The view from England: Cryptocurrency crash reminiscent of past bubbles 


In 2021, El Salvador announced plans to adopt bitcoin as a legal tender. It is reported that the government has spent $ 100 million on cryptocurrency, and half of the 6.5 million people in the Central American country have also apparently taken over the president’s investment council. Since then, the cryptocurrency store has lost a third of its value, which is a severe blow to an already poor economy.

For Europeans, it brings to mind the discouraged investment in tulips and slaves in the 17th and 18th centuries, respectively.

The dramatic declines in the stock market over the past 100 years have included the onset of the Great Depression in 1929, Black Monday in October 1987, the bursting of the dot-com bubble in early 2001, the financial crisis in early 2008, and the covid-19 . accident two years ago. None of them, however, is as memorable as the fall in the price of tulips in 1637 and the bubble in the South Sea in 1720.

The price of tulip bulbs reached extraordinary levels in Europe during the 1630s before collapsing sharply in February 1637. In general, this is considered to have been the world’s first speculative bubble for a commodity.

Tulips were introduced to Holland in 1593, and soon became a luxury item (it was considered in bad taste to be without a collection of these fragile flowers). At the height of the tulip craze, the best lamps were priced at the current equivalent of more than $ 100,000. The inevitable accident, when it arrived, was abrupt as many people had bought light bulbs on credit and were forced to settle when prices started to fall.

About 80 years later, the South Sea Bubble was perhaps the world’s first financial crash. Founded by Parliament in 1711, the South Sea Company was intended to consolidate national debt and help Britain increase its profits in the Americas. In 1713, the company was granted a trade monopoly that included the “Black Seat”, which allowed the South Sea an exclusive right to trade in African slaves (not our best time).

The slave trade proved to be immensely profitable over the previous two centuries and there was huge public support for the scheme. Confidence increased in 1718 when King George himself took over the governance of the South Sea, and in 1720 Parliament had the company take on the national debt of £ 32 million for £ 7.5 million. The idea was for South Sea to use the money generated by its growing stock sales to pay off interest on the debt. By August 1720 the share price had reached £ 1,000.

However, trade in America never materialized, and the company lacked any fundamental value. The inevitable happened in September 1720 when the bubble burst and the stock price collapsed to 124 pounds.

Fast forward 300 years, and the biggest loser among cryptocurrencies was the moon, which fell from $ 85 in early May to a fraction of a penny.

The collapse of Luna was caused by its forced decoupling of an associated stable currency called terraUSD (UST). This digital currency was designed to retain a value of $ 1 but, unlike the stable currency, was not backed by US dollar reserves. Instead, UST used bidirectional block chain exchanges with the moon to retain a fixed dollar value.

The system broke down on May 8, when $ 2 billion was extracted from UST, and the UST exchange mechanism per moon could not be followed. Investors lost confidence in the system, and both UST and Luna fell, removing more than $ 17 billion in cryptocurrency.

The Terraform saga raises questions about the role of stable currencies, which are an integral part of the decentralized finance system (DeFi) that is supposed to allow investors to protect themselves from the volatility of the cryptocurrency market.

Promoters of cryptocurrencies, tulips, and slaves have made unadvised promises. Investors from three and four centuries ago seem naive, but perhaps the historians of the future are equally disbelieving when they look back at the current digital market. Gold suddenly looks quite attractive.

Dr. Chris Hinde is a mining engineer and director of Pick and Pen Ltd., a UK-based consulting firm he set up in 2018 specializing in mining industry trends. He previously worked for the metals and mining division of S&P Global Market Intelligence.





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