Tuesday, 23 January 2018

PEOPLE TRADED BITCOIN 300 YEARS AGO - THEY JUST CALLED IT SOMETHING ELSE


It's good to read up on finance history to get a sense of context on the two things everybody in the finance industry is constantly obsessing over : signs of market booms and busts as well as financial bubbles.


One book in particular that I recommend is Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds - it's not an easy read and some parts were interminably boring, but as a compilation of truly historic mass financial delusions, it can't be beat. Do give it a try : it's available for free here.* Or the one-page summation if you don't have the time.


My favorite chapter in the book is a very detailed, definitive account of the South Sea Bubble. It's a story on how a massive bubble forms following the introduction of a new investment instrument for making money quickly, with promises of triple and quadruple-digit % gains. Banks and regulators were initially apprehensive but then became part of the story and perpetuated the bubble.


As it reaches the mainstream and beyond the niche early adopters, the media took up the mantle and began covering the bubble around the clock. Sensing opportunity, bankers and advisors began marketing their services to members of the masses with more money than sense and those who ought to know better.


Sounds a bit like what's happening right now with cryptocurrencies? You bet.


Here's the thing about bubbles : those who are completely skeptical will stay on the sidelines, yet they will constantly envy peers who seem to be making easy money. Some will crack and become a believer. They will also end up buying into the bubble at its peak.
​The 18th century Satoshi Nakamoto.


At the other end, those who are true evangelists will have the time of their lives. They will tell the skeptics three things : 1) "This time it's different", 2) "I know it's a bubble, I'm just going to get out before it pops,", and 3) "If you're so smart, how come I'm so rich?".


Let's face it, we all belong to one tribe or the other. So what I will do here will either support or contradict your existing beliefs.


I'm going to take passages out of the South Sea Bubble chapter of Mackay's book and recontextualize them for modern times. Some may be totally and irresponsibly out of context but I like the timeless quality of the sentences. Some parts are shockingly real and others are fictionalized for entertainment value. Maybe you'll see parallels, maybe you won't.



1) "Mr. Walpole was almost the only statesman in the House who spoke out boldly against it. He warned them, in eloquent and solemn language, of the evils that would ensue. It countenanced, he said, “the dangerous practice of stock-jobbing, and would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation."


Paraphrased for modern times : A visibly agitated guest on a CNBC panel on cryptos starts his rant. He says the dangerous practice of Bitcoin-trading, would divert the genius of the nation (former bankers who never went up to C-suite level) from trade and industry (they are now partners in crypto startups). It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of Bitcoin, by exciting and keeping up a general infatuation that is perpetuated by round-the-clock financial media and industry conferences.



2) "Several peers spoke warmly against the scheme; but their warnings fell upon dull, cold ears. A speculating frenzy had seized them as well as the plebeians. Lord North and Grey said the bill was unjust in its nature, and might prove fatal in its consequences, being calculated to enrich the few and impoverish the many."


Paraphrased for modern times : Several people who know better spoke out against Bitcoin (Jamie Dimon) ; A speculating frenzy had seized JP Morgan's prospective clients as well as the public (prompting Dimon to quickly backtrack). The market bears pointed out the flaws in cryptocurrencies' very nature, and might prove fatal in its consequences, being calculated to enrich the few (early adopters, bitcoin hoarders, and the founders of XRP) and impoverish the many (the Uber driver who's humble bragging about his three-week investment in Ether which has tripled).

In 20 years' time, this will be the defining image of the crypto mania.


3) "The inordinate thirst of gain that had afflicted all ranks of society was not to be slaked even in the South Sea. Other schemes, of the most extravagant kind, were started. The share-lists were speedily filled up, and an enormous traffic carried on in shares, while, of course, every means were resorted to to raise them to an artificial value in the market."


