Cryptocurrency mania: what’s your edge?
Crypto is an increasingly dominant topic of conversation among investors,
but is it a genuine asset class or the latest in a long list of financial manias?
Dan Kemp from Morningstar discusses…
Cryptocurrency is an increasingly dominant topic of conversation around the BBQ (or these days, on social media) as investors try to understand whether they are a genuine asset class or simply the latest in a long list of financial manias.
As long-term, valuation-driven investors who take the stewardship of our investors’ capital seriously, it is tempting to ignore the convulsions occurring in one corner of the capital markets and focus our attention and resources on assets with more predictable outcomes. However, experience has taught us that excess in one part of the capital markets can metastasize, impacting all investors and therefore cannot be ignored.
When tackling these situations, it is often useful to look at similar episodes in history in an attempt to learn lessons that will benefit our decisions in the present. It is therefore with perfect timing that William Bernstein has published his new book on “The Delusions of Crowds”. As a psychologist and investor, Bernstein is interested in the way we make investment decisions and this book does a wonderful job of recounting the more serious religious and financial manias over the past 500 years.
Characteristics of market mania
Against this backdrop, the current enthusiasm for cryptocurrencies and related technology companies appears rather tame. Yet it bears many of the hallmarks of these historical episodes:
- the advent of a new technology
- the support of low interest rates
- a rapid increase in supply (according to CoinMarketCap, the total value of cryptocurrency
reached a recent peak of more than $2.2 trillion, up from $243 billion a year ago) - a disregard for traditional asset valuation principle; and
- a separation of society into those who “get it” (recall the “laser-eyes” social media profiles) and those that don’t, with the latter resulting in the creation of echo chambers and self-reinforcing loops of belief.
Given these similarities, historic manias can therefore provide several important lessons for investors in the current environment that are equally relevant to those on the “inside” or “outside”…
Continue reading Morningstar‘s article… here.