News regarding Bitcoin and cryptocurrencies is in constant turmoil. It can happen that important information gets lost in the daily news flow and you miss important points.
This format is there to remedy that. We come back to the news of the past week in the Crypto Weekly to keep you informed on the current situation of cryptocurrencies.
For the unmissable of this week, we find Thomas who returns to the mother of financial bubbles , namely the South Sea bubble . Occurring 300 years ago, this one is nonetheless interesting to study.
What is a bubble?
Before delving into the history of the Compagnie des Mers du Sud , let’s define what a financial bubble is. A bubble is increased , rapid and often irrational price of an asset, which will be followed by a sharp decline : the bubble burst .
Our story takes place in 1720 . The British crown is heavily in debt after a war of succession with Spain ( 1701-1714 ). Trade with the colonies is flourishing. The Company was granted a monopoly of trade in the South Seas in exchange for its management of the British debt .
For a few years now, the South Sea Company has been importing slaves from Africa to the Americas. However, these operations are not a great commercial success. Indeed, taxes imposed on this trade following the war with Spain reduce profits.
In order to facilitate the management of the British debt, the Company undertakes to collect all the debt securities in circulation . It offers a simple exchange: a debt security for a share of the company with a guaranteed minimum dividend of 5% . This 5% was therefore a minimum dividend with a strong potential for an increase due to the Company’s monopoly.
Daniel Defoe , director of the Company, then undertook to manipulate the courses by all the means at his disposal. False rumors about profits in the South Seas, corruption of parliamentarians, use of prestigious figures to attract small investors . This market manipulation partially approved by the British government has paid off. The price of the securities was 128 pounds sterling in January 1720 and reached 1,050 in June 1720 .