"History doesn't repeat itself, but it often rhymes."
Multiple clients have asked our views on cryptocurrencies, such as Bitcoin, and related assets. That's understandable given all the press and the huge increase in valuations.
After consuming many webinars and articles and a dense book (see below), and speaking with a number of observers, I conclude that Mark Twain (or whoever uttered the quote above) had it right.
The current frenzy is all too similar to the dot-com bubble of the 1990s, which I lived through and remember well. Below, I will remind you what happened and draw parallels.
My point is not to throw cold water on digital currencies or assets. Nor will I dismiss blockchain or similar technologies which enable these assets to exist. Rather, the lesson of the dot-com bubble is that identifying that a technology may change the world is different from profiting from that conviction. More on that later. First, let's go back in time.
The internet as a tool for "regular people" made its debut in the mid 1990s, with the creation of web browsers that allowed users to access the modest, but rapidly expanding, world wide web.
Entrepreneurs pounced. Thousands of companies were launched to conduct business over the internet and to make the internet more accessible ... the digital equivalent of the gold miners and the sellers of picks and shovels, respectively.
Soon, investors followed.
From 1995 to the March 2000 peak, NASDAQ, the index most closely associated with the internet boom, rose 400%. Thousands of companies raised billions of dollars from venture capitalists and everyday investors through initial public offerings. Seemingly anyone could launch a company worth hundreds of millions of dollars, as long as you were planning to sell through the internet and had "dot-com" in your name. Actual sales or profits were not required. It was a heady time.
Then, in 2000, the dot-com bubble burst. Estimates peg the loss of value at over $2 trillion within less than a year. In fact, NASDAQ lost 1/3 of its value within a month of the March 2000 peak. From that peak, many companies lost over 90% of their value or did not survive: Pets.com, Boo.com, theGlobe.com, Excite.com, WorldCom, Global Crossing, Enron, Webvan.com, eToys.com, Go.com, Drkoop.com ... the list goes on and on.
We now have over 25 years of hindsight. In sum, we learned:
- The internet was indeed revolutionary.
- Identifying which companies would succeed thanks to the internet and which would fail was hard. There were many more losers than winners.
- Even if you did identify a winner, you needed a strong stomach and a long-term view to profit from your good call. Exhibit A is Amazon, below.
In 1997, Amazon -- perhaps the best-known winner of the internet's rise -- sold shares in an IPO at the equivalent of $2, compared to today's price of almost $3,000. Within 2 years, the stock was worth 50x the IPO price -- more than $100. But then a funny thing happened. Over the following two years, the stock collapsed 95%, to $6.
To profit as an early Amazon investor, you either had to time the market brilliantly or have a very long-term view and nerves of steel.
To profit from the dot-com bubble more broadly, you had to know Amazon would be a winner and WorldCom would not. (It went bankrupt.) I was there. I can assure you, it was far from obvious.
Fast forward to 2022. Trillions of dollars of wealth have been created for owners of Bitcoin, Ethereum, Tether, Binance Coin and hundreds of other crypto-currencies, and for people who created and sold non-fungible tokens, or NFTs, which are digital representations of real-world images. Heady times, just like in the 1990s.
Blockchain appears to be revolutionary -- just like the internet. But how can an investor today profit from that? Which digital currencies should you buy? Or should you buy a fund that owns a currency? Maybe buy NFTs? Should you instead bet that a payment company like PayPal will benefit? Sometimes it is adjacent players who thrive, the way that Apple has succeeded wildly by turning the mobile phone into a mobile internet device.
It may be a decade or more before we know the answer.
And it goes without saying (but I'll say it anyway): if you do take the leap of faith, keep it a small fraction of your investment portfolio. If you can, diversify within those bets. Try to take a very long-term view. And buckle up.