Lessons From Bitcoin

I remember having a conversation with a friend back in the fall of 2017 about an asset that seemed to get endless play in the media: Bitcoin. He was and still is very bullish, despite the significant downturn. With a relatively sizable position in the crypto currency, I urged him to divest and lock in his gains – which were in the 300% and over range! I explained that my position on Bitcoin was that the asset was clearly in bubble territory and that its bursting was inevitable. He disagreed and stated that Bitcoin was going to change the way the world works. His comment gave me pause:  I started to think about other technologies that have changed the way our economies work and how these paradigm shifts have influenced investor behavior in the past.

In the early 19th century the nascent American economy was jolted by the development of the steam engine and its application in railroads. It was easy to see that this new technology was going to change the way the world worked. The railroads made it cheaper and faster to travel than ever before. When President Andrew Jackson traveled to Washington from Nashville for his inaugural address in 1829 the trip took a month by stagecoach. Thirty years later the trip could be made easily, and far more comfortably, in three days by train. But were the railroads a bubble? In many respects, yes. During the later part of the 19th century in the US railroads had run amok. Far too much track had been laid and the railroads became grossly inefficient. It took the management expertise of JP Morgan to consolidate many of them and return the market to good order.

Many of us remember the internet bubble of the late 1990s and how investor appetite for such investments grew to unhealthy amounts. The Nasdaq Composite stock market index, which included many Internet-based companies, peaked in value on March 10, 2000 at 5,048 after increasing nearly 50% in the fourth quarter of 1999. It would not reach this level again until 15 years later in the spring of 2015. If that’s not a bubble I’m not sure what is. And clearly no one would argue that the internet has not changed the way our economy operates.

As I tried to explain to my friend, just because a new technology is destined to change the world does not mean it can’t enter the market place as a bubble. In fact, I would argue that if it truly is a game changer it is most likely going to cause euphoria among investors and provide some irrational exuberance in the market place.

This article is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.