WHEN I was first introduced to Bitcoin several years ago, I had two immediate thoughts: gold and tulip bulbs. The gold association sounds pretty good and valuable but the reason I thought a Bitcoin had the same characteristics as gold was that the asset was not interest-bearing, could (in principle) be exchanged throughout the world, and was not subject to one specific national law, etc.

However, gold has another special feature, namely international trust — everyone in the world trusts gold. It is a very special feature that the US dollar also enjoys to a great extent, but gold is something special.

Despite the fact that gold is known by everyone, the total volume of gold is quite limited and many people know how difficult it is to extract the precious metal. The same rarity is in a way also applicable to Bitcoins, so it is all about trust. People who buy gold have confidence in the future value of gold and one can relatively easily transport gold, which also applies to Bitcoin and other cryptocurrencies. It is investor confidence that is crucial if an asset is to be considered “crisis-proof.”

Cryptocurrencies have just turned out not to be that. In the last month or so, things have gotten ugly for this new asset class. Since the beginning of the year, Bitcoin price development has followed stock market swings more rather than exhibiting an independent crisis-proof life, while gold trades at approximately the same price since the beginning of the year.

Furthermore, the market for cryptocurrencies was hit by another scandal during the days around May 19, when the two so-called “stablecoin” mirror currencies terra and luna collapsed. They were both artificially coupled to the US dollar, where an algorithm controlled the peg without any real values behind it. I have never perceived it differently than that the project was technically based on trust. The realistic version is that as long as there were enough buyers/investors to keep demand up, the system worked, which has been seen incredibly many times in the past.

When the link to the dollar disappeared, $40 billion went up in smoke that day. The meltdown was due to the fact that there was no real value behind the peg to the dollar. Subsequently, it has been interesting to follow statements from the CEO (chief executive officer) of the large crypto platform Binance. Changpeng Zhao has explained that the due diligence they use and have also been using in connection with terra/luna involves turnover in the cryptocurrencies. It has been given a lot of importance that many investors do the same to create a form of hype around the product/ investment.

With that argument, the market for tulip bulbs in the Netherlands should have never collapsed in February 1637, because investors bought futures (contracts for future delivery) on bulbs at a senseless pace, even on the day the market collapsed.

Maybe I am, after all, surprised about how many tulip bulbs have been traded in today’s market. The cryptocurrency phenomenon has been going on for years but I still find the spread of the “meme stock” mindset thought-provoking.

Buying a stock because it rises is an argument that is just as good as many other arguments, though it also means buying because others are buying. It increases fluctuations in the stock market and investors will most likely sell because others sell. That investment strategy sounds very straightforward but my experience now is that it is more complex than it seems.

But if one believes in it, then it is brilliantly simple to identify meme stocks as they are the ones that are hyped in different groups on the internet. Melvin Capital tried to go that way with its fortune of $12.5 billion, though it generated 39 percent in negative return in 2021 and 23 percent during the first four months of this year. There are probably many investors who have made a lot of money on meme stocks but the said fund has now opted to close.

I have always considered it a worrisome situation whether one invests in tulip bulbs, cryptocurrencies, or meme stocks just because others buy them and this has been confirmed once again. I see no sign yet that cryptos or memes have given me new instruments that can ensure a more differentiated or better management of investment portfolios or financial risks. Put in another way, I have not yet seen a replacement for the disciplined work that it is to understand investment opportunities, markets, economies, etc., before making an investment decision.