Lessons from 19th Century Cryptos

Every year, when schoolies week rolls around, you know exactly what’s going to happen.

Drunken escapades. Deafening levels of yahooing and horn beeping from riders on motorised scooters. High fives and fist pumps. An air of invincibility that comes with youthful bravado.

Each new batch of schoolies thinks they are unique. In their minds, no one has ever done these sorts of antics before.

But they have. Boringly so.

Every year, for one week, they live in a make-believe bubble…then it’s back to the real world.

Schoolies week reminds me a lot of market action.

And speaking of market action, someone who is an expert on the market’s pricing trends is my fellow editor Murray Dawes.

Murray’s proprietary trading technique has delivered gains as much as 184% on certain stocks.

If you’re interested in learning more, Murray is holding a free workshop later this week, where he’ll reveal his trading techniques. To learn more, go here.

Repetitive patterns of behaviour

Some patterns of behaviour — like schoolies — are repeated with annual monotony.

Others are less frequent. But they all follow their own predictable path.

In the 1630s, the Dutch pioneered the modern-day asset bubble. Every bubble since then has been a copycat of Tulip Mania.

Sane and rational people change into insane and irrational beings, only to return to a sadder, poorer, and saner version of their earlier self.

Another era and another generation comes along believing it’s the groundbreaker. Convinced they’re venturing where others have never gone. The new paradigm syndrome.

Just as we know how a week-long drinking binge by teenagers on the Gold Coast will play out, we know how these episodes of invincibility and self-assuredness in ‘it’s different this time’ also end…in a word…badly.

And here we are in (yet) another bubble…participants delirious with delusion over the next big thing.

The crypto cult is pumped up about being at the cutting edge of history. This is the avant-garde of a new monetary system…one that’ll revolutionise the world and wrest control from the evil money printers.

Blockchain technology is widely admired — even by me — as a very clever bit of computer code.

Plenty of clever people are betting it’ll play a central role in the rapidly approaching evolution of digital currency. Maybe. Maybe not.

From what I can gather, the hype around crypto comes from this notion of being change agents.

We ain’t going to take it no more. Time to seize control…power to the people and all that stuff.

While people in enough numbers buy into this delusion, then the vast majority of (what are essentially worthless) cryptos will be afforded a value.

My rather boring, negative and old-school suggestion is, lovers of crypto would be better served reading history rather than Elon Musk’s tweets and the self-serving media comments of the crypto puppeteers.

Decentralised currency is not a new concept. It was in the US of A over 200 years ago.

These bank notes are a sample of what 19th century cryptos looked like…


Source: MHS

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Individually issued currency by…the Harvard Bank, the Howard Banking Co, Ville de Ville and thousands more who had access to a graphic artist and printing press.

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Not all that different really to someone with programming skills and a computer.

In his book Bank Notes and Shinplasters The Rage for Paper Money in the Early Republic, Joshua R Greenberg looks at the US financial system prior to the introduction of the US dollar (backed by gold and the US government).

If, like me, you didn’t know the definition of ‘shinplaster’, this is from the Merriam-Webster dictionary:

A piece of privately issued paper currency, especially: one poorly secured and depreciated in value.’

Here’s an extract from the book’s introduction (emphasis added):

Before the Civil War, greenbacks and a national bank network established a uniform federal currency in the United States, the proliferation of loosely regulated banks saturated the early American republic with upwards of 10,000 unique and legal bank notes. This number does not even include the plethora of counterfeit bills and the countless shinplasters of questionable legality issued by unregulated merchants, firms, and municipalities. Adding to the chaos was the idiosyncratic method for negotiating their value…

Proliferation is what happens when there are no rules and easy money is on offer.

In simple terms, these schemes all work the same way…the dumb transfer their money to the smart.

Sometimes you have to marvel at history’s capacity to rhyme.

Look at the latest crypto count on CoinMarket…upwards of 10,000 unique cryptos.

I know, it’s just a coincidence…but it is an oh-so delicious one.

Coin Market

Source: CoinMarket

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Amongst the 10,070 cryptos are things called stablecoins.

Whenever I see the word ‘stable’ aligned with an investment product, alarm bells start ringing.

Little sidebar here.

In the early 1990s, there was a product called ‘Capital Stable’. At first blush you’d think the product would be true to label. Wrong. In 1994, there was a bond-market rout. These funds proved to be anything but stable. From memory they lost 25% in value.

But that was then, obviously we’ve learnt a lot since those days of misleading marketing.

I jest.

The biggest stablecoin of all, at US$60 billion capitalisation, is Tether.

Before we take a look at Tether — which was so named because it’s (supposedly) tethered to the US dollar — here’s what Fed official, Governor Lael Brainard, was saying (just over a week ago) on 24 May 2021 about stablecoins (emphasis added):

some technology platforms are developing stablecoins for use in payments networks. A stablecoin is a type of digital asset whose value is tied in some way to traditional stores of value, such as government-issued, or fiat, currencies or gold. Stablecoins vary widely in the assets they are linked to, the ability of users to redeem the stablecoin claims for the reference assets, whether they allow unhosted wallets, and the extent to which a central issuer is liable for making good on redemption rights.

Unlike central bank fiat currencies, stablecoins do not have legal tender status. Depending on underlying arrangements, some may expose consumers and businesses to risk. If widely adopted, stablecoins could serve as the basis of an alternative payments system oriented around new private forms of money. Given the network externalities associated with achieving scale in payments, there is a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses.

A predominance of private monies may introduce consumer protection and financial stability risks because of their potential volatility and the risk of run-like behavior. Indeed, the period in the nineteenth century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payments system. It led to the need for a uniform form of money backed by the national government.

Pretty stern words from a high-ranking Fed official. Not what you’d exactly call a ringing endorsement for stablecoins.

Call me crazy, but I’m guessing the central bankers are in no mood to go back to nineteenth century active competition for the currency they now monopolise.

Is Governor Lael Brainard just scaremongering because her fiat monopoly is under genuine threat OR does she make a valid point about financial stability risks because of their potential volatility and the risk of run-like behavior?

The answer to that question is in Part Two tomorrow.

We’ll look at how tethered Tether really is (that’s a mouthful), and the major flaw I think the crypto crowd is making.

Until tomorrow.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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