When is a bubble not a bubble? When it involves blockchain

Bitcoin may have been a bubble, but there is value in blockchain.

Article updated: 11 December 2018 10:00am Author: Michael Baxter

It’s a bubble — clearly Bitcoin was a bubble, maybe the very concept of a cryptocurrency was blown into the ether by a bubble blowing machine — but look past the hype and indeed the anti-hype, blockchain is a massive investment opportunity.

Bubbles happen. We can trace them back to the 1636 — at least that is how far back the bubbles we know about go. That was the year when the price of Dutch tulips broke through the greenhouse window and went up and up. In the following year the price collapsed.

We have had multiple bubbles since:

  • The Mississippi bubble — an investment craze over swamp land that burst in 1721
  • The South Sea bubble — which cost Sir Isaac Newton himself a fortune and spawned one investment which was described as an opportunity of great advantage but ‘no one to know what it is’
  • The telegraph and railroad bubbles in the US during the 19th Century
  • A stocks and shares bubble particularly in investment trusts which burst in 1929
  • The dotcom bubble of the late 1990s
  • The subprime mortgage bubble which burst in 2008
  • The cryptocurrency bubble of the 2010s, which probably burst in either 2017 or 2018.

Bubbles seem to tie in directly with the idea of madness of crowds — a concept Charles Mackay introduced to the world in 1841 with the publication of his book Extraordinary Popular Delusions and the Madness of Crowds.

But for me the madness of crowds is linked to the idea of Group Think, and indeed the fast way of thinking made famous by Daniel Kahneman. He proposed that we think both fast and slow, fast thinking is often irrational and based on instinct, slow thinking is more rational and logical but that we tend to be dominated by fast thinking and the slow way of thinking then seeks to find ways to justify an action when no rationality was behind it at all.

I believe group think does not only lie behind Investment bubbles, but political disasters too and indeed democratic ones — such as the madness that caught hold in 1930s Germany. Indeed, I suspect that group think and fast thinking lie behind much of public discourse.

Bitcoin was, in my view, an example of group think feeding into madness of crowds. The concept behind bitcoin was flawed because it was based on a conspiracy theory, the idea that central bankers cannot be trusted and that we need to find a mechanism free of institutional manipulation to determine the money supply and interest rates. Bitcoin was seen as a kind of digital equivalent of the gold standard. In my view, such a view is wrong. Central bankers may occasionally get it wrong, but they get it wrong far less often than the free market. It is precisely because central banks did not seek to boost the money supply post 1929 that the Great Depression occurred. The gold standard throttled the economy for centuries, made growth almost impossible and it was only thanks to the discovery of gold in the New World that the industrial revolutions of the 18th and 19th centuries could be funded.

The delusion of delusion

But not all bubbles are bad news in the long run. The Dutch tulip bubble created a legacy that spawned the Dutch horticulture industry — today, 77 per cent of flower bulbs traded worldwide come from the Netherlands.

The US telegraph and railroad bubbles created an infrastructure which eventually enabled the US to become an economic powerhouse. And the dotcom bubble accelerated the rise of the internet and may have even made the so called fourth industrial revolution possible.

Madness works both ways

The madness of crowds does not only create bubbles it can also create a wave of antipathy that can be just as irrational.

We are witnessing such a misguided backlash with blockchain.

Blockchain is not just about cryptocurrencies

There is so much more to blockchain than creating a new virtual currency.

It provides a ledger that is virtually impossible to cheat — it makes it possible for people who don’t know each other and have never met each other to trade with each other.

Here is a practical example: Tracr, a blockchain platform for facilitating the diamond trade, conceived by De Beers. Each diamond is engraved with a tiny number and the blockchain keeps a record of that number and who the diamond belongs to, making it all but impossible to benefit from stealing a diamond that is part of that system.

They say possession is nine tenths of the law, but with blockchain this no longer applies, ownership belongs to the person/organisation that the virtually impossible to cheat blockchain ledger says it belongs to.

Another example

The Peruvian economist Hernando De Soto has created a compelling theory to explain why certain poor countries seem unable to lift themselves out of poverty — he puts it down to poorly defined property rights. Because property ownership is so poorly defined in the shanty towns of South America, for example, trust in the financial system is virtually non-existent, there is little stability. Blockchain, by creating an immutable ledger of who owns what property can solve this and transform some emerging markets.

Opportunity

The last time I looked at blockchain, I said that we would see a crash — but that good concepts, applications of blockchain with genuine practical benefits, will get caught up in the anti-hype and that will create a buying opportunity.

I believe Ethereum, which is a kind of open standard for blockchain that can be applied in multiple ways is an example of such an asset. I predicted it would get caught up in the bitcoin panic sell-off creating an opportunity.

Another possible blockchain Investment opportunity is Insolar, a new open sourced, enterprise-focused blockchain platform.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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