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Health, Wealth, and Happiness

March 24, 2023

"In investing, what is comfortable is rarely profitable."

— Robert Arnott

In today's issue: Are we in a crypto bubble? Has the bubble passed, or is it still to come?

In today's newsletter, you'll learn why bubbles can be good for society by funding enormous projects that benefit us all.

You'll see how the current/past/future crypto bubble is building new payment rails, just like the bubbles in railroad stocks built physical rails.

You'll also learn how governments can manage bubbles by providing subsidies and support... not by suing.

If you have any doubts about what we're building during this exciting time in history, read on.

Must Read

Today's most important story for crypto investors.

Crypto Community Fired Up Over SEC Action Against Coinbase(Decrypt)

Speaking of suing, top U.S. crypto exchange Coinbase has become the second U.S. crypto firm to receive a Wells notice from the SEC in the span of several weeks.

The notice, which informs of potential legal action against the exchange, follows on the heels of a similar notice delivered to Paxos at the beginning of March that caused them to halt minting and support for the BUSD stablecoin.

The news ignited crypto fans on Twitter, with many decrying not only the SEC, but the entire Biden administration. They claim the U.S. government and regulators are trying to shut down the use of crypto in America.

Quite the slow response from the SEC. ViaTwitter.

To many, the SEC's actions seem late. The SEC approved Coinbase's public listing in 2021, and the company's offered staking products for many years. Also, Coinbase says it met with the SEC over 30 times in the past nine months to build a path towards registration of crypto assets. During that time, the company claims the SEC provided almost no feedback or guidance.

Investor takeaway: While reports of support for crypto continue to emerge from Congress, the same can't be said for the White House and the SEC. The White House's recent Annual Economic Report was gloomy on crypto (more on this next Tuesday), and the SEC has been increasing its actions against the industry.

Not everyone is discouraged, however. Tech investor Cathie Wood reportedly sold $27 million of TSLA stock to load up on COIN (sell the overvalued, buy the undervalued).

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Next Tuesday: President Biden's Stance on Crypto

The President's Economic Report was just released, and there's an entire chapter devoted to crypto.

It's dense reading, but for those who are time- and attention-challenged, our analyst Steve Walters will give you the key takeaways in next Tuesday's Premium newsletter... as well as what it all means for the industry.

Premium members get our analyst summaries every Tuesday and our trending tokens every Thursday delivered straight to their inboxes.

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Financial Bubbles: The Secret to Building a Better Society

by John Hargrave

In the 1840s, investors in the UK went crazy for railroad stocks.

The Industrial Revolution was churning away, creating a need to transport new goods, products, and heavy machinery. Railroads were the answer.

A flurry of new companies acquired land and promised to build chunks of railway to connect the continent. They would fund these massive projects by selling stock to everyday investors.

Fueled by a young newspaper industry, the British public began to pour money into railroad stocks. The UK government did little to stop the speculation. In fact, it approved nearly all the applications by these companies, even the sketchiest.

When the Bank of England raised interest rates in 1945, the bubble popped. In some cases, it wiped out investors' life savings.

And so ends the story of “British Railway Mania” in most history books, except it leaves out one critical detail... The railroads eventually got built.

Bubbles built this.

Why Manias May Be Quite Sane

Most bubbles are described by historians as “manias” or “frenzies,” just as bank runs are called “panics” or “contagions.” The implication is that these people went nuts.

I have a different point of view. Bubbles are unspoken, unconscious agreements to fund large projects to better connect society.

In the case of the UK railroad bubble, while many of the proposed railways were impractical, there were a good number of useful routes that were publicly funded and built. After the bubble burst, these routes were acquired by the larger railways (at a deep discount) and consolidated into a connected whole.

A similar railroad bubble formed in the US about 30 years later, but this time, the government took a more hands-on approach, promoting and subsidizing much of the railway development. The result was more railway companies became profitable more quickly, and more shareholders were rewarded.

In both cases, we can see the projects (connecting entire countries by railroad) were too large and ambitious for the governments of the day. Instead, private enterprise, fueled by money from individual investors, stepped in to build these massive infrastructure projects.

