Cannon Financial Institute

Tulip Bulbs, the SEC, and Paris Hilton - Cryptocurrencies: Part Three

Would you like to own an investment which increased in value by 30,000% in the previous year? Then you needed to have been one of the lucky owners of Ripple, the second largest cryptocurrency next to bitcoin as of this writing. On January 4, 2018, one of the co-founders of Ripple temporarily became the fifth wealthiest person in the world displacing Mark Zuckerberg for a few minutes until the price of Ripple sold off by a few dollars.1

Facebook is a giant worldwide corporation. Ripple is not. What does Ripple make? Mostly it makes Ripples which are electronic currency tokens manufactured by computers since Ripple is a digital currency. Why did Ripple zoom to such a valuation? You would have to ask a brilliant investment wizard like Warren Buffet or maybe the Wizard of Oz or perhaps the Wizard Merlin.     

Cryptocurrencies do strange things. They shoot skywards come back to earth then go up again then sideways then down then up then who knows where. Lots of money is chasing cryptocurrencies. What is driving this mania? The usual: fear and greed, those hallowed words which have long been used in the trade to describe what drives the stock market.

Many commentators compare the current cryptocurrency boom to the infamous Dutch tulip bulb mania of the early 1600s. For reasons unknown, people lost their reason when it came to the price of tulip bulbs. Exotic bulbs were bid up to fantastic prices with a few being worth the value of a large home. Why were they so valuable? Because people decided they were.

First published in 1841, the book “Extraordinary Popular Delusions and the Madness of Crowds” by Scottish journalist Charles Mackay, remains a classic of crowd psychology. One of his chapters describes the Dutch tulip bulb mania. According to Mackay, by 1635, some tulip bulbs sold for as much as 2,500 florins, ten times the average annual wage of a skilled laborer.2 (These figures are contested by some economists).

As prices kept climbing a negative thought began to form in the minds of more and more people. What did these tulip bulbs do besides bloom into tulips? Nothing. Did they possess some medicinal properties? No. Could you snort, sniff, or smoke tulip bulbs to get high? No. Could you eat them? No. Suddenly people stopped believing in the magic. And the moment enough people stopped believing in the magic panic selling occurred and the bubble ended as bubbles do—badly.

The type of investment mania occurring with cryptocurrencies is becoming of increasing concern to the SEC, FINRA, and financial regulatory authorities worldwide.  They fear unsophisticated investors will be drawn into this mania and invest in cryptocurrencies with little understanding of what they are doing or the risks they are taking.

Another big concern of the SEC is many cryptocurrencies are being promoted by celebrities including socialite Paris Hilton. These celebrities are not just endorsing these investments because they are bored. They are being paid to endorse various cryptocurrencies. In recent statements, the SEC has made it clear they are disconcerted by celebrity endorsements of cryptocurrencies. Federal laws governing the issuance of securities require anyone endorsing a security to disclose their relationship with the company offering the investment opportunity.

"A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws," the SEC said, adding that keeping quiet about any financial arrangement could be considered fraudulent. It said it was keeping an eye on people who promote the crypto-currencies to ensure laws were not broken.3

To ensure investors understand how negatively the agency views celebrity endorsements, the SEC went so far as to issue an unusual investment alert on November 1st, 2017, which stated their thoughts clearly:  “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”4

When it comes to cryptocurrencies the best advice is caveat emptor: buyer beware.

 

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Resources: 

1 https://www.nytimes.com/2018/01/04/technology/bitcoin-ripple.html

2 https://en.wikipedia.org/wiki/Tulip_mania

3 http://www.bbc.com/news/technology-41845185

4 https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-celebrity-endorsements

 

Contributing writer: subject matter expert Charles McCain

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