From January to December 2017 the price of Bitcoin rose from $1,000 to $20 000. Experts forecast Bitcoin at $100,000, and investors took loans to buy Bitcoin and exchanged cars for ASIC miners. In 2018 Bitcoin’s price fell to $4,000. Some users lost their savings, some of them went into debt.
A similar situation unfolded in the silver market in the 1970s. The asset’s price rose from $2 to $50, and then fell to $4. The metal’s prices were driven up by Haroldson Hunt’s sons — one of the wealthiest Americans according to The New York Times at the time. The subsequent market crash entered history as the “Silver Thursday.”
Alongside the crypto exchange Currency.com we compare the silver price surge in the 1970s with the 2017 crypto boom. We explain how to spot a market bubble and when to invest in new markets.
Hunt Brothers: Billionaires With No Income
Haroldson Hunt — American oil magnate. In the 1940s he earned $1 million a week from 900 oil wells in the United States and Libya.
In the 1960s, Hunt imported Arab oil into the United States and profited from price differences. By 1969 the billionaire lost this income: Muammar Gaddafi seized power in Libya and nationalised the oil industry.
Three years later the Hunt empire began to crumble: Haroldson developed dementia, and the United States faced an oil crisis. In 1973 the OAPEC countries stopped supplying oil to the United States. America reduced consumption of oil products, and Hunt lost part of his income.
A year later OAPEC lifted the embargo and restored supplies. American companies began buying Arab oil: its unit cost was a third of American oil.
Haroldson’s sons were left without a source of income. Herbert and Nelson Hunt assessed the state of the U.S. oil industry and decided to make money from another commodity.
The Hunts chose silver. In the 20th century it was used by jewelers and the film stock manufacturers. Companies like Kodak consumed several tonnes of this precious metal each year.
The oil crisis of the 1960s-1970s coincided with the heyday of the American film industry. The number of films produced annually rose by about 7% on average. Hollywood needed film stock, and its producers — silver.
The Hunts Buy Silver. Asset price — $2.9
The Hunts’ plan was simple: to monopolise the silver market and sell it at a premium. In 1973 they bought 40 million ounces (1,244 tonnes) of silver for $116 million. The average asset price was $2.9 per ounce.
By February 1974 the price of silver rose to $6.4 per ounce. By December of the same year the Hunts owned 55 million ounces (1,770 tonnes) of the precious metal — 8% of the world’s supply at that time.
Purchasing 40 million ounces of silver triggered a 100% rise in the asset price (price chart SILVER/USD on Currency.com).
For five years the Hunts created a silver shortage: they bought up futures, demanded deliveries against them and moved the metal to Switzerland. By 1979 they had effectively monopolised the market.
The silver shortage led to a surge in prices. In two months — from August to October 1979 — consumers and speculators pushed the asset price from $8 to $16 per ounce.
Consumers battled the Hunts and pushed the price higher (price chart SILVER/USD on Currency.com).
The plan worked: suppliers expected further price gains and cancelled selling offers on exchanges. This exacerbated the shortage, and in 1980 the price of silver rose to $50 per ounce.
The Hunts Own a Third of the World’s Silver Stock. Asset price — $50
By 1980 the Hunts owned about a third of the world’s silver reserves in bars. They also held 69% of the April-delivery futures.
The Hunts hoped for further price gains. They did not sell the bars and continued to buy futures contracts.
In early 1980 the brothers’ paper profits stood at $3.5 billion. Their futures positions were worth $7 billion, with $6 billion borrowed from brokers.
In February 1980 silver was trading at $50 per ounce (price chart SILVER/USD on Currency.com).
Actions by the Hunts affected jewelers and silver miners. The former lost customers as jewellery prices rose, while the latter hedged risks and incurred losses.
Consumers and silver producers grew wary of a market takeover. They filed complaints with the financial regulator CFTC and commodity exchange leadership, and publicized the situation in newspapers. For example, in 1980 the jeweller Tiffany published in The New York Times an article accusing the Hunts of greed.
The Hunts Sell Silver. Asset price — $5
In early 1980 jewellery-industry representatives approached the leadership of the US COMEX exchange. They asked the exchange to curb the Hunts’ silver accumulation.
