Why I Believe In Cryptocurrencies & Blockchain, but why I’m not buying now

At the height of the Industrial Revolution that started in the United Kingdom (UK), the railroads were once thought to be ‘game changers’. After the invention of the steam engine and the locomotive, railroads took off as they start to replace the traditional roads and paths of commuters.

North_British_Railway_locomotive_224.jpg

Instead of the slow and rather painful way of traditional horse-drawn vehicles on land, the railroads enabled people and cargo to travel faster and more efficiently, speeding up the progress of industrialisation and economic development, enabling Europe and later the United States to industrialise and urbanise throughout the 19th century.

In hindsight, they were really ‘disruptive’ game changers, but the episode in Britain would go down in history as the British ‘Railway Mania’. In the 1830s, bankers and financiers rushed capital to railroad companies, and investors scrambled to buy whatever shares of publicly-listed railroad companies they could get their hands on. As manufacturing activity picked up in the 1840s and as economic prosperity rose, more capital went to the railroad and rail construction companies.

Investors became enthralled by the railroad boom, and this led to a formation of a bubble in stock prices. Like anything in capitalism and the free market, high profit margin industries tend to see a rise in competition over time as more people join the bandwagon and more capital enters the industry. This was what happened in Britain during this time, as more and more railroad companies laid down lines and enticed the public to get into the party. In fact, even famous Britons like the intellectual John Stuart Mill, Charles Darwin, and politician Benjamin Disraeli also got involved!

Railroad-related stocks saw a strong upward move from 1842 to 1845, before collapsing disastrously later in 1846 to 1850.

railroadstocks.jpg

The British Railway Mania was one of the numerous examples throughout economic and financial market history of investors turning over-exuberant over the prospects of a wonderful technological advancement. The railroads did stay and changed the world, but many of the early speculators and investors may have not been so fortunate…

And now, we turn to Bitcoin (BTC).

Grapping headline news all over the world, the digital currency has taken the world by storm once again with its meteoric rise in prices year-to-date (170% surge) and garnering the attention of almost everyone I know.

BTC

The concept behind BTC and blockchain is fascinating, and industry experts and observers have opined that it is still in the early stages of development. I agree, but I am extremely wary of the current situation as we know it.

A simple comparison to BTC’s price trend since January 2013 against the historical price of silver futures in the late 1970s shows how similar the sharp move in BTC’s price is against the Silver Mania back then. Inflation rose at double digit rates throughout the 1970s, exacerbated by the twin oil shocks back then causing severe recessions in the developed countries, causing many to scramble for inflation-hedging assets. The precious metals markets (gold and silver) saw miraculous price gains during the scramble, which led to the infamous Hunt Brothers’ corner in silver in the late 1970s.

Silver futures surged from below USD 9/ounce in June 1979 to hit close to USD 50/ounce in over just a brief period of 7 months! (a 446.9% increase!). It was an irrational and highly emotional surge that ended up in disaster for many speculators when silver crashed more than 70% in 1980.

silver vs btc.JPG

As shown in the chart above, whereby the red line is BTC’s price in USD terms and the blue line is of silver futures in the late 70s, BTC’s sharp surge year-to-date reminds me of that surge seen in silver back in the 1970s – a parabolic price movement with hardly any healthy price corrections and a market that is rife with speculators. Google trends’ search simply mirrors the attention that BTC gets at this moment:

google trend.JPG

Like the British Railroad Mania of the 1840s and the Tech/Internet bubble of the late 1990s, whereby we saw marvelous innovations and inventions, I have no doubt that cryptocurrencies and blockchain is here to stay, evolving and pioneering advancement for a more efficient way of transactions in this cyber-age of the twenty first century.

However, just like those instances, there clearly is some form of exuberance in the prospects of cryptocurrencies at this juncture. Hence, I’m not buying at the moment.

And just like the British Railroad Mania and the Tech Bubble of the late 1990s, where there was a washout in speculation and a consolidation among industry players (did I mention the numerous competitors BTC has like Ethereum?); I would like to see that happen too before I start to take the development seriously moving forward.

*image credits to http://time.com/money/4623650/bitcoin-invest/, http://www.thebubblebubble.com/railway-mania/*


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