Imagine that one fine day, aliens, meaning full-blown extraterrestrials and not your fellow humans south off the border if you live in Gringoland, show up on your doorstep and ask you, telepathically, of course, in their finest English with a bit of that Proxima Centauri accent, to take them to your leader. This may eventually happen, though probably not during the lifetimes of those persevering through this dreary pandemic period.
Now, what would the reaction of financial markets be once the presence of the extraterrestrials became public? Would they go up in an exuberant frenzy or crash spectacularly?
Hard to tell, but one thing seems to be pretty certain: they would go crazy. One should expect wild swings; their volatility would likely be higher than ever recorded before. It’s conceivable that their activity would even be suspended for a few days, just as it was the case after the 9/11 attacks.
Surely, what we are considering here is pretty outlandish (pun intended), but the behavior of financial markets during the Covid pandemic, whose tenure in the Western world has just been extended to another year, has been quite outlandish too. With the worldwide economy pretty much depressed by this pesky Covid virus, it’s not easy to understand the financial bubble we are in right now. Even if we account for the hope of the pandemic ending soon.
This outlandish behavior manifests itself in some markets to a greater extent than in others, but it’s particularly visible in fintech, a new technology sector known largely for cryptocurrencies. The people betting on the future of this technology seem to believe, just as countless participants of similar bubbles in the past did, that this time is different.
Even though I like this upbeat attitude quite a bit, the economic history teaches us that it never is. Different, that is. Intelligent trading or investing requires one to grasp some (not even that fine) aspects of human psychology. As Richard Feynman, a famed American physicist, who, I am sure, would make an outstanding trader too, wisely observed, “you are the easiest person to fool.” Let me officially call these words the Feynman dictum.
I still remember very well the Internet stock mania of the golden 90s. The market bubble created back then eventually deflated and some of the stocks that seemed to defy gravity are not even listed on stock exchanges any more. This is especially true of the stocks of first search engines.
Who now knows what Lycos is? Only old timers, I am afraid. And that’s not even the most extreme case because Lycos, founded in 1994 is still around, as you can find out using… Google. Yes, Google that back then virtually nobody even heard of – founded in 1998, went public in 2004, a few years after the Internet stock bubble deflation – and which now dominates the search engine market.
But let us go back to the cryptocurrencies. How many of them do we really need in this world?
Well, here is an auxiliary question: how many search engines do you really use on a regular basis? Probably just one or two. There are more, of course, but in the developed world the most commonly used are Google and Bing, the latter a poor cousin of the former. If you are more sophisticated, you may be using Yandex from time to time, but its main market is in Russia. Still, it’s a good search engine. The Chinese use mostly Baidu, more than Russians use Yandex, but outside China it’s even less popular than Yandex, I suspect.
Thus, the answer by way of analogy, I think, is that there isn’t that much need for all those cryptocurrencies and it’s only a matter of time before they (most of them, at least) share the fate of the many original search engines (Lycos, Infoseek, Excite, and more). This may even happen to the most buoyant of them. Such as Bitcoin.
Bitcoin, the most popular of cryptocurrencies, is a very bad candidate for anything even remotely related to the idea of currency for the thing one expects most of the currency is its stability. Yet, Bitcoin with its wild price swings cannot obviously guarantee it.
And then there is another issue, quite important too. Mining Bitcoin, that is, creating new digital coins, is a very wasteful enterprise. It is estimated that this activity on the global scale consumes as much energy as Argentina, which, believe it or not, is still a country, though not without persistent financial problems of its own. In the world that wants to be greener and greener, and there seems to be nothing stopping this trend, Bitcoin may well be replaced by something else, by some Google of cryptocurrencies yet to emerge from someone’s garage.
Remember AltaVista? Don’t worry, not too many do these days. Established in 1995, it was a very fine search engine, yet lost ground to Google, and acquired by Yahoo! in 2003, was eventually shut down in 2013. Such stories are not uncommon in the world of technology.
Even if Bitcoin survives for another decade or longer, what are the odds that it will remain as dominant as it is now? It may as well, if not at best, end up as a Bing of cryptocurrencies. Or may follow the trajectory of AltaVista.
This brings me to the bottom line or two: yes, there is future in cryptocurrencies and other fintech solutions, but the first solutions, especially not well though-out, are not that likely to survive. Keep this in mind when considering your investment in Bitcoin. In these circumstances, short term trading appears to make more sense, though it’s also not for everyone.
For the record, I hold no positions in cryptocurrencies nor do I plan on taking any in the near future.