Cryptocurrency & Railway Mania’s
I was recently reading about the Railway Mania of the mid-1800s in Great Britain and was struck by the similarities between that time period and the expansion of cryptocurrencies (more broadly blockchain technology), over the past 5 years. During that time, thousands of tracks were laid as entrepreneurs tried to take advantage of an entirely new technology that promised to change the world. And while it did in fact change the world – there were big winners and big losers along the way.
While there are plenty of differences between the two periods, I would like to discuss six of their similarities below.
Starts with something promising
Bitcoin and other cryptocurrencies are designed to be a decentralized currency, uninhibited by global monetary policy and potential fraud. The use applications for this are endless and could very well be useful in the future.
The same was true for railway lines that significantly cut transportation time as tracks were laid between major cities. A trip from London to Leeds would have taken about 5 days before the railway, and only a few hours after.
Not all of them will succeed but all of their prices are up.
There are now thousands of cryptocurrencies, many of which have come into existence in the past few years. Many of these smaller cryptocurrencies will likely serve no purpose other than short-term speculation. There is simply no way for all of them to maintain a market share in the future.
During the railway mania, multiple railways were laid between the same cities even though everyone knew only one would survive. Edward Chancellor writes in Devil Take the Hindmost that “new railways were proposed in the uninhabited wilderness” and served no economic purpose.
The Economist wrote that “…we see 9 or 10 proposals for nearly the same line, all [selling at high prices] when it is well known that only one CAN succeed…”
Stories of people investing everything they have
In February 2020, a man named Glauber Contessoto decided to invest his life savings in a small unknown cryptocurrency, which turned into a fortune nearly a year later.2
Chancellor writes that in the middle of the Railway Mania, “two brothers, who together [bought] Euro 37,500 worth of [railway] shares, were discovered to be the sons of charwoman living in a garret off a guinea a week.”
There is little to go around, which creates scarcity
One of the biggest arguments for the value of Bitcoin and other cryptocurrencies is that there is limited quantity, similar to gold and other precious metals. This can create a store of value because it can’t be produced endlessly.
During the Railway Mania, it was common for the owners of these railway lines to retain most of the stock so that when the remaining smaller amounts became available to the public, it created instant scarcity, driving up the prices.
It can go on for a long time
The first railroad in England was built in 1825, railways picked up enthusiasm in the early 1830s, heavy speculation began later that decade and through 1845, before panic selling finally started settling in. Well after many called it a bubble, it continued on for over a decade.
Many market pundits and very well-known finance executives have been talking about a “crypto crash” for several years now, which up to this point has not happened. Your guess might be just as good as theirs if history is any guide.
Some survive
As we all know, railways stuck around and became an integral part of the global economy. Despite all the transportation changes we have experienced since their invention, many railways continue to thrive.
I don’t know what the future of cryptocurrencies will be, but there is a compelling use case for the technology behind them – otherwise known as blockchain - and I think it’s reasonable to expect some to be around for years to come.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.
1 - Chancellor, Edward. Devil Take the Hindmost: a History of Financial Speculation. Plume, 2005.
2 - Roose, Kevin. “He's a Dogecoin Millionaire. And He's Not Selling.” The New York Times, The New York Times, 14 May 2021, www.nytimes.com/2021/05/14/technology/hes-a-dogecoin-millionaire-and-hes-not-selling.html.