Market manias and the madness of crowds have driven speculative bubbles in Dutch tulips, Japanese real estate, dot-com stocks and U.S. housing, just to name a few. All ended badly for people who got in late and lost money.
This year’s sevenfold increase in bitcoin has skeptics wondering if the cryptocurrency is the latest bubble that inevitably will pop and wipe out speculators.
“The digital currency topped $7,000 this month for the first time, a gain of more than 600% so far this year,” writes Steve Russolillo in The Wall Street Journal. “Three years ago, bitcoin was at $300. Six years ago, it was at $2.”
While traditional bankers like J.P. Morgan’s Jamie Dimon, Credit Suisse’s Tidjane Thiam and Goldman Sachs’s Lloyd Blankfein have described bitcoin in terms of a fraud or a bubble, the finance industry is also showing signs of getting into cryptocurrencies.
“Goldman said last month it was considering setting up a trading operation for digital currencies,” Russolillo writes. “exchange operator CME Group Inc. announced plans to begin offering a bitcoin futures contract. That would give Wall Street traders an avenue to bet on bitcoin prices and hedge against volatility, a crucial step in bitcoin’s move into institutional and retail markets.”
Proponents of bitcoin say its limited supply will protect its value, especially when central banks like the Federal Reserve expand the money supply during recessions. The Fed has been in a gradual tightening cycle for the past two years, and that followed a period of keeping interest rates at record lows since the 2008 financial crisis.
But many central banks, like the European Central Bank and Bank of Japan, are still flooding markets with liquidity, driving up the price of financial assets like stocks. And like bitcoin, the stock market is also being described in terms of a bubble.
‘The more investors speculate, the more they tend to become impressed by the outcomes of their own speculation, which temporarily results in self-reinforcing bubbles,” fund manager John Hussman this week wrote on his website. “At every market extreme, investors are tempted to abandon historically reliable measures of valuation.”
The S&P 500 has risen 19 percent in the past 12 months to record highs. But investors are paying a high price for earnings that haven’t grown nearly as much. The Shiller price-to-earnings ratio for the S&P 500 is now about 31 times, higher than it was when the stock market crashed in 1929 and 1987.
“We expect the stock market to lose nearly two-thirds of its value over the completion of this market cycle,” Hussman said. “We also expect the S&P 500 to lose value, even after dividends, over the coming 10-12 year period.”
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