When James W. Marshall discovered gold in Coloma, California, little did he know that a fever of greed would pass through the nation, unleashing an excitement that would re-shape the U.S. landscape and rattle the population. If history has proven anything, it’s that the smallest inkling of wealth can profoundly impact the world economy.
Like the 19th century gold rush that brought roughly 300,000 people to California, bitcoin is moving a whole lot of money without much thought to the consequences. Maybe it’s some visionary minds moving fast or a severe case of FOMO, but either way, many are rolling the dice in the hope that they won’t be left on the sidelines.
As we stand on the precipice of the bitcoin revolution, the question remains…what lessons have we learned from history?
What is Bitcoin?
Bitcoin is a global payment system that operates without any bank or institutional interference. It works like any currency where it can be earned or acquired and exchanged for goods, services or other currencies. Transactions take place between users and is protected by cryptography, hence the name cryptocurrency. A public digital ledger called a blockchain records all the transactions, removing the need for a central bank. Since the inception of Bitcoin, there are over 1384 cryptocurrencies available on the Internet and that number continues to grow. To put this number in perspective, there are only 180 global currencies across the globe.
The Failure of Speculation
It’s common to be blinded by something new, exciting and potentially prosperous. A quick scan of any newsfeed or newswire will reveal all these success stories proclaiming bitcoin as a path to riches. Rarely do people lament the crazy exchange rate or having lost their investment. Even when the value of bitcoin dropped 20% in late December, it garnered little attention.
The 1849 gold rush is a prime example of how the prospect of wealth can backfire. While many got rich off the deep gold deposits, an even larger group invested everything only to receive nothing. Mining companies went bankrupt, people were backstabbed, workers were left bloodied and communities of people were pushed off their land. All for the promise of something that didn’t contain the value that people had assumed.
This isn’t to say that bitcoin won’t eventually become a globally accepted currency, but the rush needs to be tempered. In fact, with something of this magnitude it should be a slow and thoughtful build.
The Early Fallout
Bitcoin is not without its influential detractors. While many believe digital payment and currency are necessary, others in the economic and financial community see bitcoin as being inflated to increase the wealth of a small group of people. Former chief economist of the World Bank, Joseph Stigliz, believes bitcoin should be made illegal due to its lack of oversight and regulation. Warren Buffett even added ‘I can say almost with certainty that they will come to a bad ending’.
Whether it’s the stock market or tech, every bubble bursts. When value is speculative, it can balloon a market to unsustainable levels. Prices become impossible to justify and more money gets invested by people who are aggressively looking to make a fortune. There’s also the possibility that the U.S. Government intervenes, which could kill bitcoin’s perceived value and render it an empty investment.
With speculation, there will undoubtedly be losers. While some savvy investors will find prosperity, most need to proceed with the utmost caution.
A market correction is creeping up.
It’s only a matter of time.