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Bitcoin mania

Bitcoins are not owned by large financial institutions so can’t trigger a major crisis.

Dec 08,2017
The tulip mania of the 16th century is being discussed once again. In the late 1500s, a German strolling in a garden discovered a new type of flower he had never seen before. It stood upright with thick green leaves and a showy turban-like bud on top. Mesmerized, he asked about the flower and discovered that it came from Turkey.

He brought the flower home to give to his wife. A friend stopped by their house and was equally enthralled. Word got around about the exotic flower. Suddenly everyone wanted to get their hands on it. The phenomenon spilled over to the Netherlands.

The fervor bloomed even brighter there. The tight supply could not satisfy an ever-growing demand so the Dutch had to open an exchange and begin trading the flower as a commodity. Farms mushroomed and bred all types of hybrids. Investment went out of control. People took out loans on their land. They spent their life savings. They sold anything they could in order to buy tulip bulbs.

By 1634, a single stem sold for the price of 300 sheep. At the peak of “tulipomania,” one bulb of Semper Augustus — a rare breed of red-and-white striped tulips with a blue-tinted base — sold for about $1,800, which was enough to buy 64 bulls at the time. The tulip craze crushed all other industries in the Netherlands. Who would want to bake or tailor clothes when a tulip can buy a mansion?

As with all speculative bubbles, this one had to burst. Some prudent people begun to sell in advance of the burst, and more joined in. Soon, everyone was anxious about their tulip assets. Prices began to nosedive. Thousands of merchants went out of business every day. Farmers, traders, bankers, and office workers lost incomes and jobs.

Few emerged unscathed from the crash. Enraged people who lost their life savings and assets began to look for scapegoats. Everyone shared the guilt, in fact — the industry, investors, media, and farmers. The Dutch suffered a long depression afterwards and have since been very careful about speculative investments.

Today’s tulip is the bitcoin, an exotic concept until a few years ago. Its birth remains as mystifying as its true meaning. The revolutionary concept was invented by someone identified as Satoshi Nakamoto in 2009 to allow people to use a currency outside the control of regulators and central banks. No one knows who the inventor really was, let alone if it is a he, a she, a group or even a government.

Bitcoin is created through a so-called mining process, which refers to highly intensive computing that solves mathematical problems. It is backed by the blockchain, or an automated digital ledger that works to make financial transactions simpler as well as protecting the assets from counterfeiting and theft.

One of the world’s biggest exchanges for cryptocurrencies is based in South Korea. Last month, the value of one cryptocurrency exceeded $10,000 in Seoul for the first time in the world. Many people around the world are invested in cryptocurrencies. Bitcoin’s value was six cents seven years ago, $12 four years ago and $14,000 yesterday. Investors dream of becoming millionaires with extreme speed.

Bubbles are swelling dangerously fast, and no one knows when they will pop. No one can confidently evaluate the future value of a certain asset. “We have to admit that our basis for knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory . . . or a building in the City of London amounts to little and sometimes to nothing,” said John Maynard Keynes.

A number of Nobel Prize-winning economists have warned of the eventual burst of the bubble since the cybermoney does not have intrinsic value. Joseph Stiglitz went as far as saying the currency should be outlawed. Experts are mixed with some predicting as big a crash as the dotcom bubble while others are not so worried as the digital assets still remain peripheral and are not owned by mainstream financial institutions, so can’t trigger a major crisis.

The Seoul government has begun to take the matter seriously and formed a task force led by the Ministry of Justice. It must be prudent and not clamp down too hard, which could pop the bubble. Bitcoin fired up the speculative instinct in Koreans. Korea became its biggest trader soon after derivatives such as futures and options products were introduced. A dangerous speculative binge has swept Korea. Missteps could cause a catastrophic crash and aftermath a lot like the Dutch witnessed 400 years ago.

JoongAng Ilbo, Dec. 7, Page 34

*The author is a columnist of the JoongAng Ilbo.

Yi Jung-jae



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