Bitcoin bubble? The warnings from history

Bitcoin is drawing comparisons with past economic bubbles, owing to its meteoric rise this year. Here are some perhaps poignant history lessons:

Tulip mania

One of the earliest example of an asset bubble, the tulip boom occurred in the 17th century when Dutch speculators caught a dose of irrational exuberance over tulip bulbs – then new to Europe from the Ottoman empire.

Speculators bought and sold bulbs, pushing up prices, while more people rushed in to the market after hearing about all the money being made. Prices skyrocketed to unsustainable levels, before crashing spectacularly as demand dried up.

South Sea bubble

Sir Isaac Newton was among those thought to have lost heavily from investing in the South Sea Company, which had the monopoly rights for trade between Britain and South America in the early 18th century.

Investors bought shares on the expectation of profits, but prices rose far beyond the gains on offer. Britain was at war with Spain for control of South America, and little profit was made, prompting the shares to collapse.

Dotcom bubble

The arrival of scores of new internet companies to the stock market, including the New York-based Nasdaq exchange, created a buzz in the late 1990s that led to excessive speculation. Many new firms were able to win huge valuations as public companies, even though they generated very little or no profit whatsoever.

How bitcoin compares with previous asset bubbles

S&P 500

Nasdaq

House prices

Bitcoin

Z-scores for:

6

Bitcoin

Equities and

Nasdaq bubbles

4

Housing bubble

2

0

-2

1997

2002

2007

2012

2017

Guardian graphic | Source: Fathom Consulting | Z-scores: Asset price gains versus their long-run average

Selling at the top of the market in early 2000 triggered panic, while the sources of funding for companies with little profit-making ability dried up, further exacerbating their decline and the market crash.

Subprime mortgage crisis

Banks irresponsibly lent to US households who couldn’t really afford the mortgages they were being sold, egged on by the massive returns to be made by packaging the loans into bonds by their investment banking arms.

When the number of households fallings into arrears on their mortgages began to rise, investors began to realise the scale of the bad assets pumped into financial markets, triggering the collapse of the banking system in 2008.