COMEX staff found no grounds to freeze the market: the Hunts acted within the law. The exchange then proposed that the brothers sell April futures at $50 and, instead, buy July contracts at $25 or silver coins at $35 per ounce. The Hunts refused.
The decision sparked accusations of market manipulation. COMEX announced a trading freeze on futures and banned new positions. The Hunts could not buy futures or sustain the silver price. Meanwhile traders were closing long positions on the April futures.
By March 1980 the price of silver had fallen to $30 per ounce. Thereafter brokers demanded a margin of $135 million from the Hunts.
Liquidation of the Hunts’ positions in a day knocked silver price down by 40% (price chart SILVER/USD on Currency.com).
On 27 March 1980 the Hunts liquidated the remaining silver positions. The day became known as Silver Thursday: the metal’s price fell by 50% to $10 per ounce.
The Hunts’ losses amounted to $9 billion. The brothers liquidated futures positions, sold silver in Switzerland and pledged the family business. Even after this they still owed about $1.5 billion.
During Silver Thursday, market participants realised the Hunts would not defend the asset’s price. After their positions were liquidated, the market’s silver supply rose by about a third.
For two years the metal’s price drifted lower. By 1982 it had returned to roughly the 1975 level, around $5 per ounce.
Silver-1979 and Bitcoin-2017: What They Have in Common
The market bubbles of 1979 and 2017 began with traders’ faith that other investors would buy the asset above its current price. But the silver bubble and the Bitcoin boom share other features as well.
The asset’s price rose thanks to borrowed money. The Hunts pushed silver to $50 per ounce thanks to a $6 billion loan. The brothers planned to repay it after selling their positions for a profit.
According to a study by Joe Griffin of the University of Texas at Austin, in 2017 an unknown manipulator bought Bitcoin after new issuances of USDT. After Bitcoin’s price fell in 2018 the manipulator returned unsecured USDT to Tether for burning.
The price rose due to manipulator activity. The Hunts sustained the silver price through a pre-existing deficit. According to Griffin, an unknown manipulator in 2017 bought Bitcoin on dips, accumulated a position and prevented the price from dropping below prior lows.
The price rise sparked public panic. In 1979–1980 Americans sold silver bars melted from cutlery, coins and jewellery to speculators. Thieves carried silver from homes while leaving other items untouched.
In 2017 the media covered Bitcoin and Ethereum growth. This drew newcomers to the crypto markets, who borrowed to trade on crypto exchanges, buy coins and mining devices.
Silver-1979 and Bitcoin-2017: How They Differ
The silver and Bitcoin bubbles followed a similar path but differed in several respects. This reflects the absence of regulators in the crypto market in 2017.
The silver bubble burst due to exchange intervention, while Bitcoin collapsed after demand from large investors waned. COMEX halted silver trading amid suspicions of market manipulation. The crypto market had no such regulator. The Bitcoin bubble burst when large investors closed their positions and the asset’s price fell about 25%.
Silver fell about 80% in two months, Bitcoin in a year. After COMEX’s decision the Hunts could not defend silver’s price. Other traders closed positions and drove the market down. New investors bought silver due to the trading freeze.
Cryptocurrency exchanges continued to operate after Bitcoin’s price drop. Newcomers bought Bitcoin, while traders took profits.
According to Currency.com analyst Mikhail Karhalev, the possibility of a trading halt could be beneficial for cryptocurrencies:
“In March 2020, when Bitcoin fell to $4,000, some exchanges stopped trading due to technical glitches. That saved the market from a crash. On another occasion this may not happen, and only a regulated trading halt would help. Do not forget that institutional investors are entering the crypto markets. They will push for regulation to protect their funds,” he notes.
For now regulators’ role in crypto markets is partly fulfilled by exchange glitches. Trading engines struggle to handle order volumes during market panics. In such moments traders cannot place new orders, and exchanges manage to execute liquidations.
