The
noise that surrounded Bitcoin since 2011 has intensified over the past 2 years.
Everybody wants their say on where the price of this virtual currency is
headed; advocates mention millions of dollars while far less optimistic
onlookers suggest pennies. It is typical of what happens when something has no
intrinsic value and yet everyone wants to name their price for it.
Disregard
the hype surrounding “money 2.0” and you are left with scarcely little. Bitcoin
is less of a digital currency and more of an ongoing modern parable about
behavioural finance. Right now, there is only one certainty for Bitcoin: books
about the irrationality of its hikes in price are being penned at this very
moment in time for next Christmas.
A
book they would do well to match on the subject is “Irrational Exuberance,” by
Nobel prize- winning economist, Robert Shiller[i]. In a chapter covering the
news media, he writes, “The history of speculative bubbles begins roughly with
the advent of newspapers.” The relationship between the media (in particular,
newsprint media) and economic bubbles is thereafter laid out by Shiller.
The
Bitcoin phenomenon is almost certainly one such media-driven bubble. There
appears to be a strong correlation between the frenzy created by the media and
the price of Bitcoin. Unfortunately, much of the noise has been generated specifically
by the financial media, who seem to have learned little from recent crises. For
some people, it seems that virtual currency is just too much of a good
narrative not to follow.
Word on the Street
Bitcoin
received its first mention in the pages of the Financial Times of London on
June 6, 2011[ii].
Interestingly, it was referred to in the title of the article as “virtual
money,” which seems a far more accurate means of describing it than “digital money,”
or “money 2.0.” One bitcoin could be purchased that day for $8.
Three
days later, on June 9, 2011, the Wall Street Journal published an article,
“Bitcoin: Online Currency Taking Off.”[iii] Bitcoins were already
trading at $15 and were climbing. In the same article, the journalist pointed
out to readers, “the thing to note is that Bitcoin has real, and actual,
value;” Confusing a price with value: the hallmark of a bubble
By
June 13, 2011, the price of Bitcoin had risen to $28 – a bullish market by
anyone’s standards. In Just seven days, its price had risen 250%. In the same
period, the S&P 500 fell from 1,286 to 1,271 – a fall of 1%. Granted, it’s
not as good a story as that of Bitcoin’s meteoric rise, but at least the fall
was probably more closely related to fundamentals.
Other
media were also getting in on the action. On June 20th 2011, The
Bloomberg news channel ran a report on “what some are calling the money of the
future.”[iv] Therein, we were told
that “you can speculate” on Bitcoin. The piece finished by interviewing a man
making Bitcoin ATMs – because presumably his venture on Betamax videos didn’t
pay off.
“This time it’s
different”
Headlines,
articles and general financial media analysis of Bitcoin’s ascent show some
outlets to be more culpable than others; what the majority of them were guilty
of is giving weight to a phenomenon, which frankly, doesn’t deserve it (speaking
from an economic perspective, at least).
One
example is how much of the coverage features a supposed technology guru, who is
understandably excited about the programming behind Bitcoin. The natural
impluse for an investor who knows no better is to make an association with the
last hugely successful tech shares they let go too late to invest in.
Secondly,
coverage of Bitcoin frequently uses the expression, “money 2.0,” suggesting
that this is the next generation of money – the internet generation. What
investor would want to miss out on the next generation of money? Nobody wants
to be the guy in the marketplace that was using leather money long after
everyone else had changed over to paper.
Plus ça Change
Something
else was happening, which could have had an effect on the price of Bitcoin: stock
prices were hitting pre-crisis levels. In 2012, the S&P 500 continued its
steady rise until it reached a record high at the beginning of 2013. With stocks
touching a peak, it might make sense to “get in on the ground” elsewhere.
Looking around for inspiration, investors might have been struck by the new
virtual money that everyone seemed to be talking about.
At
around the same time that the S&P 500 was approaching its pre-crisis peak,
Bitcoin was receiving increasingly regular media coverage. A study conducted at
the Charles University in Prague has shown the relationship between searches on
Google containing the word “Bitcoin” and the price for a single bitcoin over the
period between June 2011 and May 2013[v]. The studied correlation
seems clear (see figure 1).
Figure
1. Relationship between Google Trends Searches and Bitcoin price
Source: Dr. Ladislav Kristoufek
Although
causality is impossible to prove, even someone ardently against the idea that
the media has played a significant role in the Bitcoin bubble would find it
hard to reject the relationship between the above variables. The correlation
has remained strong until the time of writing at December 2013.
The
year 2013 finished as it begun – with more stories on the new form of money
that was going to make you and yours rich. On December 26th, Forbes.com
ran a graphic with the headline, “How you should have spent $100 in 2013 (Hint:
Bitcoin),”[vi] as value investors
everywhere looked on in bewilderment.
Conclusion
Media
commentators play an important role in bringing efficiency to capital markets.
The information they provide is quickly contained in asset prices and allows
investors to make better informed decisions. They cannot always be expected to
get it right. That said, they have played a large role in the Bitcoin pricing
bubble that at the time of writing, continues to expand.
The
problem is that when prices become too remotely distant from value, investors
get hurt. Certainly, Bitcoin has made millionaires and might make many more. As
the renowned Professor of Finance, Aswath Damodaran, points out, “you can be
right in your assessment of value and go bankrupt being right.”[vii]
When
media commentators use the expression “money 2.0,” we should stop and ponder
for a moment. Money went through its second incarnation several thousand years
ago. To say “money 2.0,” shows a lack of knowledge of the complexity of money
and how it got to here. And then, in speaking of the forms that money took –
perhaps their advice should be taken with a pinch of salt.
Sources
[v]
Kristoufek, Robert, 2013.
Bitcoin meets Google Trends and Wikipedia: Quanitifying the relationship
between phenomena of the Internet era. Scientific Reports 3. Article 3415.
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