The recent BTC surge has been accompanied by numerous hints about the graph price going “parabolic”. Art Cashin, Director of Floor Operations at UBS Financial Services, remarked exactly this last month adding that “this usually doesn’t end well” and he’s not the only one thinking so.
The “parabolic” feature of the graph is clear, but are we really sure that this is actually a case of concern? Let’s have a look at different price surges in the past and see if “parabolic” always means “bubble”.
The first example, always mentioned whenever a bubble comes out, it’s the tulips bubble in Netherlands between 1636 and 1637. The price of tulips bulbs increased dramatically during the last months of 1636 just to eventually collapse abruptly in febraury 1637. Bulbs were priced higher than luxury houses at some point and the parabolic movement ended in a bloodbath. Therefore, this is clearly a case of bad parabolic feature.
Another infamous bubble often compared with the current cryptocurrencies situation is the Dot-com bubble of earyl 2000s. Nasdaq index rose parabolically at the end of the decade, just to lose circa 80% of its value thereafter. What is interesting to note, however, is that the index is now at a much higher level than before the bubble explosion.
The same is also true for the gold price, which experienced a parabolic rise both at the end of 70s and between 2005 and 2010. Even in this case, despite major price corrections, value remained high. Parabolic, here, has not meant bubble.
What we can conceivably infer here is that the parabolic feature is just a typical feature of prices when the experience a truly dramatic rise. However, that feature alone doesn’t always lead to a bubble. Moreover, even if the bubble esplodes, Nasdaq index and gold shows how a solid asset (or tech) is always able to recover from an initial mispricing and keep growing. Do you think the bitcoin is more similar to the internet or to a tulip?