Cryptocurrency has been the hottest topic in finance in 2017 and has gained an extreme amount of media attention. Cryptocurrency is a digital asset that is used to trade goods and services via the internet. The system operates on a technology called ‘blockchain’, which is a never-ending distributed-ledger of transaction records that are linked and protected using cryptography.
So, over the past year, millions of investors have been dumping their money into cryptocurrency with slim or no understanding of how the foundation it operates. This movement towards a digital world has brought fear and optimism into the lives of millions. At the beginning of February 2018, the stock price of the leader in cryptocurrency, Bitcoin, fell from $10,000 to $6,000 in four days. This drastic fall has answered the questions of both the feasibility and sustainability of this medium of exchange.
Talbot Babineau, CEO, IBV Capital, referred to cryptocurrency as “the modern-day Tulip Mania.”.
Tulip Mania was a speculative bubble during the Dutch Golden Age. Tulips being a new flower during that period were highly sought after therefore, making the flowers quite expensive. These high prices made buyers more inclined to fill up on their inventories during the growing season. Many were trading their entire life savings to get more tulips, so they could reap the huge profit margins.
That being said, the prices did not truly demonstrate the true value of a tulip bulb. Typically, in speculative bubbles, people begin to get nervous about the reliability and begin selling to maintain a profit. This acts as a domino effect. Many others begin selling their stocks (or tulips) while few were buying, causing prices and the value to nosedive.
In February 2018, the world-renowned investor, Warren Buffett, eliminated discussions to invest into cryptocurrencies, warning that the Bitcoin bubble will “come to a bad ending”.