Tulips and Bitcoins
Paul Vigna, in a recent Wall Street Journal article, pointed out that “digital currency fans are partying like its 1999.”
Perhaps Mr. Vigna may want to look further back than 1999, to 1637. That is when, according to Wikipedia, during a period in the Dutch Golden Age, the contract prices for a single tulip bulb reached a level equal to 10 times the annual earnings of a skilled craftsman, and then dramatically collapsed.
This might be an appropriate time to revisit the “Great Fool Theory”, which states that the price of an object is determined, not by its intrinsic value, but rather, by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party (a bigger fool) will be willing to pay an even higher price.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®