Professor Niall Ferguson now says the emergence of cryptocurrency could signal the start of a new asset class as significant to the history of finance as corporate stocks and bonds.
Bitcoin was trading around US$19,000 last year, when the Stanford professor’s teenage son, Lachlan, pointed out that he had suggested his dad buy some a few years earlier, when it was priced at just US$353.
Despite the fact Bitcoin soon crashed by more than half, Ferguson still feels a fool for having dismissed what he now considers an important financial innovation as a fad.
That is why he spent much of late 2017 investigating why he had been so wrong about Bitcoin, and the blockchain technology that underpins it.
Ferguson still says Blockchain, which is now fetching about US$8500 ($11,000), is in a bubble but he also now believes this unnerving period may be just the beginning of a serious new asset class.
In fact, in an address delivered via video-link to the Portfolio Construction Forum Markets Summit last month, he likened today’s volatile Bitcoin trade to the early days of the equity market.
“You will have all heard sceptics of cryptocurrency talking about tulip mania − a famous episode from the 17th-century Netherlands, when the price of tulip bulbs went haywire from 1634-1637,” Ferguson told the gathering of Australian professional investors and advisers. “But tulip mania is the wrong analogy. It doesn’t fit at all.”
He says a better comparison is the financial innovations of the late 18th century, when the notion of equity finance was invented.
“If you look at what happened in the South Sea bubble of 1719-1721, there were actual financial innovations. Financial institutions and companies issued new types of financial instruments,” Ferguson explained.
“There was a bubble but not a complete annihilation of investors. Subsequent to the crash, from the 1720s onwards, there was a sustained growth of the London capital market for both bonds and stocks of companies. Those instruments went on to become the underlying instruments of modern finance.
“You don’t want to find yourself dismissing cryptocurrencies in the same way someone may have dismissed equities in 1721, just because there had been a bubble.”
Ferguson is a senior fellow of the Hoover Institution at Stanford, and at the Center for European Studies, Harvard University. He is a political and economic commentator who has written 14 books, including The Ascent of Money and his most recent The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power.
“There is something about being an economics professor that encourages you not to do much reading outside your own domain. It is a dangerous thing,” Ferguson said. “It leads you to do what I did three-and-a-half years ago, which was to dismiss out of hand a major technical innovation with big implications for finance.”
Ferguson said a significant portion of the audience probably stopped thinking seriously about Bitcoin when it crashed, but warned attendees not to jump to the conclusion that the bubble has burst.
“The big challenge in a period of high volatility, which is usually associated with a period of financial innovation, is you can’t say where the floor is, and you can’t rule out a zero,” he said. “In some bubbles, there is an incredibly low floor, if not zero then very close, but not in all bubbles. Some bubbles can deflate, only to gradually reflate.”
He noted that some companies deflated spectacularly in the 2001 dot.com bust, only to grow and become among the most valuable companies in the world.
Ferguson urged the audience not to buy into the “luddite view” on Bitcoin that it is, as many have said, akin to tulip mania. He noted that the maximum number of Bitcoins that can be created is 21 million, of which about 4 million have probably been lost by people who bought them early then lost their hard drives.
“The number of millionaires in the world is 36 million. Their total wealth is $129 trillion, so if they were to hold just 1 per cent of their wealth as Bitcoin, the price would be significantly more (about US$75,000) than its previous peak of US$19,000. Even if they only held 0.2 per cent of their wealth in Bitcoin, its natural long-term price would be more like US$15,000,” Ferguson postured.
“I’m not saying that is going to happen, I’m just saying that my now 18-year-old son thinks it is possible and I’ve learnt to listen to him.”