Take the dot-com mania that peaked in 2000. In 2010, many of the ideas from the bubble era had been productively recycled by the next wave of start-ups. Companies selling airline tickets or groceries online were dramatically overvalued during the boom and widely ridiculed during the crisis. But in the aftermath of the postwar era, e-commerce took over Main Street.
This boom-bust-triumph sequence is the rule, not the exception. The bubble of the 1920s was inflated in part by exaggerated euphoria about the technology of the time – mass production that relied on Henry Ford’s assembly lines and the electrification of factories. Similarly, the bubble of the 1960s rode on the euphoria of semiconductors and computers. The two decades ended with a bang. But mass production, integrated circuits and computers remain among the greatest innovations of the 20th century.
Or think back to the British mania of the 1840s, when the railways’ share of total stock market value tripled in three years. In their book “Boom and Bust: A global history of financial bubbles », William Quinn and John D. Turner report that in 1845 alone, 1,238 new railway projects were started in Britain, a tally that makes the recent proliferation of crypto tokens seem modest. Anticipating the YouTube channels, Twitter feeds, and homemade podcasts that today hype digital currencies, the 1840s saw an explosion of cheerleading railroad periodicals. Victorian day traders could choose from practical manuals such as “How to Make Money with Railroad Stocks” and “The Short and Sure Guide to Railroad Trading”.
Of course, only a fraction of these railway companies could hope to be profitable. By 1850, railroad stocks had lost two-thirds of their value. A few promoters have engaged in shenanigans worthy of a modern crypto scam: George Hudson, known as the “Railway King”, was driven into exile amid allegations of dodgy accounting. But none of this changed the reality that the railways were transformative.
After the railroad boom, came the bicycle craze. Until 1885, the penny farthing bicycle amplified the rider’s pedal power by means of its oversized front wheel, and riders fell from frightening heights when ambushed by a pothole. But then those potentially deadly mega-wheels were replaced with smart chains and gears, while lighter steel and rubber tires created a bike that was maneuverable and comfortable. In 1896, bicycle-related inventions accounted for 15% of new patents, Quinn and Turner tell us.
The new technology was solid, but it sparked an unhealthy mania. Opportunists have bought cycle companies, promoted their outlook, and paid journalists and politicians to publicize them even more; then they sold them through the stock market at absurd valuations. Cycle shares tripled in 1896, but then hit that proverbial pothole. Half of the new bicycle companies collapsed and died around the turn of the century.
All this suggests three lessons.
First, new technologies are getting investors excited, as they should. But precisely because the technology is new, investors cannot gauge how much excitement is warranted. Booms and recessions inevitably follow.
Second, these boom and bust cycles can’t tell you much about the triumph of a technology. Investors are betting on things they hope they can work out, but the nature of early-stage tech betting is that a majority of companies go to zero. During the bull cycle, soaring valuations are no guarantee of success. On the downside, falling stock prices are also a bad signal.
Third, innovation and profit are not reliably linked. Trains, bicycles and e-commerce were all true innovations, but many pioneers went bankrupt. Conversely, Google and Facebook weren’t the inventors of internet search and social media, but they captured almost all of the value in these categories. Similarly, some of today’s crypto innovators will go bankrupt. But they could show the way to others.
The real test for crypto is whether it creates services that interest non-cryptos. On this point, the jury is still out, but the provisional evidence is promising. Digital tokens can create smart incentives for customers – think a fancier version of airline miles. Crypto payments can generate cheaper ways to transfer money across borders. Play-to-Earn computer games, with digital assets that users hide in personal wallets, can bring a new dimension to the already vast gaming industry. Audius, a Spotify-like service, streams music stored on a blockchain.
Today’s Internet makes it easy to store, transfer and share information. Already, we cannot imagine life without it. The crypto and blockchain enhanced internet of tomorrow could achieve the same value. Legions of smart coders are working to realize this vision, and no one can tell what will come of it. But one thing is certain: the financial markets are no more far-sighted than the rest of us.