There can be little doubt that railroads were huge social positives. They made it easier to transport people and products. They put long-distance travel within reach of everyone. They drove progress and innovation, making the Industrial Revolution even more revolutionary.

If the governments couldn’t or wouldn’t build them quickly enough, the public stepped in.

Note that this agreement was unspoken and unconscious. On the surface, it was driven by FOMO. Everyone’s investing in railroad stocks and getting rich, so why shouldn’t I?

On the level of our collective consciousness (our “hive mind”) however, we share certain norms and values to govern everyday life. One of these values is the need for humans to connect with other humans.

For proof, just look at the other financial bubbles that have arisen through the last several hundred years:

East India and South Seas bubble: Funded companies to connect trade routes from Europe to the world;
Canal bubble: Funded canals to connect waterways throughout England and Wales in the early 1800s;
Telecom bubble: Funded massive fiber optic networks to connect households in America and elsewhere;
Dot-com bubble: Funded new internet ventures to connect businesses and consumers to the Web;

And of course:

Crypto bubble: Funded new Web3 companies to connect the world to a digital financial system.

These are all connecting technologies. They’re so big (and today, so global) that a single government can’t fund them.

So we agree, as a society, to fund them ourselves. This is an unspoken and unconscious agreement.

Later, historians call them speculative crazes or irrational manias, but they're actually quite rational.

We’re building infrastructure that benefits us all.

The Benefits of Bubbles

Why do we come up with these unspoken, unconscious agreements, then pour our life savings into them? Greed plays a part, leading to financial ruin for many people. However, bubbles also bring important and lasting benefits to society.

Innovation and progress: Each of these bubbles ushered in new eras of scientific and technical innovation. When we connect people, we’re also connecting their brains. Ideas and information flow more freely. Just as railroads accelerated the Industrial Revolution, these bubbles accelerate human progress.

Wealth creation and redistribution: When ordinary investors invest in these large-scale projects, they share the risk, sometimes losing it all, though they also share in the reward, which can redistribute wealth from the rich to the not so rich. The housing bubble of the 2000s, for example, led to a significant increase in home values, giving middle-class homeowners more money to invest elsewhere.

Job creation and economic growth: I got my first job during the dot-com boom, and I remember well the seemingly unlimited opportunities and wealth creation (it’s the first chapter of my book). Even after the bubble bursts, there is typically a new segment of the workforce that is trained and ready to work.

Societal benefits: Railways and canals brought improved infrastructure. The Internet brought better access to information and education. All these lead to higher living standards. If managed properly, bubbles can help build massive social good.

I believe every bubble brings at least some of these benefits. Even the Dutch Tulip Bubble turned Holland into the “Flower Shop of the World.”

Bubbles built this.

How To Invest During a Crypto Bubble

You can only see a bubble in hindsight. For that reason, it’s hard to say whether crypto is in a bubble, already went through a bubble, or waiting for a bubble to come.

It doesn't matter. A crypto bubble should actually give us cause for hope.

If bubbles are unspoken, unconscious agreements to build valuable projects for society, then by definition, a crypto bubble would be building a new financial system that connects the world.

That’s what crypto investors have been saying for years of course, but viewed in the context of history, we can now say it with confidence.

Another huge lesson is that bubbles have better outcomes when they're well-managed by governments. Remember the laissez-faire attitude of the UK government toward railway stocks was a disaster for investors, while the US government’s management and promotion of them was a boon for investors.

The lesson for us today could not be more clear. As legislators sit on their hands in regard to this new financial system and try to apply old laws to new technologies, it’s worse than doing nothing. Bubbles must be actively managed with good laws and good regulation.

As crypto investors, nothing changes in our approach. No matter where we are in the bubble, we patiently invest a little bit each month into handfuls of quality digital assets as tiny parts of well-diversified portfolios. We also think long-term (five or more years).

There’s a reason we often refer to this new financial system as “payment rails.” We’re literally building today’s version of the railroad. One that transports value, not people. It’s a social good that will benefit everyone everywhere in the world.

Full steam ahead.

Health, wealth, and happiness,

John Hargrave

Publisher, Bitcoin Market Journal

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