
Newton’s Financial Misadventures in the South Sea Bubble [pdf] - jpelecanos
http://www.dtc.umn.edu/~odlyzko/doc/mania13.pdf
======
pimmen
I read about it first in _The Intelligent Investor_ By Graham, but it's nice
to get a more in depth description of this anecdote.

One of my friends once asked me how the growth in cryptocurrency value i an
unsustainable bubble when so many smart and math proficient people believe in
it. This is a handy bit of Newton trivia to make the point that the
intelligent investor is not necessarily the one with the best math proficiency
but the one who understands and abuses market folly. When everyone goes right
look if there's anything of value people might've missed to the left.

~~~
gautamnarula
Smart people moving into cryptocurrency and cryptocurrency being a bubble
aren't mutually exclusive in another way: the long term potential of
cryptocurrencies could be valid, even if it's in a short term bubble.

I think there are a lot of parallels between cryptocurrency/block chain tech
now and the dot com bubble in the 90s. During the dot com bubbles fortunes
were made and lost over nothing and there were many scams and vaporware
business, but the underlying tech was sound and if you could identify the real
businesses (e.g. Amazon, eBay) from the trash you could still make a lot of
money in the long term even as the bubble popped and the market crashed. In a
way, the bubble popping was good in a 'creative destruction' sort of way for
clearing the brush (scammy and terrible companies) so the real ones could
emerge and thrive. I think something similar will happen with cryptocurrency
and blockchain tech.

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dharmab
For those who want an accessible introduction to the South Sea Bubble, Extra
History has a video series on the causes and aftermath:
[https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD...](https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD8HXTsBEmm3uxFrnvsmfOfhg)

~~~
sinnet3000
Thanks for that link! It's really ironic I was getting ads of a Mexican
bitcoin exchange while watching this!

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godelmachine
This article kind of changed my life perspective in so many ways. Till now, I
always believed that Newton & Einstein were "otherworldly" scientists who
never dabbled in earthly mortal ventures like equity , SIP, mutual funds etc.
Now I realize they had to worry about their subsistence & daily bread just as
I need to.

~~~
walrus1066
Also, that even the smartest of us are vulnerable to the power of greed, 'fear
of missing out' and herd mentality, to trump rational thought/judgement.

It is why we will always have financial bubbles and scams.

~~~
godelmachine
Agree with you, but I always thought highly of Newton coz he died a virgin.
Not that I aspire to be like him :D But he was a hardcore scientist through &
through. Maybe that's why I always thought of him as "out of this world"
genius.

~~~
ShabbosGoy
> Agree with you, but I always thought highly of Newton coz he died a virgin.

What? That’s why you think highly of him? Not because of his contribution to
Physics and Newtonian mechanics? That’s really strange.

~~~
godelmachine
No, you got me very wrong.

I thought he was a nerd, who disliked socializing and kept to himself in his
home doing & reading science. Also thought he was hardcore introvert.

Had I been like him the past few years, I would had achieved what I had set
out to. Instead I pursued dames in my college & set out on romantic
adventures.

Was of the opinion that all super successful scientists & engineers had the
same MO, & I always thought of Newton to be like that.

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Charizma
Suppose he was a master of seeing trends till his last days. All this happened
when Newton was almost 80 years old. However, he died 7 years later happily as
one of most famous people of all times.

~~~
dnautics
Was he really happy? Newton was generally an angry loner who spent a lot of
effort demeaning his peers.

~~~
Charizma
He died happily by demeaning his peers which were happy because they made a
good money from South Sea stocks. :)

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comboy
For those short on time, here's a TL;DR image:
[https://i.imgur.com/AEzxuLy.jpg](https://i.imgur.com/AEzxuLy.jpg)

~~~
Casseres
That chart shows a little under 10x from beginning to peak. Many people
compare cryptocurrencies to the South Sea company, however, many of the
different cryptocurrencies have gone 15-30x within the last year.

A lot of the hype in the media seems to be gone (or is now "doom and gloom"),
so it will be interesting to see whether or not today's values can be
sustained without a high rate of people continously buying in.

~~~
charlesdm
1\. Most bubbles are not global but geographically restricted in some way;
crypto is global.

2\. There is some value to Blockchain technology, so the value is not $0.

3\. When comparing, given all of these assets had a starting value of
effectively $0 at launch, you should probably look at them from an angel
investment PoV. Peter Thiel got similar returns when investing in Facebook.

I'm not saying crypto is (entirely) comparable to Facebook in value (it might,
it might not -- too early), but that's how I think the gains could make sense.
It's valued like an internet startup, and then some.

4\. The global market is still tiny? The entire crypto space is $550bn in
market cap. Facebook is $552bn in market cap.

Valuations have probably gotten ahead of themselves and a lot of the smaller
coins will die eventually, but it's still a blip in the grand scheme of
things.

5\. There is too much capital in the world. Too much cheap debt. Too much free
money. This will fuel the mania. You could have put $2m in the stock market in
2008-2009, and if you used leverage in a smart way, could have ended up with
$75-100m.

~~~
dnautics
Most bubbles are debt driven phenomena. I'm not entirely convinced people are
playing the crypto market en masse using debt based instruments (besides the
dollar itself, which is our point of reference anyways).

~~~
charlesdm
Maybe not directly, but indirectly? If I have $10m of unrealised gains in the
stock market, I can easily borrow $500k against that at near free interest
rates to invest that in Bitcoin.

I have a friend who did that, and he has done well. So it's definitely
happening.

~~~
dnautics
This is going to happen more, especially as mainstream finance gets in the
game, but I don't suspect it's common. Also note that the leveraging in your
case is inverse. 500k against 10M is 5% leverage, Forex trades are done with
1000%, 10000% leverage...

