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).
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."
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"
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."
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.
