Our generation may well be defined as one that lived in the age of Bitcoin. For those of us who have watched it grow from 3 cents in 2008, where you mined for blocks of 50 Bitcoins, to today, when it has just crossed $17K, it helps us imagine incredible wealth, on having invested a pittance. Having invested $10 in 2008, which is the cost of a sandwich in a the wealthiest of nations and a cost of a meal for a family in the poorest, you would now be in the process of grappling with questions such as which luxury car to buy to look at your dream house with the swimming pool that you’ve always dreamed of owning, and whether to now spend all that money or put it in an interest bearing account so that you might comfortably live off the interest.
You might now be tempted to invest in the next big thing, since your sheer wisdom at having recognised this opportunity was surely a stroke of genius and a reflection of your hereto unknown visionary financial acumen and evidence that this was truly your calling.
After all, you had converted $10 into $5.5 m. Perhaps your first instinct was remorse at only having invested $10 since your friends had discouraged you from investing more in something that was surely going to be a waste of money. But surely, next time, you would follow your instincts.
For a moment there, it’s fun to imagine your having invested $10K in 2008. How amazing would that be. At about this time, you would be struggling with reducing your media exposure and online social footprint so that those unwanted and long forgotten relatives and the charities for the betterment of everyone else can’t locate you quite so easily, or your fortune, now estimated at a bit over $5.5 billion. The looks of strangers change from perhaps appreciation for our elegant attire or obvious good looks to an underlying suspicion of personal safety, as paranoia sets in. Even in locations you may have previously considered safe, danger lurks in the form of personal risk to you or your children. If you’re single, you see the risk of a gold-digger spouse, and the legal relevance of a prenup, harking to the leaders among us, like the president of the US on his third marriage, and wonder if by objectifying the relationship, they indeed got it right.
Living in the age of Bitcoin and hearing the stories of those who invested in it or even knowing those who mined it, it’s easy to forget that in the history of civilisation, this is only the second time that this sort of super-bubble has occurred for something that has no defined base value that can be backed by something tangible. The first was the tulip mania.
In the early 1630s in Holland, tulips were becoming exceedingly popular with the wealthy classes to showcase their wealth. The different colours and hues made them dramatically different from other flowers. The more rare the colour of the flower, the more prized the bulb. The irony was that the rare streaks of double colours were a result of virus infections in the bulbs.
In a short period of time, the price of the rarest of the bulbs went up to an extent where, at one point, they were more than five years of salary paid to a skilled worker. This went on till February 1637 where on one particular tulip auction, there were simply no buyers, resulting in financial ruin for untold thousands of spectators. This started a shock that reverberated across Holland. This was the first known instance of a bubble.
Of course, this was only in Amsterdam, so the impact was localised.
Let’s come back to imagining investing $10K in Bitcoin and seeing its value jump to $5.5 billion, it is appropriate to pause for a moment, before you feel too dejected at having missed the opportunity of a lifetime. It’s actually more than that. It’s likely the opportunity of a civilisation. In this, it’s an anomaly, though quite the ride. One of my students who actually mined Bitcoin in 2008 asked me if I had invested in it. On inquiring why, he said he thought I looked like someone who would. My initial feeling was to consider this as a complement. On reflection, however, it’s no more than a roll of the dice. It’s similar to having been Mark’s roommate at Harvard when he created “The Facebook” and needed $1K, and you gave it in exchange of some equity, or being the fourth housemate of the three housemates who created Airbnb.
It’s fun to imagine the possibilities that incredible wealth would afford you, and the stresses you’d have to deal with, as one of the wealthiest 0.0001%. I asked my children over dinner what they’d do if they had unlimited money. Their responses, at age 11 and 13, were telling. “A zoo”, said my daughter, till she was gently reminded of the logistical challenges of managing it. I also noted the weekly struggles, full of intrigue and political strife and the backroom dealing more commonly seen in the dens of mafia dons or Washington, in deciding who would clean the goldfish aquarium. On second thoughts, it seemed easier to simply visit the animal petting zoo. “Servants”, they both cried in unison. We don’t have any, shocking as it may be to anyone from Asia. Point taken! “A car that can play music streamed from the iPhone.” Done! “Someone to do the garden work and house-work.” (Nice of them to recognise how their parents toil). Gladly. “Dinner a couple of times per month in a restaurant.” Oh, ours is a simple life. Done again! And just like that, they ran out of things they wanted. Total bill, less than $100k, for a new car, et al.
In the time we spent discussing over dinner, the possible interest at a rate of 5% per year on $5.5 billion was more than adequate to cover all their desires.
Perhaps Alfred Doolittle, when asked in “My Fair Lady” how much money he wanted, was on to something when he replied “5 pounds”. “The missus wouldn’t have the heart to spend ten, Governor; ten pounds is a lot of money; it makes a man feel prudent-like; and then goodbye to happiness. No, you give me what I ask for, Governor; not a penny less, not a penny more.”