What went wrong?
What went wrong in both cases is that there wasn’t any substance to back up speculators’ euphoria, and once everyone realized that nothing more than hope was buoying stocks and Bitcoins, both bubbles began to collapse in epic fashion.
The Internet bubble of 2000 wiped out trillions in market value and bankrupted companies that previously had carried market values in the tens of billions. The Bitcoin bubble clearly won’t have the same trillion-dollar effect on the economy, but it still could have a notable ripple effect on the pocketbooks of Tyler and Cameron Winklevoss, who’ve collectively invested about $11 million in Bitcoins. The brothers may have made it a point to avoid investing in something backed by the U.S. dollar, which they see as controlled by politics, but inadvertently chose to throw $11 million into a non-physical currency that pits emotional traders against one another with no tangible price drivers other than greed and hope.
History will keep repeating itself
The worst part about Bitcoins and the Internet bubble of 2000 is that it will perpetuate the get-rich-quick mentality and ensure that another bout of irrational exuberance and emotional trading will occur in the future.
A more recent example is the debut of social-media powerhouse Facebook Inc (NASDAQ:FB) , which tipped the scales with a $100 billion valuation in the secondary markets before its IPO. Investors had placed a valuation of nearly 100 times sales on the company based on the assumption that it would grow into the next Internet powerhouse. The problem, as I described in August shortly after its IPO, is that investors are poor judges of disruptive technologies. It isn’t that we can’t recognize a great idea when we see one; it’s that we assume it’ll be a success almost immediately.
The same can be said for Bitcoin. It’d be wrong of me to assume it has absolutely no chance of being a viable currency medium over the long run, but speculators’ opinions that this is the greatest thing since sliced bread probably has no bearing, either, since there are no tangible price-driving factors that would make the currency move higher outside of greed and hope. And the last time I checked, greed and hope weren’t investing strategies — not even by Gordon Gekko’s standards anymore! (Link opens a YouTube video.)
The sad reality is that the Bitcoin bubble will create a new generation of traders that have no real understanding of how the market truly works. Don’t get me wrong; the stock market is only as rational and efficient as the investors and brokerages behind those trades. However, the effectiveness of the stock market is a far cry from an emotionally driven, non-tangible, hope- and greed-based cyber-currency that is the Bitcoin.
The article This Is the Real Danger of the Irrational Exuberance Surrounding Bitcoins originally appeared on Fool.com is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Facebook and Microsoft and recommends Cisco Systems and Facebook.
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