Paraphrased for modern times : The inordinate thirst of gain that had afflicted all ranks of society (crypto mania) was not to be slaked even in Bitcoin alone. Other schemes, of the most extravagant kind, were started (Initial Coin Offerings). These were speedily filled up, and an enormous traffic carried on in ICO trading, while, of course, every means were resorted to to raise them to an artificial value in the market (by peddling ICO-issuing fintech companies backed by zero fundamentals - I mean, it worked during the dotcom bubble, right?).



4) "Contrary to all expectation, South-Sea stock fell when the bill received the royal assent."


Paraphrased for modern times : Contrary to all expectation, Bitcoin prices fell after Wall Street (a royal capitalist class if there ever was one) blessed it with the validation that it apparently commands. Prices have fallen quite a bit since Bitcoin futures were introduced by the CME.



5) "Already the directors had tasted the profits of their scheme, and it was not likely that they should quietly allow the stock to find its natural level without an effort to raise it."


Paraphrased for modern times : A cryptocurrency creator sells all of his holdings out of a sense of altruism and civic duty. Freed from his ties to the market (by cashing out - what could be better?), he now aims to promote the underlying tech of his cryptocurrency without any conflicts of interest (how noble).



6) "In the mean time, innumerable joint-stock companies started up every where. They soon received the name of Bubbles, the most appropriate that imagination could devise. The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some of them lasted for a week or a fortnight, and were no more heard of, while others could not even live out that short span of existence. Every evening produced new schemes, and every morning new projects."


Paraphrased for modern times : In the mean time, innumerable ICOs started popping up every where - US$3.5bil worth of them last year. They soon received the name of Bubbles, the most appropriate that imagination could devise (You'll find a variation of this 'bubble' story on Bloomberg every day). The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some ICO scams fizzled out in weeks, and were no more heard of, while others could not even live out that short span of existence. Every crypto fintech conference saw new startups conceiving  new schemes, and every time the 'consultants' (former investment bankers trying their luck) oblige by advising on new projects .

​Imagine a conference on sardines were you get EXCLUSIVE access to buy 10 carefully selected cans of sardines under the companies' terms. At least they have tangible value (and are yummy).


7) "Dozens of schemes, hardly a whit more reasonable, lived their little day, ruining hundreds ere they fell. One of them was for a wheel for perpetual motion—capital one million; another was “for encouraging the breed of horses in England, and improving of glebe and church lands, and repairing and rebuilding parsonage and vicarage houses.”


Paraphrased for modern times : Dozens of ICO schemes surfaced, hardly a whit more reasonable, testing the confidence of even the most ardent cryptocurrency bulls. The best ones yet were coins where you can monetize likes, sponsor trips to North Korea, and get lifetime access to a Las Vegas strip club run by a mixed martial arts fighter.


8) "The shares of this company were rapidly subscribed for. But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled “A company for carrying on an undertaking of great advantage, but nobody to know what it is.” Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project."


Paraphrased for modern times : Yet another ICO of a promising fintech company (it didn't exist a month ago) was rapidly subscribed for. But the most absurd and preposterous of all, and which sort of demonstrated, more completely than any other, the utter madness of the people, was one started by  an unknown adventurer, entitled “a standard ERC20 token, so you can hold it and transfer it. Other than that… nothing. Absolutely nothing." (it netted $40,000). Were it not been endlessly covered by scores of media outlets, it would be impossible to believe that any person could have been duped by such a project.



9) "Persons of distinction, of both sexes, were deeply engaged in all these bubbles; those of the male sex going to taverns and coffee-houses to meet their brokers, and the ladies resorting for the same purpose to the shops of milliners and haberdashers. But it did not follow that all these people believed in the feasibility of the schemes to which they subscribed; it was enough for their purpose that their shares would, by stock-jobbing arts, be soon raised to a premium, when they got rid of them with all expedition to the really credulous."


Paraphrased for modern times : Persons of distinction, of both sexes, were deeply engaged in crypto trading. Men and women are now attending get-rich-quick crypto trading seminars and began contemplating life as a full time cryptocurrency trader. But it doesn't matter that they know that it's a bubble, all that matters is to buy into Bitcoin quickly, wait until it is raised to a premium, and get rid of them to the really credulous - it's the greater market fool principle, after all.


