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Is the Bitcoin bubble about to burst?

PUBLISHED: 06:00 01 January 2018 | UPDATED: 13:32 01 January 2018

Part of ‘'Hogarthian image of the South Sea Bubble'’, by Victorian painter Edward Matthew Ward. ‘These people would have bought Bitcoin had it been around in 1720,’ says Peter Sharkey

Part of ‘'Hogarthian image of the South Sea Bubble'’, by Victorian painter Edward Matthew Ward. ‘These people would have bought Bitcoin had it been around in 1720,’ says Peter Sharkey

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Should we heed a history lesson from the 1700s? asks Peter Sharkey

Peter Sharkey Peter Sharkey

With little else of great consequence to distract us, the festive break is an understandably popular time for mulling over life and considering the merits of the previous 12 months before examining prospects for the forthcoming year. This coincides with the appearance of seasonal lists, usually the previous year’s top ten x or y, and of soothsayers either warning of doom and gloom or forecasting unfettered joy and economic wellbeing.

Self-appointed sages tend to avoid predicting the latter; indeed, as the old year drew to a close, there was an even greater than usual volume of investment-related opinion which erred on the side of caution. Such a risk-conscious mood is widespread. I sense that many investors are finding it increasingly difficult to believe that the protracted “bull run” of rising asset values, from shares to bonds, commodities and a host of other securities, will continue unabated for another 12 months.

Investors Chronicle recently reported that “in the past 12 months, 30 British companies with a market [value] of more than £100 million have seen their share prices at least double. The temptation to cash out is high…but investors [face] the conundrum of low interest rates and expensive alternative investment options.” Many investors wonder if they should take their profits now. Meanwhile, stock market commentators are predicting everything from a “minor correction” to a collapse of 2007-08 proportions, resulting in a pervading sense of gloom settling across the UK market.

Are we in similar “bubble territory” to that at the turn of the last century? I think not. Bubbles are created when enthusiasm for certain shares or market sectors is unfounded; people buy because everyone is buying.

This was certainly part of the process that powered the dotcom boom prior to a stark realisation far too many tech companies were massively over-priced. While we’re not in such a situation, the hype that has propelled the value of one share price (at the time of writing, Bitcoin was up 900% during 2017) could have a debilitating impact once the price goes into reverse, though it’s only a single stock.

Whereas the dotcom bubble burst when the financial metrics of many companies in the tech sector no longer stacked up, if this single, over-hyped company, Bitcoin, goes bang, something similar could happen. It has before.

The notorious “South Sea Bubble” of 1720 provides us with such an example. The affair not only undermined public confidence in the financial system, it shook the nation’s trust in its political leaders. (Sound familiar?) The crisis originated after the South Sea Company, an outfit that dominated British trade with South America and the Pacific, offered to take over the existing national debt. The “national debt” was, in effect, the means by which Britain paid for a succession of wars, introduced in 1692 (as an emergency measure). The Government invited corporations and individuals to lend it money in return for an annual dividend. Investors received a reliable source of income and the Government found the wherewithal to pay for armies and navies without having to raise taxes.

The South Sea Company was prepared to accept a lower dividend yield than the Government was paying to its existing creditors and so its offer was accepted. Not surprisingly, shares in the South Sea Company soared, prompting hundreds of other companies to jump on the bandwagon, promoting all manner of speculative – and many dishonest – schemes. The resulting speculative mania, powered by people buying into increasingly costly projects that had little chance of succeeding, was, like Bitcoin, self-perpetuating: based on nothing other than hearsay and rumour.

The mania collapsed suddenly, in September 1720, ruining thousands of people. It produced the Bubble Act, which virtually outlawed the company as a form of enterprise in the manufacturing sector, a development that would hamper economic growth until the Act was repealed more than a century later.

This column is brought to you in association with Almary Green This column is brought to you in association with Almary Green

Could something similar happen when Bitcoin mania comes to a sudden end? Regrettably, it’s not far-fetched to answer in the affirmative.

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The Week in Numbers

1/33

Ridiculously short odds on Manchester City being crowned Premier League champions this season. Bullish punters can still get 40/1 against them winning four major trophies….

25ft

Size of fibreglass shark sticking out of the roof of a house in Oxford since 1986 when it was built by Bill Heine. Oxford council wanted it demolished PDQ, but as it’s become a bizarre tourist attraction, an application for it to be listed on the city’s ‘Heritage Asset Register’ has been lodged with the council.

£16,000

Annual fees the Duke and Duchess of Cambridge will pay to send their two-year-old daughter Princess Charlotte to Willcocks Nursery School five days a week. The princess will start nursery in a few weeks and is expected to attend between 9am and 4pm on three days a week, finishing at noon on the other two days.

£14billion

After deciding to build a smaller new terminal, executives at Heathrow Airport have revealed they can expand the nation’s busiest airport for £2.5billion less than they originally calculated. The new price? A snip at £14 billion.

1.8million

The Royal Institute of Chartered Surveyors predicts that an additional 1.8million homes will be needed to meet rental demand by 2025. No-one knows where they’re going to come from though.

14.2%

Over the past 35 years, the stock market has enjoyed a nominal annual return of 11.7%, while gold has increased in value by an average of 1.9% a year. However, according to a study by online firm Baghunter, the value of handbags manufactured by French company Hermes rose, on average, by 14.2% a year. Not once has the value of a sought-after Birkin bag fallen in value.

Peter Sharkey read economics at the University of Bristol. He worked as an accountant on three continents and has been a company director and investor for more than 30 years, building and selling three different companies.

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