Holders of cryptocurrencies are reeling after a brutal year-to-date, with a catastrophic April and May serving to remind investors of the dangers in relying upon such ephemeral stores of wealth.
The Financial Times estimates that more than $1 trillion has been wiped from the value of crypto assets in the five months to the end of May. Losers include Vitalik Buterin (creator of the Ethereum blockchain), hedge fund luminary Mike Novogratz (who backed Terraform Labs’ collapsed luna digital coin) and El Salvador.
In 2021, El Salvador announced plans to adopt bitcoin as legal tender. The government is reported to have spent $100 million on the cryptocurrency, with half of the Central American country’s 6.5 million population also apparently taking the president’s investment advice. The crypto store has since lost one-third of its value, which is a painful blow to an already parlous economy.
For Europeans, it brings to mind the ill-advised investment in tulips and slaves in the 17th and 18th centuries, respectively.
Dramatic stock market declines of the past 100 years have included the start of the Great Depression in 1929, Black Monday in October 1987, bursting of the dot-com bubble early in 2001, the financial crisis at the start of 2008 and the covid-19 crash two years ago. None of these, however, are quite as memorable as the tulip-price crash of 1637 and the South Sea Bubble of 1720.
The price of tulip bulbs reached extraordinary levels in Europe during the 1630s before dramatically collapsing in February 1637. This is generally considered to have been the world’s first speculative bubble for a commodity.
Tulips had been introduced to Holland in 1593, and soon became a luxury item (it was considered bad taste to be without a collection of these fragile flowers). At the peak of tulip mania, the best bulbs were trading at today’s equivalent of over $100,000. The inevitable crash, when it came, was abrupt as many people had purchased bulbs on credit, and were forced to liquidate when prices started to decline.
Some 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 the national debt and to help Britain increase its profit in the Americas. In 1713, the company was granted a trading monopoly that included the ‘Asiento de Negros,’ which allowed South Sea an exclusive right to trade African slaves (not our finest moment).
The slave trade had proved immensely profitable over the previous two centuries and there was huge public support for the scheme. Confidence was boosted in 1718 when King George himself took governorship of South Sea and, in 1720, Parliament arranged for the company to assume the £32 million national debt for £7.5 million. The idea was that South Sea would use the money generated by its ever-increasing stock sales to pay interest on the debt. By August 1720 the stock price had hit £1,000.
However, the trade in the Americas never materialized, and the company lacked any fundamental value. The inevitable happened in September 1720 when the bubble burst and the share price collapsed to £124.
Fast forward 300 years, and the biggest loser amongst cryptocurrencies has been the luna, which collapsed from $85 in early May to a fraction of a cent.
Luna’s collapse was caused by its forced uncoupling from an associated stable-coin called terraUSD (UST). This digital coin was designed to retain a value of $1 but, unlike the tether stable-coin, wasn’t backed by reserves of U.S. dollars. Instead, UST used two-way blockchain exchanges with the luna to retain a fixed dollar value.
The system broke on May 8, when $2 billion was extracted from UST, and the mechanism of exchanging UST for luna couldn’t keep up. Investors lost confidence in the system, and both UST and luna crashed, wiping out over $17 billion in crypto value.
The Terraform saga has raised questions about the role of stable-coins, which are an integral part of the decentralized finance (DeFi) system that is supposed to allow investors to hedge against the volatility of the cryptocurrency market.
The promoters of cryptocurrencies, tulips and slaves all made ill-advised promises. The investors of three and four centuries ago seem naïve, but perhaps historians of the future will be similarly incredulous when they look back at today’s digital marketplace. Gold suddenly seems rather attractive.
— Dr. Chris Hinde is a mining engineer and the director of Pick and Pen Ltd., a U.K.-based consulting firm he set up in 2018 specializing in mining industry trends. He previously worked for S&P Global Market Intelligence’s Metals and Mining division.