Cryptocurrency: Can We Predict The Future By Looking At The Past?

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Cryptocurrency was one of the hottest topics of 2017 and will be again in 2018. Everyone seems to be talking about it and social media is now rife with accounts claiming to help you make money investing in crypto’s. Many people trying to make money in cryptocurrency will be looking for new, up-and-coming crypto’s to try to find the next Bitcoin or Ethereum. So, can we predict the future of cryptocurrency?

A lesson from the past

I recently started the book “The Snowball: Warren Buffet and the business of life” by Alice Schroeder. In chapter two, Schroeder tells the story of a speech Warren Buffet made at the Allen & Co Sun Valley Conference in 1999. At the time, tech stocks were booming and many of the audience members had benefited greatly as a result. Buffet had steered clear of tech stocks, instead sticking to what he knew best. Many people at the time thought this was a huge error, especially as the stock price of Buffet’s own company, Berkshire Hathaway, had been in decline. In his speech, Buffet did something he rarely ever does – make a market prediction. Buffet believed the market was in a bubble and used the opportunity to educate the audience on how companies fared during previous “technological breakthroughs”.

The automobile boom

At the beginning of the twentieth century, cars began to be mass-produced. At the time it was cutting edge and a vision of the future. In his Sun Valley speech, Warren Buffet pointed out that there were around two thousand auto companies competing in this market in America in those early years. Buffet concluded by advising the audience how many had survived – “as of a few years ago, only three were remaining”. Only 0.15% of the companies which made cars in America as part of this technological breakthrough were to survive to the early nineties. In the early days there was a huge buzz around the industry and plenty of “money-making” opportunities but over time investors did not fare well.  The similar thing would happen in the aviation industry. Of the hundreds of companies in America that tried to profit from commercial aviation when it was a new technology, only a handful survived long-term.

The comparison with cryptocurrency

As of January 2018, there are over 1300 cryptocurrencies in existence. If we apply a more generous success rate of 0.3% (double the success rate of the auto companies), we can calculate that only 4 cryptocurrencies will stand the test of time. To me, this doesn’t sound surprising. I don’t doubt that cryptocurrency will find it’s place in the world’s financial system but is there a need for thousands? Or even hundreds? The short answer is no. If you are at the point of placing your bet, history tells us that it’s better to back the favourite than try to pick an outsider. I stumbled across an article recently by a journalist at The Guardian who dabbled in the alt-coin Verge and at the time of writing was still in the game with the price per coin at 13 cents. Just a few months on the price is less than 3 cents – a 77% fall! From it’s high of just over 27 cents it’s down 89%.

Summary

Anytime a new technology comes to the market a battle will ensue between the companies trying to make money from it. I highly doubt anyone will be looking at the history of the auto industry when deciding whether or not to invest in cryptocurrency, however, history tells us that only a small percentage of companies fighting it out in the early days to deliver a new technology to the masses will survive. For those looking to invest in the crypto space, it’s a lesson well worth remembering.

Most of you will know how Warren Buffet’s tech forecast went. For those that don’t – he was spot on. Less than a year after he gave the speech at Sun Valley the bubble burst and billions of dollars were wiped off of the value of tech stocks.

Don’t say I didn’t warn you…


Thinking of investing in the stock market? Find out how to value a stock.

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