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Chart of the week: “Is bitcoin the new Tulip Mania?”

January 2018

Bob Cunneen, Senior Economist and Portfolio Specialist
 

Bitcoin vs tulip prices


Sources:  Reuters, Datastream. McClure.J.E and Thomas D.E (2017), Financial History Review

 

Bitcoin has made astonishing price gains over the past year, rising from US$960 at the start of 2017 to a peak at US$19,700 in early December 2017 (black line). Since then, Bitcoin has suffered a reversal with prices falling back to US$15,136.

Essentially Bitcoin’s appeal is a composite of its perceived ‘novelty’, ‘notoriety’ and ‘scarcity’. Novelty comes from being a digital currency stored on a single computerised global ledger known as a blockchain. The notoriety is the untraceable transactions and history of stolen Bitcoins. The scarcity is that there is only 21 million registered units of Bitcoins. New Bitcoins are only issued when a new block of transactions is successfully added to the chain.

However history warns that Bitcoin’s boom could be already over. The Tulip Mania in Holland (1636 -1637) saw prices rise by twenty times and subsequently dramatically fall (red line). Dutch speculators mistakenly perceived tulip bulbs as investment goods that were scarce in supply.

Bitcoin could face a similar challenge to Tulip Mania as the novelty appeal fades and scarcity becomes an illusion with competition from other digital currencies.


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