The decentralised digital currency Bitcoin hit $17,000 recently. In one day, it gained as much as what it's entire value was at the beginning of 2017. It's very exciting stuff for some people. There's a widespread view that implicitly implies that since bitcoin is a 'digital' construct, those buying and selling them are immune to psychological flaws that humans are prone to. This idea is too ridiculous to even refute.
Do note that I'm not criticising bitcoin or its underlying blockchain technology. I think these are revolutionary inventions and will eventually have a deeply transformational impact. I'm only talking about how people are going crazy while trading bitcoin right now.
If you find the idea of trading bitcoins attractive, do read this column that I wrote a decade ago, in November 2007, when the Indian stock markets were in the grip of a similar mania.
Monkeys, Goats and Markets
So, there was this village where one day a man appeared and said that he wanted to buy monkeys. He said that he would pay a hundred rupees for one monkey. The villagers caught all the monkeys in the neighbourhood and sold them to him for a hundred rupees each. Soon another man appeared and said that he would pay two hundred rupees for each monkey. But there weren't any more monkeys around. They were all owned by the first man. So the villagers went back to him and said that they wanted to take the monkeys back and return his money. But the monkey owner was unwilling to sell. The villagers raised the price offered to Rs 150 per monkey, then Rs 175 and finally to Rs 199 but the man still didn't want to sell, even though he clearly had no use for the monkeys. Eventually, just to see whether he would sell, they offered him Rs 200 but he still refused.
The villagers were puzzled by this. Finally, one of them assumed that there must be someone else who was going to come to the village and offer even more money for the monkeys. Convinced that this was the real explanation, they went and offered the man Rs 300 for each monkey and sure enough the man accepted. Joyous at having landed such a good deal, they quickly paid him off before he changed his mind and took possession of the monkeys. The man went away with his money and presumably lived happily ever after. The villagers waited for the next buyer. But they kept waiting and waiting. But no one ever appeared who wanted to buy the monkeys.
If you think you've guessed the moral of the story, you are wrong because the story isn't over yet. This story isn't quite the same as the monkey story you may have come across in one of those forwarded chain- emails. My version is slightly different. There was another village nearby where a man appeared one day and offered a thousand rupees for a goat. Now, goats are valuable, but it does not cost as much as a thousand rupees a piece, so the villagers happily sold all the goats to this man. A similar thing happened here too. A second man appeared and offered two thousand rupees for each goat. The first man refused to sell at the buying price and eventually the villagers ended up buying back the goats for Rs 3,000 each. Here too, both the men disappeared and no one ever came and offered so much money for a goat again. But there was a difference. Goats aren't monkeys. They can be milked every day and the milk is good for health. In fact I've heard that Gandhiji preferred having goat milk. Even the goat droppings can be used as fuel, though I'm not sure of this. When the goats eventually grow too old to be milked, it can be killed for meat. So, buying goats wasn't a complete disaster for the villagers.
But the monkey-owners were not so lucky. Since, these weren't demat monkeys, they had to be kept in one's house. The monkeys ate too much, shouted and shrieked all day and sometimes bit people. Eventually, when it became clear that the monkeys were worthless, their owners abandoned them in the forest nearby and tried to forget about their losses. And that's the moral of the story. In the stock markets today, there are good companies that are overpriced and there are worthless companies that are overpriced. If you are going to be a fool and pay absurd prices because you think that a greater fool will appear in the future, make sure you buy a goat and not a monkey.
This was written in November 2007, but the situation is not very different now in circa December 2017. So if you want to make soaring profits from your investments, do not buy this bitcoin monkey. Also stay away from the monkey stocks in the Indian equity markets. The markets are at a high and there are plenty of monkeys disguised as goats. So, please be cautious!