Psst! Want to buy some bitcoin?
I find finance boring. Still, one of my all-time favourite books is Manias, Panics and Crashes: A History of Financial Crises, by the late MIT economist Charles Kindleberger. The recent collapse of bitcoin’s value made me dig out this masterful work again.
At its core, the book is about human nature: not just about greed – though that plays a large part in the annals of human folly – but the intolerable pain and envy, so well described by American social critic Thorstein Veblen, of watching people around you get rich so fast, so easily while you are left out.
Too bad Kindleberger died in 2003, otherwise, he would surely have added bitcoin to his long list of manias and crashes. The cryptocurrency has lost more than 60 per cent of its value since it peaked in mid-December. Maybe it will rebound and become a legitimate currency. Who knows?
But that’s one of Kindleberger’s key messages. A perfectly valid new technology with transformative potential can easily trigger frenzied financial speculation on products tied to it, whether it was railway networks in the 19th century, telegraph and radio transmission in the early 20th century or the internet in late 1990s. In our case, it’s blockchain technology, which probably will transform banking and finance.
Legend has it that Joe Kennedy, father of the assassinated US president, dumped all his stocks ahead of the 1929 crash after his shoeshine boy offered him a sure-win stock tip. We don’t have shoeshine boys any more, but we do have many media pundits such as me.
Bitcoin reached an all-time high of US$19,511 on December 18. Four days later, famous commentator Stephen Shiu Yeuk-yuen delivered a video clip on memehk.com boasting about how much money he made from bitcoin and how he had recommended friends to buy it. Interestingly, he mentioned the Dutch Tulipmania and the South Sea Bubble, but no tech-driven bubbles.
His real purpose, however, was to deny bitcoin was a Ponzi scheme.
On December 14, local investors’ rights activist David Webb warned in an analysis that bitcoin was “the world’s first decentralised Ponzi scheme”.
Siu is not known for his expertise in computer programming and financial technology; Webb does know something about both.
You don’t have to agree with Webb that bitcoin is a Ponzi scheme to recognise all the danger signs of a speculative frenzy.
Webb, it turns out, was spot on. I wonder how many people listened to him.