Bitcoin, the leading cryptocurrency, is far removed from the days when it reached $19,873 in its mid-December stratospheric rise last year as it has fallen below $4,000 –a drop of more than 80%–as post-Thanksgiving bears feasted on the digital currency.
However, bulls are quick to dismiss that the bubble has burst for Bitcoin, citing that its latest 80% drop in valuation is not the largest in its history of market corrections.
— Dennis Parker⚡️ (@Xentagz) November 21, 2018
Others are keen to say that the latest drop-off in price will attract an influx of institutional investors as the number of retail investors fall quickly to the wayside.
“Through 2017 all of the buyers were retail — as the price is drawing down you’re starting to see institutional investors come in,” said Anthony Pompliano, founder and partner at crypto investment firm Morgan Creek Digital Assets, who remains bullish on Bitcoin in the long term.
Until the cryptocurrency that was once the toast of the town can resuscitate itself and get out of its latest correction, it calls to mind market bubbles of the past that elevated investors into a state of euphoria before unceremoniously popping and crashing down to earth.
“Tulipmania” in the Early 1600s
Unlike Bitcoin, tulips were an actual, tangible thing that you can see and hold. In fact, it was their rarity and exotic beauty that caused them to be incredibly overvalued between the years 1634 to 1637 when “Tulipmania” reached fever pitch in the Netherlands.
The perceived value of the tulip bulbs created a market of flippers, investors who purchase an asset and sold it later at a higher price for profit, who capitalized on the demand for tulips–demand-fueled speculation was apparently so high that the price of one tulip reached $10,000 in today’s valuation. Eventually, “Tulipmania” withered sharply as sellers were desperate to unload with no buyers in site as the tulip market crashed and brought the whole Netherlands economy with it, resulting in a mild economic depression that wouldn’t subside until years later.
The South Sea Bubble of the Early 1700s
The South Sea Company, an international trading company, was granted special rights to trade in the South Seas, which is now comprised of South America today, by the British government. In an incredible marketing and promotions sleight-of-hand, South Sea Company executives touted the company’s exclusivity to trade in the South Seas, causing its shares to skyrocket.
Speculators caught up in the buy-and-sell frenzy of its shares soon realized that the company churned out less-than-stellar profits that fell below the company executives’ claims. An eventual sell-off battered South Sea Company’s share prices, causing one notable investor and famed scientist, Sir Isaac Newton, to famously remark, “I can calculate the movement of the stars, but not the madness of men.”
“Black Monday” in 1987
Perhaps the name came about as it left investors’ portfolios battered black and blue as the U.S. stock market crash of 1987 on a Monday, October 19 became notorious as the largest single-day decline with the Dow Jones Industrial Average shedding a whopping 22.6%. Prior to the crash, markets were in a heated frenzy as they were fueled by a spate of corporate takeovers that made stars out of names like Carl Icahn.
However, with the advent of portfolio insurance, investor sentiment was tantamount to being in a risk-on mode with an injection of steroids. As the story goes, a tsunami of sell-offs that Monday caused a market capitalization loss of over $500 billion, causing the Federal Reserve to intervene after the crash by lowering interest rates in order to help bring the financial markets back to life.
The “Dot-Com Bubble” of the Late 90s, Early 2000s
As technological innovation spurred a rise in internet companies labeled “Dot-coms,” investors were wide-eyed with the potential these companies could bring in this burgeoning internet space. As such, these Dot-coms were overvalued to exorbitant levels as investors were eager to cash in on the next big thing in this new economy.
However, early 2000 marked the resurgence of common sense as investors were realizing that a plethora of these companies were worth far less than their billion dollar valuations at the time. In addition, scandals related to inflated earnings caused panic selling and as such, many of these Dot-coms were reduced to nothing.
The Housing Bubble in the Mid-2000s
In the mid-2000s, real estate was the equivalent of gold with land, a foundation, retaining walls, roof, windows, and interior accoutrements. Unlike shares of Dot-coms, real estate was something that was also a tangible asset and such, was deemed a safer asset, especially for those who were burned by the recent internet company bubble.
Combined with low interest rates and easy access to credit via subprime mortgages, fly-by-night real estate investors began flooding the real estate market by the masses, inflating real estate prices to levels far beyond their true market valuations. As values peaked in early 2009 and subsequently fell, the housing market went into a downward spiral that eventually took down the whole financial sector and the rest of the economy with it into what would eventually be labeled “The Great Recession.”
Related: The Key to The First Bitcoin ETF
For more information on the cryptocurrency market, visit the Bitcoin category.