To Understand Crypto’s Crazy Growth, Look to the Mona Lisa… And Tulips!

If you’d invested $10 in Bitcoin in July 2010, then left that investment undisturbed until 2022, you’d be sitting on on a pool of value to the tune of $42,952,93.88.

That’s BIG growth for a commodity that can’t be eaten, can’t be drunk and, even despite it’s meteoric rise to prominence over the last decade, the vast majority of us would’t have the slightest idea how to use or even spend.

The same can be said for Bitcoin’s more prominent crypto cousins, Ether (Ethereum) and Dogecoin, too. All are reported to have practical uses, outside of making investors rich, but it would be safe to say these “currencies” fame is firmly rooted in the latter. But why? Why is it that even despite their relative uselessness, all three of the aforementioned cryptocurrencies are so widely recognised as incredibly valuable?

Leonardo Da Vinci’s 16th century masterpiece, the Mona Lisa holds many surprising, but pertinent similarities. Aside from its subjective beauty and fame, the painting has little functional value. We can’t eat it, we can’t drink it and, even if we were to burn it, it’s definitely not going to keep us warm for long on a cold, Parisian night.

Initially commissioned by a wealthy Milanese silk merchant as a gift for his wife, the painting was first sold for a paltry sum of four thousand gold coins – and is now believed to be worth more than AU$1.2B. Or slightly more than Seven West Media, Australia’s third most valuable media company and owner of Channel 7, the West Australian and more than 40 other outlets across the nation.

This extreme, and perhaps over, valuation is not driven by the painting’s usefulness or practical value. Instead, it is based on what any potential buyer would “feel” it is worth and would be driven almost wholly by the notion that it will, in time, be rewarded with a significantly higher resale price. The risk, of course, is whether or not that bet would pay off.

This is what’s known as a “speculative asset”. “Investment” purchases that do not produce any earnings, interest, rent or income – outside of the hope that they will continue to grow in value. All three of our aforementioned cryptocurrencies and the Mona Lisa are textbook examples. Yes, money can be transferred using Bitcoin and the Mona Lisa will generate revenue from museum admissions, but the main driver for both these items’ valuations is the bet that the price will continue to go up.

Perhaps obviously, not all speculative assets are the Mona Lisa, and history is littered with examples of these overvaluations gone wrong.

One standout would be the “Tulipmania” bubble that gripped the 1630’s Netherlands. Unfathomably, the price of Tulips soared twentyfold between November 1636 and February 1637, then dive-bombed more than 99% by May of the same year. By the time it was all over, hundreds of thousands of dutch citizens had, quite literally, plowed their life savings into the ground – with some tulip bulbs demanding prices greater than houses.

When trying to understand the rapid growth, and risk, associated with the cryptocurrency craze over the last decade, we once again find ourselves in a position where a commodity with little to no “practical” use far outstrips the value and growth of consumables, stock exchange listed companies and even the economies of entire nations.

The real question for any would be crypto investor is, are you buying into the next Mona Lisa or plowing your cash in to the 21^st Century’s own Tulipmania?