By: Reed C. Fraasa, CFP®, AIF®, RLP®
The First Speculative Investment Bubble
The first investment speculative bubble was the tulip bubble of the mid-1600s. The details are debatable, but from 1634 to 1637, a speculative bubble developed on future contracts for new tulip varieties in Holland. Prices snowballed, reaching ten times the annual salary of a typical tradesman of the day. By February 1637, the market had collapsed. The tulip mania of the 1600s resulted from a mass hysteria for new varieties of tulips developed in Holland after the flower had been introduced to Europe only a few decades before.
The tulip bubble was a mass hysteria from a fear of missing out. A collective disregard for intrinsic value and believing tulip prices would continue to rise solely because their current price was higher than in the recent past. Unlike stock in a Dutch trading company, Tulips had no expected return, but that didn’t stop speculators from ignoring fundamentals and believing the hype.
The Most Recent Speculative Investment Bubble?
Following the recent collapse of FTX, cryptocurrency, blockchain, and non-fungible tokens (NFTs) may be today’s tulips. The tech industry pitched blockchain, cryptocurrency, and NFTs as new technologies with unique intrinsic value only a few years ago. Unlike the email protocols SMPT, POP, and IMAP, a new technology industry projected blockchain protocols to have value separate from the services or products that utilize them. In the 1990s, you could not own and profit from email protocols, but you could hold the companies that provided services and products using email technology, like Google, Microsoft, AOL, etc.
Investing in Blockchain Technology
Blockchain technology will continue to impact many businesses and personal services, including artificial intelligence, autonomous vehicles, personal and business privacy and security, and financial transactions.
However, investors may realize the actual value of the technology by owning the companies that will develop innovation with the technology and not in the “tokens” and “coins” that represent them.
Protecting Yourself From Investment Bubbles
Bubbles will always happen, but you can protect yourself by focusing on the fundamentals. An investment should have an expected return. You should base your expectation for a return on investment on intrinsic value and not the current market price. Determining intrinsic value can be a complex calculation, but you should always ask these three basic questions:
Is there revenue?
What are the expenses?
Is there positive cash flow?
At the risk of mixing metaphors, when it comes to FTX and perhaps other related and unregulated tokens and coins, the emperor may not be wearing any clothes while offering a bundle of tulips.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.