Over several decades of discussing markets with clients, I’ve noticed one or two personality traits that generally make for a successful investor. The first is the confidence to reject any idea they don’t understand or feel comfortable with, and the second is a willingness to forego the initial upside of a trade by allowing another investor to “cross the road first”.
Why take the risk investing in an ostensibly transformational idea when it could so easily fail? It is true that first time movers are sometimes successful and some early stage investors richly rewarded, but for every idea that made it, the road is scattered with the debris of entrepreneurs – and their investors – that failed.
History is replete with examples of magnificent misses and burst bubbles, from the railroad boom in 18th century America, to 1980s real estate in London’s Canary Wharf, and the dot-com mania in the 1990s. And while the investment thesis behind each strategy was no doubt credible, oftentimes the timing was wrong. Typically, after the debt was written down, subsequent rounds of funding and subsequent technological upgrades were usually more successful.
This phenomenon, which I label the “First Time Second” rule, will apply to the cryptocurrency market. In other words, while I’m convinced the initial bubble will eventually burst, I’m also pretty certain its second incarnation – utilising more effectively its underlying rationale – will succeed.
Without doubt, there are some positives associated with cryptocurrencies. For example, the idea of replacing fiat currencies, disintermediating central banks, and democratising the medium of exchange has a certain anti-authoritarian appeal, particularly to millennials. I also like the idea of cryptocurrencies being an alternative to gold as store of value in challenging times.