Bitcoins, Tulips, NASDAQ, Gold and Modern Art
I do not know much about Bitcoins and, at this point, do not really care to. Maybe I willat a later date. Bitcoins seem to be starting out as a craze with people jumping on the bandwagon. This made me think of other crazes – some spurious and some that seem to have taken hold.
In 1637 Holland, tulip mania became the rage with some tulip bulbs bid up to be worth more than 10 times a skilled worker’s annual income. When this bubble burst, countless investors and speculators (and some normal people, too) were wiped out.
You might say this was repeated somewhat in 1999 and early 2000 when the NASDAQ index was bid up to 5408 from 2193 at the beginning of 1999 only to drop eventually to 1108 in Oct, 2002. Earnings and dividends were ignored with stocks selling at multiples of sales! Let’s hope this phenomenon doesn’t reoccur.
Gold is another of those assets I do not quite understand. The intrinsic value is industrial and a jewelry product, yet it is considered as a medium of exchange or a hedge against inflation or some countries’ currencies. Longevity can make it right since its use started over 6,000 years ago. I don’t like gold because it costs money to store, it is too heavy to cart around and doesn’t pay a dividend. In some places you even have to pay sales tax to purchase it. To make money on gold, as with any other investment, you have to be both a smart buyer and smart seller and this double feat is not so easy to achieve.
I regularly attend art museums, galleries and read news items when high valued paintings are sold. Some look like the work of young children just learning to draw. The artist’s signature provides the value. Will that signature be as valuable 100 years from now when the memory of the public persona has vanished? Who knows, but also, who cares? I remember in the early 1990s,the economy tankedand there were unsold “famous” paintings at highly publicized auctions. This certainly has changed, but will it change back? Who knows?
The point is that many are quick to jump on band wagons of new crazes without understanding the dynamics and what is really occurring, how value is created or what has to happen for value to be created. I know that for something to rise in price there has to be more buyers than sellers; and when the opposite is present, the value drops. Just because there are more buyers of the current rage today doesn’t mean there will be tomorrow. With monetary or investing fads, all that can happen if you do nothing is that you lose an opportunity. It’s when you do something that can cause you to really lose.
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