Whatever you think of bitcoin and crypto currencies, there is plenty to learn from their ascent, even if it is still a small part of the global financial system. Forget the noise of “Biggest bubble ever” – the market cap of the NASDAQ was $3.7 trillion in 1999 and fell 70% (a total of $2.6 trillion) by 2002. That puts the total of $500 billion in all crypto currencies outstanding into the correct context.
Still, even if you are in the “Bitcoin Bubble” camp, don’t let that blind you to the lessons of what has happened in the past few years. It is tempting – but wrong – to simply dismiss a 5-digit bitcoin price as the illogical mania of crowds.
Here is a list of 5 instructional points where bitcoin has a bigger story to tell.
#1 Decentralized technology – where no one is “in charge” – can both create and hold trust. Recall that bitcoin launched in January 2009, in the depths of the Financial Crisis. US stocks would not bottom until March of that year, and at the time no one knew how – or if – the global financial system would survive. That sounds like hyperbole now; it wasn’t then.
Combine that vacuum of faith with the growth of mobile technology and high-speed Internet around the world, and bitcoin was at the right place at the right time. Early adopters were a mélange of libertarians and tech nerds, each of whom saw their own reflection in the bitcoin mirror.
Bitcoin’s rise from there is similar to any FANG-y stock story. Global adoption of new technologies led to Facebook’s dominance in social, Google’s in search, and Apple’s in hardware/software. What is different with bitcoin is that it has no CEO, no board, and no proprietary physical assets. But that has proven to be a feature, not a bug. No one “needs” to be in charge … and that’s new and notable.
#2 Get out of your head. One thing I have noticed about bitcoin’s most vocal naysayers: They are almost all wealthy westerners. They cannot imagine why the world needs a crypto currency backed by nothing but computer code and the faith of the masses. For them, steeped in the status quo, it simply makes no sense.
Personal story here: My parents fled the Cuban Revolution in 1960 with $200 and a suitcase. They weren’t allowed to take anything else, or transfer funds overseas. They arrived in New York with no place to live and no work. My mom didn’t speak English.
Step outside the safe confines of western democracies, and my parents’ history is a relevant and cautionary tale. Similar stories happen every day, across multiple continents. Of course, there is intrinsic value in a decentralized store of value that governments cannot control or confiscate. To think otherwise is myopic.
#3 Have a Little Faith. Bitcoin and other crypto currencies are notoriously volatile, but few investors/traders seem to care. There is even a self-identifying moniker in crypto circles – HODLers (Hold On For Dear Life) – that captures this sentiment. Don’t sell on any dip, and add to your position if you can.
This confidence comes from a deep-seated faith, and it is something that equity investors in particular can learn from. A wise reader once told me, “The lows for US stocks in 2009 weren’t caused by people giving up on stocks – they were caused by people giving up on America.”
You’d think that after +70 years of consistent long-term value creation, US equities wouldn’t have to prove time and again that they are money-making investments, and America is a safe country in which to invest. Bitcoin’s rise shows such faith is possible; equities – and the US – have the track record to merit the same level of confidence.
#4 You never know where you will find the next Big Idea. We started looking at bitcoin in 2013 after reading about it on Zerohedge. Learning more meant studying the structure and uses of the Dark Web, boning up on computer-driven cryptography, and plowing through fringy tech websites.
In contrast, no large investment bank bothered with bitcoin. Financial news sites gave it a passing look when drug dealing website Silk Road was a thing, and when Japanese exchange Mt. Gox imploded.
Basically, the entire world missed the story. Too weird, too sketchy, too geeky, too … strange. And in that is an important lesson: You need to go off the standard intellectual grid to make outsized returns. Some will pan out, and others won’t. But without any exposure, your returns are guaranteed to be zero.
#5 Imagination. There is an old Hindu saying that goes something like this: “From a drop of water, you should be able to imagine ice, steam, glaciers, rain, oceans, and waterfalls.”
Think back to when Amazon just sold books – its “Drop of water.” A few farsighted individuals could imagine everything that would come next. But not many. And certainly, none of its competition had an inkling until it was too late.
Regardless of where crypto currency prices go, remember the water drop. The use cases so far have varied, from the illegal to the sketchy to the current popular trading craze.
All this is as powerful a cautionary tale as I can imagine. It echoes through the expansive challenge of equity investing even more than the narrow confines of crypto currencies. Technology writ large is a largely ungoverned force for societal change. It can engender high levels of trust very quickly, in the right framework.
What comes next for crypto currencies, we have no idea. But we know a drop of water when we see it.
We’ll close out with a quote from Bruce Lee, who in an alternative universe would have made a great investor: “You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. … Water can drip, and it can crash. Become like water, my friend.”