Bitcoin has a seductive story. All great investment manias have a compelling narrative behind them, all with a fistful of truth. An early one being tulip bulbs. I still argue Bitcoin is NOT an investment, but a speculation in a maybe-currency. It also is waste of energy (in my view). Bitcoin mining energy, which consumes the same as a medium sized country like Ireland, could be used more productively given the pollution cost emitted.
Still, the mania has further to run, in my view, as although many random people I meet talk about it, there are still many people to be seduced.
Jeffrey Robinson, the author of BitCon, writes that bitcoin is "a digital-something pretending to be a currency; that same digital-something pretending to be a commodity; a political movement that reeks of a delusional cult; and a technology — a unique peer-to-peer transfer system — that happens to be brilliant."
Block chain technology is great. Bitcoin itself, not so much.
But, back to the story…. My early career was as a stock broker - the sell-side - and as all good sell-siders know, selling investments is about selling a story, selling a narrative… indeed politics and much of life today is about the story… “facts” and data are only a small (or even non-existent) part of the debate. Don’t let a fact get in the way of a good story (fakenews).
An early story of being seduce by investment manias involves Isaac Newton of gravity, physics and maths fame. He supposedly said (though my guess this is made up):
“I can calculate the movement of stars, but not the madness of men.”
(Nassim Taleb would agree. Stars and comets and that type of physics are systems we can calculate. Complex systems like markets are beyond us, mix in fat tails and by their nature, black swans, will always be beyond our imagination).
Newton was an early winner then victim of the South Sea China Bubble. See picture above. He made a nice profit, but then went back in and lost it all. Some traders (eg supposedly Soros) can identify bubbles early and exit before the crash, but it’s a rare skill / luck.
So… the bitcoin story… it starts with a legendary mysterious inventor (pen name Satoshi Makamoto), who is unknown, unidentified and has walked away from billions to serve a larger purpose….this purposes inspires those such as this FT reader:
...The internet as we know it would not exist without the government. Crypto makes governments obsolete. Cryptocurrency combines value and governance into one package that obviates the need for nation-states. And it doesn't have to just be used for money; it can be used to decentralize anything that we currently produce or exchange in a centralized way. That is what is exciting here. Not making a bunch of money, or the massive transfer of wealth from the old guard to a bunch of risk taking nerds. The latter is exciting to me because who doesn't like money, but it's much more deeply exciting because our current governments (all of them), while mostly better than what we had before, are a truly awful human system. They tax humanity to make war with each other….
It’s also used by criminals (or any who don’t want to be traced), those who might consider gold a store of value, those who only have access to very unstable currencies.
It appeals to a certain kind of libertarian thinker, it appeals to those who are disillusioned with government (and that’s a lot of people)... and there’s the nub:
It appeals to those who love a good story. And that’s all of us. Economists would do well to remember that.
If you'd like to feel inspired by commencement addresses and life lessons try: Ursula K Le Guin on literature as an operating manual for life; Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting.
Cross fertilise. On investing try a thought on stock valuations. Or Ray Dalio on populism and risk. You can also click on the Carbon tag below.