Business

What Horses Can Teach Us About Currency

2017 was the year that crypto-valuations exploded but the question on everyone’s minds now is how long will this trend last? Is it here to stay? How do we get answers to these burning questions when the digital asset space is completely new, unexplored territory? – a good place to start in any analysis is by looking at the history of market behaviours. Can lessons from the past give us an indication of the outlook for a continuation of cryptocurrency growth going forward? – let’s take a look…

What Automobiles Can Teach Us..

Henry Ford once said that “history is more or less bunk“. Was this captain of industry and founder of the Ford Motor Company a forward-thinking visionary or merely an ambitious entrepreneur seeking to drive the adoption of the motor car with his public remarks at the turn of the 20th Century? The answer is both.

Living in the present, and looking to the future, has fueled the wider adoption of cryptocurrencies the world over. Like the automobile industry, cryptocurrencies seek to disrupt the transactions processing industry (and far more) as we know it – starting with the traditional banking sector. We can see comparisons with cars when we consider that in 1900 there were roughly 2,000 car makers producing approximately 10,000 vehicles – twenty years on, in 1920, the number of car makers shrunk massively to around only 200, while volumes soared to 2.5m cars. Moving on 10 years to the 1930s we saw that traditional horse and buggy makers were practically out of business. Leap forward 50 years to 1980s and under 50 car makers were in operation – producing over 30m vehicles.1

A Crypto Continuation?..

What can this signal to us about crypto currencies? With over 1,000 cryptocurrencies trading currently at a combined value of around US$600-800bn2, (representing approximately 1% of global money in circulation)1 and looking at the automobile industry – might lead us to predict a consolidation in crypto-coin providers whilst total valuations rocket. We might even predict cryptocurrencies will take the dominant position in transactions and store of value against currency competitors. The latter trend is certainly already showing a high likelihood given the market dynamics of the past year.

A Technological Evolution

Why would we make this comparison? – because automobiles, like bitcoin, changed the shape of the transport market completely based on solid arguments of offering a substantial improvement on the next best alternative. Both assets are underpinned by sustainable, technological evolution and tangible advantages. Bitcoin and other cryptocurrencies are likewise seeking to offer valuable improvements on the next best alternatives – improved control, security, transparency, processing speeds, decentralization of banking and more.

False Cries of Tulips…

While JP Morgan CEO, Jamie Dimon, touts the failings of bitcoin and its cryptocurrency contemporaries he, alongside a number of other prominent market commentators, have made comparisons between bitcoin and 17th century Dutch Tulip bubble3. However, what these parties have failed to consider is that Tulip mania was based solely on perception rather than value based arguments – making the comparison irrelevant at best.

What the Tech Boom Can Teach Us?..

The dot.com bubble offers up a similar comparison for us. Hundreds of new companies sprung up in the 1990s but for most of these start-ups the hardware, networks and software in place were ill-prepared for the long haul. We saw a stream of market consolidation and by 2010 the real stand out players begun to grab market share – with the FAAMGs leading at the helm.

Currencies – Perception over Reality?

Finally, a key factor suggesting that cryptocurrencies and here to stay, albeit in a different market structure than we see today, is that currencies create value based on perception. Perception creates value in currency markets – a perception of a store of value and exchanges that take place when there is consensus on that perceived store of value. Based on flaws that we see in current currency systems – such as artificial manipulation, central bank based inflation, fraud and political exposure – crypto currencies present a more effective alternative. This leads some to believe that cryptocurrencies show a solid underpinning for significant growth over the long haul.

*Sources:

  1. Macquarie Equities Research, Why history matters, Henry Ford, dot.com & bitcoins, 11th January 2018
  2. CoinMarketCap , 15th January 2018
  3. Bloomberg: “Jamie Dimon Slams Bitcoin as a ‘Fraud’, 12th September 2017,