It’s springtime, and something fanciful is in the air. I’m not referring to the romantic ardor thought to revive along with the flowers on the hillside. Rather, there have been multiple sightings of what investment pundits call bubbles, or asset prices that appear to be floating on air.
Such sightings are usually cause for concern. The last two episodes of spectacularly irrational speculations — dot-com stocks in the late 1990s and subprime real estate in the mid-2000s —ended badly, both for the overall economy and for the broad equity market.
Which naturally brings us to the subject of bitcoin, and what might happen to stocks and the economy if the steep selloff in bitcoin shares that began shortly before Christmas gathers steam. By the time these words reach your inbox, of course, the heretofore leading cryptocurrency could be shooting the moon again — bitcoin still gained almost 2,000% in 2017 — or completing a parabolic flight back to earth.
But given that bitcoin has no actual value, and thus is unhinged from the firmly grounded investment fundamentals espoused by BetterInvesting, it would seem to qualify as a bubble. Perhaps the biggest bubble in history, dwarfing even the tulip mania of 17th century Holland, when at its peak a single tulip bulb sold for up to 20 years of earned income.
So should you be worried about collateral damage to stocks if the bitcoin bubble pops? The short answer is, probably not. That’s because the amount of money that could be lost in a total collapse of all cryptocurrencies is small relative to the capitalization of the U.S. equity market. According to coinmarket.com, the value of the 100 largest cryptocurrencies as of mid-January was about $500 billion, or less than 2% of the $30 trillion value for all U.S. stocks. That’s also about 14 times less than the $7 trillion of homeowners’ equity lost when house prices fell 30% nationwide between 2006 and 2008.