On Dec. 10, 1999, Amazon.com stock closed at $106 per share, a mind-blowing 67 times its price only 2½ years earlier. Opinion articles in major newspapers declared there was no doubt that Amazon shares were in an irrational bubble.
The disbelievers were right. Less than two years later, in September 2001, Amazon’s share price had collapsed to $6.
While many of Amazon’s dot-com peers didn’t survive, Amazon’s stock on Jan. 9 reached an adjusted share price of $1,252.70 — more than 11 times its 1999 high. Indeed, an investor in Amazon at the stock’s 1999 peak would have since realized an annualized return of 14.6%, far exceeding the S&P 500’s SPX, +0.50% 5.3% annualized gain over that same period.
Now we have a new bubble. The rapid rise of bitcoin along with other cryptocurrencies, is similar to Amazon’s phenomenal 1998-99 runup. Of course — as was the case with Amazon — many are declaring this an obvious irrational bubble.
Maybe so. But if it isn’t, what is propelling it? The vision among cryptocurrency enthusiasts, even in the face of recent setbacks, is in ways a logical extension of the dot-com era belief that digital commerce would be the wave of the future.
As of now, global commerce is denominated in national currencies. There are about 180 national currencies. Most can be freely exchanged, but only a country’s own national currency is used within it. Transactions between two countries are inefficient, costly, and slow.
This state of affairs is archaic in the age of seamless global interconnection. Cryptocurrency enthusiasts believe it will end, replaced by a future where the main currencies will be application-based and internet community-based. For example, there might be several currencies or a single currency used for airline travel. If you want to pay for your own or someone else’s air travel in another country you won’t need a credit card, you’ll just digitally send the tokens (i.e. currency) used for airline travel.
In this global blockchain economy, Amazon will have its own currency; Airbnb its own currency; Uber its own currency. Facebook might even have its own currency. Like the internet, these currencies will know no national boundaries, aside from any measures required to adhere to national laws.
National central banks will issue their own currencies also, as they do now, but they’ll be digitized like cryptocurrencies, and used mainly to pay government employees and contractors and to pay taxes.
These currencies (also called tokens) will be readily interchangeable, just as national currencies are now. Bitcoin might be the chief numeraire — the standard — of this digital economy. The world almost always has designated a principal numeraire currency. For most of history, the numeraire has been gold.
Gold’s predominance ended in the mid-1970s when the U.S. took the dollar off the gold standard, though many gold enthusiasts still regard it as the only reliably enduring numeraire. Gold has since been replaced primarily by the U.S. dollar. This is one of the reasons why the dollar’s value has remained so buoyant.
But 10 or 20 years from now, if bitcoin is still the chief numeraire of cryptocurrency, its current price may turn out to have been justified.
There is no certainty whatsoever about this scenario, but it is not absurd. To call bitcoin an irrational bubble is too rash. Its value could even be viewed — with considerable imagination — as a reflection of rational expectations.