Easy Sunday: Bitcoin, Beanie Babies, and other collectables

“Extraordinary Popular Delusions and the Madness of Crowds"
Charles Mackay, 1841

I did not encounter this book as a student of history or economics. Too bad. I finally encountered the book in my first week of training to be a financial advisor in my mid 30s.

The book looked at the tulip bulb mania in Holland in 1634 to 1637. For a while a single tulip bulb was valued as highly a grand house on one of Amsterdam's canals. Then the mania ended that the prices collapsed. The book examined the South Sea Bubble, canal bubbles, railroad bubbles, and fads where it became fashionable for women to poison one another and men to challenge each other to duel with sword. But the most dramatic part of the book was the look at financial speculation over the centuries. Some new product or technology would spark attention. People saw others buy stock which went up in value, which created its own momentum. More people joined in and the price of the stock became totally disconnected between the utility of the item and its price. Its price was all that mattered. Mackay was astonished to report that people bid up prices on things that were completely imaginary.

People may not have thought they were buying to sell to some "greater fool." Briefly, they thought -- hoped -- they had real value because it had a real price.

My best education about the madness of crowds took place from experience. In the mid-1990s I watched the Beanie Baby phenomenon. The cheap toy dolls caught the public's attention. The toys had no utility, but the were produced in small enough quantities that they were understood as "collectables." People would stand outside stores that received shipments of new editions of the toy, buy them and then immediately resell them for ten or more times the price on E-Bay. What a deal! Everyone wanted in on it. The toy itself was irrelevant. What was important was the price of the toy and its ability to be sold at a profit. When the buying stopped people rushed to sell and salvage some of their investment. Now they sit worthless on the top shelves of closets.

They are still available on E-Bay, with die-hard sellers, putting a huge price on them, which creates a sales opportunity. People see an offering price and anchor that price. If someone wants $50,000 it must have some value. There remains an underlying problem: there is no underlying utility. But a seller can hope, and wait. This is the toy released to honor Princess Diana. Different sellers hope to sell for different prices.

They are easy to buy. Hard or impossible to sell.

This brings me to cryptocurrencies. There is no use for it other than to facilitate drug sales, money laundering, tax evasion or other illegal activity. Donald Trump had been a cryptocurrency sceptic until he received campaign help from people with interest in crypto. Now he is a participant in the industry, with his own $Trump cryptocurrency. Trump is suggesting that what the U.S. might do is create a Strategic Crypto Reserve, something modeled after the Strategic Oil Reserve. Only instead of having oil stashed away onshore, in the event of an oil supply emergency, in which real oil would be immediately available,the U.S. would use taxpayer money to buy entries in ledger of in the event the U.S. faced a shortage of something imaginary -- but artificially rare. This would solve a problem for the industry. Finally there would be a use case. What purpose do they have? One can sell them to the government.

Crazy as the tulip bulb mania was, at least the bulb could be planted and the world would be improved for a two weeks that spring by the sight of a tulip in flower. It wasn't worth as much as a grand home, but at least it was something. At least a Beanie Baby toy can decorate a shelf or be chewed on by a toddler.

Cryptocurrency doesn't even have that.