Bitcoin makes its own market Jeffrey Scharf, Everybody’s Business

How does one know when an investment mania is in full flower?

In his classic book “Extraordinary Popular Delusions and the Madness of Crowds,” Charles Mackay describes Tulipomania in 1634 Holland. At the height of the bubble, the owner of an extremely rare specimen was offered 12 acres of buildable land for his bulb. Speculation was so widespread that “Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney-sweeps and old clotheswomen, dabbled in tulips.”

Of 1929, Fortune magazine quotes financier Bernard Baruch describing the atmosphere before the stock market crash. “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish….My cook had a brokerage account and followed the ticker closely.”

In 2000 at the height of the Internet bubble, the Wall Street Journal ran a feature on a barber in Cape Cod who was giving advice to customers. The barber turned $100,000 into $600,000 from 1991 to 2000. Half his portfolio was in EMC which he expected to triple over the next three years at which point he would be able to retire. In 2002, the Journal made a second visit and found the unfortunate gentleman’s portfolio was down 87% from the high.

Last Monday, the Journal struck again with a feature story titled, “Who are the investors behind Bitcoin?”

By way of background, Bitcoin is an unregulated cryptocurrency which trades via peer-to-peer technology. Bitcoin exists outside the control of any government. Unlike traditional currency substitutes such as gold or silver, Bitcoin has no industrial use. It is not wearable such as jewelry. It cannot be enjoyed such as fine art. In short, Bitcoin is a computer entry worth only as much as those who buy, sell and accept Bitcoin decide it is worth.

As such, the price of Bitcoin is extremely volatile. “Investors” swing regularly from fear to greed.  At the start of 2016, Bitcoin sold for less than $500 before surging to more than $19,000 by the end of 2018. From there, it collapsed to $3,400 within a year. In then rebounded to $11,000, fell to $5,300 and has surged anew at more than $19,000.

So who are the investors featured in the Journal article? A software salesman, an insurance underwriter, a community college student, a police officer and a “bitcoin fund manager.”

Perhaps the peak will not occur until the Journal moves the Bitcoin story from the second section to the front page. But, in the end, what are the odds that Bitcoin investors will be more successful than the barber in Cape Cod, the cook in New York or the farmers, mechanics and seamen in Holland?

Jeffrey Scharf is the Founder of Act Two Investors LLC, a registered investment adviser. Contact him at jeffrey@acttwoinvestors.com.