A carpenter started the gold rush in California in 1848. At the sawmill at Sutter’s Mill he was building, he saw something glint in the water, which turned out to be a pea-sized grain of gold. A nice story about how some gold diggers eventually became very rich, but most of them were left in poverty, almost nothing, or even dead. Winners were people like Levi Strauss and Leland Stanford, who sold supplies to legions of prospectors. Tools such as picks, shovels, shallow pans, sieves and glass bottles to collect the gold dust. Another winner was the state of California, which saw its population increase twentyfold and became an independent state two years later on September 9, 1850.
Nothing major has ever been developed or built without irrational exuberance. It is not surprising that we saw such abundance again with the arrival of crypto. Investors are opening their wallets and enthusiastically funding this new technology in many places. But after each hype and the subsequent loss of misinvested capital, in the meantime so much has been invested in physical infrastructure and solutions that seemed to work that the technology could continue to develop on that basis. And in the end could offer us all the good it had in it.
Right now the crypto bubble is bursting before our eyes. At the beginning of this year, the stable coin fell. Subsequently, trading in non-fungible tokens (NFTs) shrunk, and now the drama of the collapse of the FTX exchange is unraveling. No different than other speculative fads ended: a trail of corporate wreckage and unhappy investors. Small investors had already fled, their money or savings already decimated. The big venture capitalists are now also taking their losses and looking forward to other promising projects. The pushy crypto ambassadors will drift away and regulators will eventually issue their overdue regulations after the damage is done and the calf drowns.
Bubble without intrinsic value
When the tulip hype broke, tulips remained just beautiful flowers. When railway companies went bankrupt, the railway lines were left alone. The Internet hype left us with an overwhelming amount of modern fiber optic cable to use (again). Gold remains – even if its value decreases – still tangible gold, but a cryptocurrency disappears into virtual nothingness. Many – certainly in terms of energy – expensively mined crypto-coins have evaporated. As a virtual commodity, crypto promised to be a way to store and grow value. With applications from easy, cross-border payments to owning newly created forms of digital art. But it turned out to be less simple and convenient than it first appeared. A virtual raw material or product evaporates more easily than it can be made.
In our capitalist world, entrepreneurship is: ‘creative destruction’. After all, entrepreneurs decide to invest in potentially valuable services and take the risk of these unproven ideas. Without them, new companies would not arise. But untested ideas sometimes also create an obvious expectation, such as the existence of an unlimited market for digital assets. We must learn from each new technique and understand what the actual intrinsic value in itself is and what the actual market for that invention or innovation is. Unfortunately, there is always prejudice from seers and prophets who let too much money flow irresponsibly to too few good ideas for their own benefit.
With the arrival of Bitcoin in 2009, it became possible for the first time worldwide to store ‘value’ digitally and immutably via the Internet using a clear standard protocol – consensus in the creation, transfer and linking of blocks of data. The old-fashioned decentralized internet could easily be used for this, because the added crypto-technology – finally! – adds privacy and governance to the decentralized open internet traffic. You could argue that cryptography solves the previous omission of the old internet. And therefore the new crypto world is also safe and meaningful for users if it is decentralized. And in principle, central banks are not necessary, in most ‘old-fashioned’ exchange offices.
However, as ISPs began to offer core services to the Internet, comparable commercial banks quickly emerged in the crypto world. Not so much out of technical necessity, but out of the same commercial – central – motives as back then with the internet. Because it was not ‘just’ about communication and data, but about currency, the commercial interest was even greater to be able to quickly earn ‘own money’. After Bitcoin’s inception in 2009, one cryptocurrency appeared after another, so that we currently have more than 4000 different cryptocurrencies. Compared to the ‘only’ 180 official currencies recognized by the UN and used in 195 countries, this is an incredible number. The unbridled growth of cryptocurrencies – twenty times more than there are national currencies – had to burst.
After the deception, everyone is licking their wounds and looking more cautiously at the once beautiful promise of blockchain, Web3 and the metaverse. For many professional money managers, it has now been debunked that crypto is a safe haven in times of inflation. Or is a great diversification for investment portfolios. The losses are high and the market structure remains too risky for them without regulation for now. Delicacies like bitcoin and ethereum have plummeted as inflation has skyrocketed. Hedge funds and traders promised a way to store value. But cryptocurrencies themselves don’t, only the leverage structures around it did, and this pyramid fest also seems to be over – certainly for the time being.
People now also look differently at ‘crypto mines’, data centers in remote areas with very low energy prices, where crypto coins are ‘mined’ day in and day out. Why still ‘mine’ cryptocurrencies for trading and speculation that have become unsafe? The upside for now is that the cryptocurrency crash had no impact on the broader economy. The consequences for private investors are serious, but the economy as a whole is not yet put at systemic risk. Lawmakers have long crafted rules for the ‘safe’ use of digital currencies for consumers and businesses. It gives people hope…
Carpenter sparked the California Gold Rush of 1848, where some prospectors became wealthy but most found next to nothing. One in twelve died of hunger, disease or violence. The Indians suffered the most. Before 1848 there were 150,000 Indians in California, in 1870 there were only 30,000, massacred to drive them off their valuable land. A winner of the gold rush was the United States. Before 1848, fewer than 15,000 Americans lived in California. Just seven years later, in 1855, more than 300,000 immigrants had arrived in what would become the most populous state in the United States.
Other winners included the likes of Leland Stanford and Levi Strauss, who opened stores and sold mining supplies to legions of prospectors. Solid tools like picks, shovels, shallow pans, sieves and glass bottles to collect the gold dust. In addition, there are hammers, nails, saws, axes and planes to build and maintain the wooden cradles, locks and mines. Tools came from New England foundries and the tool shops of Ames and Simeon North.
Put on the map
In recent years, the phenomenon of blockchain has really been put on the map. Governments have also come to realize that in addition to advantages, this technique also has disadvantages that require regulation. Even DNB has blockchain as a positive technique on its website because it makes cheating difficult, for example because it makes it impossible to use the same coin twice. In Europe, the Internet gave impetus to privacy laws such as GDPR. The virtual world of crypto is now driving new eIDAS legislation for digital identities, virtual services and the use of algorithms. When the calf has drowned, the well is filled up.
However, Leland Stanford’s and Levi Strauss’ in the new Web3 world continue quietly. It draws attention to the fact that, in addition to a more ‘clear set of rules’, good and reliable tools must contribute to the safety and quality of new services in this new virtual world. In order to use blockchain technology widely in business, professional, secure and enterprise-worthy solutions are needed. We no longer know the companies from the Wild West period of the Internet, but we know the successors. It will be no different for the current crypto hype. History never repeats itself, but always rhymes…
By: Hans Timmerman (photo)