IN A RECENT Irish Times article on cryptocurrency, the billionaire investor Howard Marks says that digital currencies are an “unfounded fad”. His quote is then contrasted with Miguel Vias, a well known software developer, who thinks suggestions of a bubble are “silly”. Both are wrong. Technologies can be both promising and subject to bubbles.
In 2012, when Stripe had 15-20 staff I wrote that they had a strong chance of a breakout success. Some of the reasons I listed were that software developers were flocking to use the product, the best tech investors in the world were scrambling to get in early and the development team was exceptionally talented. The same can be said of Bitcoin today.
In Technological Revolutions and Financial Capital, Carlotta Perez explores how all major technologies start with a speculative, high growth phase. Short term bubbles and crashes occur as people lurch from excitement to worry in an attempt to profit from the breakthrough. Once the innovation becomes more widely used, the rate of adoption slows down and tapers off. This looks like an S Curve on a graph. Perez uses the railways, electricity and the internet as examples.
According to a recent interview with Jeremy Liew, an early Snapchat investor, there are up to 6.5 million bitcoin users in the world today. He believes it will continue to grow at an exponential rate, with each bitcoin being worth $500,000 by 2030. If it does becomes a mainstream technology, we could be at a comparable moment in ‘internet adoption years’ to 1993.
Warren Buffett has called Bitcoin a mirage, Charlie Munger thinks it’s rat poison and Nobel Laureate Robert Shiller says it’s an amazing example of a bubble. It has been declared dead over 100 times and had multiple price crashes of 50% or more.
And yet, it has worked non-stop as a secure payment network for over 8 years, while banks close every weekend. Over $1.8 Trillion in value has been transferred over the network to date. It currently stands in the top 50 out of 190 national currencies in terms of M1 money supply (total cash and current account deposits).
In his article entitled What the Bubble Got Right Paul Graham has noted that the beginnings of the dot com bubble were rooted in rational thinking. The internet really was a big deal. The crash occurred because it took much longer than people expected to disrupt incumbents like the newspaper, taxi and music industries.
The consensus among prominent technologists, with a strong record outside Bitcoin is that it really is a breakthrough technology. Misguided euphoria emerges when people forget that it may take 30 years for the full value to be realised. Suffice to say that very few people think on this long term time horizon when it comes to something that is appreciating rapidly in value. Most people will jump in at the top of a cycle and sell close to the bottom, dismissing it as an unreliable form of money.
So how can you protect yourself?
The same advice applies to bitcoin as to investing in stocks; never invest more than you are willing to lose. If you do invest, take the time to research how to buy and store a small amount safely. Coindesk is a good place to start. Speak to a professional financial advisor first.
Whether Bitcoin, or some other cryptocurrency becomes widely adopted remains to be seen. It is an experiment to test if decentralised money can work on a global scale. But if you’re tempted to dismiss it due to its current shortcomings, it’s worth recalling that many people saw the early internet as a toy that would never take off. Some of the most talented software developers in the world are working on Bitcoin and much like Stripe in 2012, I wouldn’t bet against them.