Bitcoin Fans Take Note: 1970s Silver Investors Learned About Bubbles THE HARD WAY
It ended in one hot mess, and the similarities today are so similar you'd think Bitcoin and silver were identical twins separated at birth...
This chart just keeps on climbing:
Just yesterday in our Midweek Update we showed the same chart:
Except in the last 24 hours since the time we posted that chart, Bitcoin is up $2,250+. In one single day.
So before anybody goes out selling their stacks as silver turns red on the year:
Let's put it into some perspective.
Here's an "inflation" adjusted silver price chart showing the price action and parabolic price rise of the 1970s:
Here's today's Bitcoin chart one more time just to get a good look:
Notice the similarities?
Granted, that's if you believe the government "inflation" statistics on the silver price chart, which the government chronically understates actual inflation.
But back on point. During the 1970s, silver experienced similar types of moves as Bitcoin is having today.
In the 1970s, there was skyrocketing inflation, and in part, people looked to silver as a way of escaping the inflation and the impending doom of the US dollar. Recall that in 1971 Nixon closed the gold window.
Even in the 1970s, the infamous Hunt Brothers had "cornered the silver market" in what is generally believed in the investment community and action by Uncle Sam as a "way to manipulate the price of silver".
Here's Investopedia:
Uncle Sam Steps InThe U.S. government became concerned over what it saw as a clear attempt at manipulating the nation's silver reserves, and the fact that this corner involved the Middle East added some venom to the government's reaction: after all, the 1970s oil crisis was still fresh in the nation's mind. Federal commodities regulators introduced special rules to prevent any more long position contracts from being written or sold for silver futures. This stopped the Hunts from increasing their positions by temporarily suspending the fundamental rules of the commodities market. With longs frozen and shorts free to pile in, the price of silver began to slide. Margin calls on the loans began to take a toll on the Hunts' reserves to the point where they were paying millions a day in calls, storage fees and interest.
The Sting of Irrational ExuberanceWhether they purposely intended to manipulate the market or not, the Hunts created a bubble in the silver market that severely shook the financial system. Whether stocks, silver, or sprawling suburban homes, too much "irrational exuberance" always comes back to bite the hand that feeds it.
There's some interesting points there.
First of all, the government got involved. Interestingly, people deny silver manipulation, but manipulating the silver market has been going on since the COMEX gold & silver futures started. Regardless of whether they were manipulating or hedging against inflation as the Hunt Brothers claimed, if something gets big enough or becomes a large enough threat, the government will step-in. How big does Bitcoin have to get? That's the question isn't it.
When the government steps in, it's not because they want to congratulate anybody or throw a party. It's because something is going on that they don't like. Silver was taken out of the coinage a decade earlier, and silver was, as it remains today, an alternative to the US dollar. The government does not like competition, nor the fact that a parabolic rise in the price of silver had caused a frenzy and speculative mania. Sound familiar? A little Bitcoinish perhaps?
Here's another point about the 1970s parabolic move in silver: It was and is considered a "bubble". Though Bitcoin is somehow "not" a bubble if you try to reason with any of the Bitcoin fans out there?
But looking at that inflation adjusted silver chart, it sure looks like Bitcoin is on the same trajectory that silver took back in the 1970s. We just don't know how the right side of the Bitcoin chart will play out, but if it is a bubble, it is safe to say it will look something like the historical silver chart does after the silver bubble popped.
The statements are exactly the same as they were in the 1970s too:
Bitcoin is a "store of value" (like silver)Bitcoin is a hedge (like silver)Bitcoin is outside the financial system (like silver)Bitcoin is a competitor to the dollar (like silver)You see, it is the exact same thing that's playing out with Bitcoin that played out with silver in the 1970s.
Only with Bitcoin:
There is counterparty risk (opposed to a silver coin in hand)The "creators" are shrouded in mystery (as opposed to the Hunt Brothers)And there is one glaring issue to come, and that is that the government has not stepped in yet to neutralize the threat.
If I was part of the cartel, and I needed to find a way of keeping gold and silver from rising, the true competitors to the US dollar, I would simply allow Bitcoin to rise in price. That way, all of the attention will be taken away from something that has a finite supply all the while allowing the cartel to restock the coffers for the next rush into the precious metals. Hmmm...
And once Bitcoin becomes a big enough threat to the government, or simply at the time of the government's choosing, Uncle Sam will step in.
We don't know when the government will bring the hammer down on Bitcoin, but for investors who have never had a loss, they will be in for a rude awakening that they can do nothing about.
Or the Bitcoin bubble could just as easily pop on it's own because they have run out of buyers or excess fiat to throw at it.
Stack accordingly...
- Half Dollar