"I probably burned more money then I made, still this is a thrilling world." - poignant words from  'supermeatboy'.


10) "On the 11th of June, the day the parliament rose, the king published a proclamation, declaring that all these unlawful projects should be deemed public nuisances, and prosecuted accordingly, and forbidding any broker, under a penalty of five hundred pounds, from buying or selling any shares in them"


Paraphrased for modern times : On the 1st of January, Chinese regulatory authorities published a proclamation, declaring that all these bitcoin mining operations be shut down as they are deemed public nuisances (by Xi Jinping himself, no doubt). Other central banking regulators try to forbid people from trading or owning cyptocurrencies, although these are merely advisories with no legal enforcement implications.


11) "
It would be needless and uninteresting to detail the various arts employed by the directors to keep up the price of stock. It will be sufficient to state that it finally rose to one thousand per cent. It was quoted at this price in, the commencement of August. The bubble was then full-blown, and began to quiver and shake preparatory to its bursting."


Paraphrased for modern times : It would be needless and uninteresting to detail the many things that propelled enthusiasm to keep up the price of Bitcoin. It will be sufficient to state that it finally rose to one thousand five hundred per cent. It was quoted at this price in, the commencement of December, 2017. The bubble was then full-blown, and began to quiver and shake preparatory to its bursting. The most recent peak was close to US$20,000 per bitcoin a month ago, but now it's trading at a more sensible (??) US$10,500.


​Growing enthusiasm in a bubble means the buildup phase takes a while. A loss in enthusiasm means the decline is swift, volatile, and brutal.

AND NOW.... WHAT MIGHT HAPPEN NEXT  :


12) It was now the general opinion that the stock could rise no higher, and many persons took that opportunity of selling out, with a view of realising their profits. Many noblemen and persons in the train of the king, and about to accompany him to Hanover, were also anxious to sell out. So many sellers, and so few buyers, appeared in the Alley on the 3d of June, that the stock fell at once from eight hundred and ninety to six hundred and forty.


Paraphrased for modern times : It was now the general opinion that Bitcoin, Ether, XRP and Dogecoin could rise no higher, and many persons took that opportunity of selling out, with a view of realising their profits. Thousands of Bitcoin millionaires (on paper, anyway) and university dropouts who just became full-time traders looked in horror as commission fees to sell coins on Coinbase skyrocketed, while at the same time transaction times now last for days. Some crypto exchanges experience suspiciously lengthy outages. Everybody was anxious to sell out. So many sellers, and so few buyers, appeared over the next few weeks. During this time, Bitcoin prices fell 50%, or slightly more volatile than usual.


13) "During the progress of this famous bubble, England presented a singular spectacle. The public mind was in a state of unwholesome fermentation. Men were no longer satisfied with the slow but sure profits of cautious industry. The hope of boundless wealth for the morrow made them heedless and extravagant for to-day. A luxury, till then unheard-of, was introduced, bringing in its train a corresponding laxity of morals. The over-bearing insolence of ignorant men, who had arisen to sudden wealth by successful gambling..."


Paraphrased for modern times : During the progress of this famous cryptocurrency bubble, the world presented a singular spectacle. The public mind was in a state of unwholesome fermentation. Men were no longer satisfied with the slow but sure profits of cautious industry (like, buying good stocks for the long term and reinvesting the dividends). The hope of boundless wealth for the morrow made them heedless and extravagant for to-day. A luxury, till then unheard-of, was introduced, bringing in its train a corresponding laxity of morals. The over-bearing insolence of ignorant men, who had arisen to sudden wealth by successful gambling...



Those last three sentences are what happens when you're living in a bubble. Doesn't matter what century it is.


*Two other books you'd like if you're a total finance history nerd : Manias, Panics and Crashes : A History of Financial Crises (Kindleberger & Aliber) and This Time Is Different : Eight Centuries of Financial Folly (Reinhart & Rogoff)

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