrinsic value so much that one rare tulip bulb sold for more than the price of a mansion on Amsterdam’s Grand Canal.

Inevitably, like all speculative bubbles, the sentiment changed. Greed turned to fear and the buyers disappeared, leaving futures contracts unfulfilled and the traders financially ruined.

There is nothing new under the sun

What does this have to do with bitcoin?  Well, both tulips and bitcoin have questionable utility and it is hard to determine their intrinsic value.

Usually with investments intrinsic value is a function of the cash flow yield. Property prices can be determined from their rental yields; company shares from their dividend yields; and bonds from their coupon rates.

But bitcoin, like tulips, doesn’t produce any cash flow whatsoever.  The return on investment is nothing more than the hope that someone will pay more in the future for owning the asset than you did. And that’s not investing. It’s firmly in the realms of speculation or gambling.

Bitcoin resurgence

After falling 75% in value in 2022, bitcoin has rebounded to its highest ever price, even surpassing USD 100,000.  The demand is coming from unsophisticated investors gaining exposure via new Exchange Traded Funds specialising in cryptocurrencies.

You may be feeling regret at missing out on the bitcoin resurgence and tempted to invest today. It can be hard watching from the sidelines and not participating in the asset boom during speculative bubbles.  And it’s true that the price of bitcoin may continue to surge on the back of positive sentiment from the Trump administration’s endorsement of crypto.

But with no ability to price the intrinsic value of bitcoin there is a real risk of overpaying, especially when sentiment turns from greed to fear.

If you must invest in bitcoin, consider it a gamble and only expose what you can afford to lose.

At Daniel Crump Financial Planning we specialise in investing, not speculation. So, if you would like help investing in real assets with a track record of paying income, give us a call.  We would love to help.

-        Daniel Crump is an independent financial adviser

This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like advice specific to you, please let us know at daniel@danielcrumpfp.com.au