The Hype Cycle: From Market Bubble to Mass Adoption
The emergence of a market bubble is partly described by the hype cycle — a pattern studied in 1995 by Gartner, the research firm. The hype cycle comprises five stages:
- Technology Trigger — news about a new technology in the media, but no commercially viable products yet;
- Peak of Inflated Expectations — success stories fuel hype while analysts struggle to assess prospects;
- Trough of Disillusionment — flaws hinder mass adoption. Early investors take profits and exit. The technology’s price falls sharply;
- Slope of Enlightenment — the technology is used in commercial projects, and it yields profits;
- Plateau of Productivity — the technology becomes mainstream and its price stabilises.
Hype cycle. Gartner portrays the plateau as a straight line; in reality technology development leads to a gradual rise in price.
The hype cycle has fully or partially passed several blockchain technologies:
- Bitcoin. In 2013 investors pumped $10 billion. The Mt.Gox price on the exchange reached $260. The exchange’s core trading engine froze due to high load. This sparked panic and Bitcoin’s price fell to $45. The plateau began in 2015 as exchanges improved;
- Cloud mining. In 2015 firms started offering mining power for rent. In 2018 Bitcoin’s price fell, and cloud mining ceased to be profitable. The technology reached the plateau in 2019 thanks to rising Bitcoin price and the emergence of more powerful ASIC devices;
- ICO. In 2017–2018 investors poured $28.4 billion into blockchain startups’ tokens. Projects raised funds in ETH, so by January 2018 Ethereum’s price rose to $1,400. In 2018 interest in ICO faded, and Ethereum’s price dropped to $90. The technology is in the stage of overcoming obstacles;
- Ripple. In August 2018 Ripple promised to discuss partnerships with banks at the Swell conference. Ahead of the conference the XRP price rose from $0.32 to $0.76, then fell to $0.37. The plateau followed after the RippleNet platform was deployed in 200 financial institutions;
- DeFi. In 2019 the trend was decentralized finance: crypto loans, stablecoin deposits, decentralized exchanges and yield farming. The technology is at the stage of inflated expectations.
Gartner warns that not all technologies reach the Plateau of Productivity. Products such as smart glasses and 3D televisions have yet to find commercial applications. Such technologies die in the trough of disillusionment.
How to Spot an Exchange Bubble: Currency.com’s Guide
Typically, bubbles arise in a small sector that has attracted the attention of large investors. It is always a market with limited supply: commodities, real estate, technology companies, or fixed-supply assets.
The formation of market bubbles begins with media coverage of investors’ successes and coincides with the technology trigger stage in the hype cycle.
“Economists have a simple definition: a bubble forms where it is hard to measure an asset’s value, and bursts when there are no buyers at the current price. At that moment, early investors take profits and push the price down,” says Mikhail Karhalev.
The hype cycle is not a precise predictor of when a bubble starts or ends, but it can help identify when to invest:
- at the technology trigger stage — to profit from the bubble;
- at the slope of enlightenment stage — to profit from a steady rise in the asset’s value.
“The hype cycle is the path a technology follows from creation to mass adoption. It should not be used as an indicator of a market bubble. Instead, analyse the asset and ask: will it really generate as much money in time as it does on the current exchange,” comments Currency.com analyst Mikhail Karhalev.
The Gartner company defines the technological trigger by such signs:
- You hear about a growing market or asset for the first time;
- Media portray the asset as a path to quick riches — 100% or more in months;
- Clone companies offer the same asset in different wrappers;
- The asset’s price rises on a parabolic path with no significant corrections below recent lows.
Identifying the stage of overcoming obstacles is easier: commercial projects profit from the asset’s properties, not from price growth. For example, Ripple earns revenue from conducting international transactions using XRP. The XRP price does not affect transaction fees or the company’s profits.
Conclusions
The 1970–1980 events in the silver market showed that a bubble can be created by people with no clear plan and $6 billion in borrowed funds. Regulators deal with this in stock markets, while cryptocurrency users must safeguard their investments themselves.
Investors have overly high expectations for new technologies. They invest on hype and contribute to market bubbles. The safest time to invest is when the technology has proven its value.
When choosing a project, consider which stage of the hype cycle it is in. If the technology trigger has passed, you risk losing money in a bubble.
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