Silver as an investment

Henry Ford, Dot.com & Bitcoins

Submitted by Viktor Shvets of Macquarie

Why history matters

Is ‘history more or less bunk?’ It provides valuable lessons

  • Henry Ford once said that “history is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history that we make today”. And yet, Ford was aware that he was making history, and his remarks were aimed at the orthodoxy.
  • What has Henry Ford to do with bitcoins? In 1900 when he was experimenting with cars, there were around 2,000 car makers globally that were producing 10,000 vehicles (some powered by steam). However by 1920, the number of car makers shrunk to around 200, and the industry was manufacturing 2.5m cars and by the 1930s in most DMs, horses were dead and buggy makers were out of business. By the 1980s, the number of car makers dropped below 50 and the industry was making over 30m vehicles. Today, there are over 1,000 cryptocurrencies and their combined value (depending on time of day) is ~US$600-800bn, or ~1% of global money in circulation. Will cryptos follow the same trajectory as their early 20th century cousin and within a decade or so become the dominant force in transactions and store of value?
  • The key that links cryptos with Henry Ford and the main difference between (say) bitcoin and tulips is that cryptocurrencies are based on sustainable and evolving technological foundations (just as cars were in the early 20th century). To argue that the blockchain is good but cryptos bad is to forget that without various forms of ledger balances (or cryptocurrencies), blockchain is an empty vessel. As in the case of the 17th century Dutch Tulip Mania, the growth of cryptocurrencies is also turbocharged by creeping monetary debasement. It is the marriage of technology and the perceived need for insurance that is likely to guarantee cryptos’ LT role, irrespective what the governments think.

Does it mean that cryptos are a reliable store of value?

  • If one indiscriminately invested in hundreds of car makers in 1900, the chances are that one would have sustained significant losses. It was still a time for venture capitalists rather than conventional investors. However, by the 1920s, investment in the surviving automakers would have yielded considerable returns while buying buggies (even at low PERs) would have led to losses. It was a similar process in the dot.com bubble. Although there were hundreds of new companies and the shape of the future was becoming clear, neither hardware, networks nor software were ready. As in the case of cars in 1900, it was a time for venture capitalists. But by 2010-15, most elements for technological progression were in place. Hence, investment in tech today is akin to buying car makers in 1920s, not speculating on start-ups in 1900.

Currencies are not like other assets. Perception = value

  • Money is anything that is commonly recognized as a medium of exchange and store of value. Most societies used seashells, rocks, severed skulls or metals. China invented paper money during Tang dynasty and with fits and starts, it gradually became the standard. Fiat money can’t be consumed and neither can it be used in production. Hence currencies do not have intrinsic value but rather trade on perception of value. As discussed (here), unlike fiat currencies, cryptos are more difficult to inflate, cost money & time to produce and are built around mathematics rather than fraud or politics. Hence, they already reflect the essence of money better than existing money. However, we are still closer to the 1900s than 1920s. There are serious challenges (e.g. depth, acceptance, custody etc). But cryptos & blockchain are the future