Bubbles from The Nifty Fifty to dot-com: Lessons for Cryptocurrency

It is a sad fact that many new crypto investors have not lost money in the stock market. In fact some are so young that they were not investing in the 1990s. This means that they will have to lose money in the cryptocurrency market, which might be even less forgiving than stocks. What the stock market has in abundance is history. Some of it written from a very personal perspective that warns of the dangers of pride. Pride comes in many forms, but the root is that an individual thinks that they are special. Ancient Rome attempted a cure. After a victorious general returned to the city of Rome, they were made king for a day. They were given a parade where they could dress as a king in purple and gold. They could wear a laurel on their head that would signify their status. Rome was a republic, and had banned kings, but for a day it was fine, as long as the general knew that they could not usually wear those special symbols. Caesar aimed to settle for more. He even dared to wear the robes to show it. As is well known bad things happened to him. He should have listened to the man who stood behind him during his triumphal parade. According to tradition, the generals had to hear, repeated over and over again, the phrase “glory fades” or according later Roman traditions “you are mortal.”

Human nature has really not changed that much. After a successful trade, where the price goes up, how many can resist the illusion that they truly understand the market? How many push their luck just a bit longer? It is all too easy, and as Caesar found, some of his friends even encouraged him to strive for more. Those friends no doubt thought that if Caesar was made king they would gain special powers. Brutus and the others in the other faction might have been correct to fear what Caesar’s ambition would have done to the Roman Republic. Luckily in a well-structured investment firm, co-workers will be around to remind potential kings of their faults. The danger is that for most investors investing is a lonely activity. They are only accountable to themselves, and any less than stellar investments are never shared with family or significant others.

Anyone who has lived during the 1960s and 1970s would have heard the term Nifty Fifty. This was a set of stocks, that no two people seemed to agree upon, that were so bulletproof that once you bought them they would continue to make money. Many of these stocks sold at extremely high price to earnings ratios. Of course many blue chip companies are still doing just fine (like Wal-Mart), but there are others that are out of business. Simply put, no portfolio no matter how distinguished can simply be left alone. Anyone who says otherwise is selling you a system that might exist in a bubble of reality, but not the reality that everyone else is in. For instance, anyone who missed out on the big name tech stocks (like Apple) in the 1970s lost a money making opportunity. As far as bubbles go, the Nifty Fifty was not as bad as the crash of 1929. It also was not as bad as the very memorable dot-com bubble of 1997-2001.

I have personal experience here. I bought things like Amazon that I am proud of. I also bought things that went bust. I enjoy looking back at the (thankfully few) shares of Enron that I bought. The man behind me in my chariot just says the word Enron and I pay attention. Looking back I had far less of a plan than I thought. I thought I was prepared. I thought that I understood how to tell the difference between sales puff and fact. Clearly I did not. Looking back I went into a used car dealership and too many things on faith. I even took on faith dealer talk that was repeated by other people who were not dealers. Finally, I also read dealer talk in magazines that was repeated by journalists as fact. It was so easy to ride the wave. The period 1997-2000 was a time when everyone could see that tech and the internet were booming. More and more people were getting computers and getting plugged in. Everyone understood that personal computing would change the way people live. People also understood that, like railroads on the 19th century, only the strong would survive. Several friends quit their jobs to play the market full time. At the time I did not think they were crazy.

When the collapse came in 2000-2002, it took me too long to react. Looking back, my favorite example is Pets.com. I saw clearly that simply adding a .com to a name was silly. It did not change the fundamentals of a business. I did not invest in that stock because I still bought dog food at a brick and mortar store. However, there were other businesses that I invested in that I clearly did not understand. I should have bailed out of the risky stocks that I knew were risky and they were going down. I thought I would just continue to ride the wave. I did not see that the wave was over. The money that was pouring into the market dried up, and the wave died. There were some stocks that recovered and went on to set new records, but for many their innocence was lost.

In any case I must like punishment. I simply continued investing. I was much more careful with my money. At the beginning of the century there were still people who went to all you can eat restaurants and stuffed their pockets full of food. I was not that careful, but I could understand the motivations of people who had suffered real shortage. At the same time I felt different, I was still drawn to some degree of risk in the market. Technology bubbles, like the railroad craze of the 1800s, led to wild speculation, overbuilding, and finally a railroad system that was the envy of the world. The dot-com bubble changed America forever. I do not think the market can function without bubbles. New technology is risky and no one can be sure what the future holds. With the space program there was government funding that lead to great new technology. Without lots and lots of money (some might even half-jokingly call it a cold-war bubble) would people have ever gotten to the moon?

Do I think cryptocurrency is a bubble? The answer is that if trends continue, money might keep pouring in (translation, I do not know if it is a bubble). There might be completely irrational expectations, and at some point the wave might just peter out. I think that anyone who says they can see bubbles in advance should put their opinions in print so they can have bragging rights later. I think that just like the dot-com bubble, everyone can see how the new technologies of cryptocurrency can change society. Very few people understand the internal workings of cryptocurrency well. Most investors have to rely to a greater or less degree on greatly simplified reports of what the new technology is and what it can do. It is far more wide ranging that just currency. No one can be sure about winners and losers. Maybe even after a crypto-bubble breaks (if it even forms a proper bubble) the issue will not be settled for many years. I suggest that in order for cryptocurrency to get anywhere, people need to take risks. Even if it is a bubble there is no way to prevent it. A bubble might even be a good thing. That does not mean it is a good thing to lose money in the bubble.

Some Rules that MIGHT prevent money loss:

1. Talk to other investors about the market. There are lots of books about the stock market that contain the personal experiences of investors. The cryptocurrency market is new, but there are plenty of videos on social media platforms where honest investors will tell you straight up what worked and what did not work for them. Without learning from experienced traders, someone is gambling and not investing.
2. Investing is almost never a pleasant process. If you find someone who wants to sell you a system of how to game the market easily you should be skeptical while walking calmly and collectedly towards the nearest exit.
3. Anyone who explains why “the market is not the same as before, and we have reached a new phase” or something like that is either trying to sell something or blindly repeating the sales talk of someone who tried to sell them something. While it can be true, it is important to realize the viewpoint of the source.
4. Caesar did not see that by trying to become king he was signing his death warrant. He did not listen to the man in the chariot telling him that fame is fleeting. People who have lost money before might be more inclined to listen to the little man. They tend to be careful in what they invest in in the future, and to not be scared by minor market dips.
5. If you are too worried about winning or losing money the game between the bull and the bear is not for you. I am speaking from experience that you have to enjoy the game in order to subject yourself to market risk. Cryptocurrency is a market that operates all day. If you like 24/7 gratification, you may have found a home.

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Pair of bookends from the Art Deco period (1930s).