[Note: This item comes from friend David Rosenthal. DLH]
Crypto ICOs as the new railway bonds
By Izabella Kaminska
May 8 2017
It was now that there began the systematic practice of stagging — applying heavily for the shares in new companies with a view to selling them immediately at a premium — and Punch that year had plenty of fun satirising ‘Stag-hunting in Capel Court”.
That’s from David Kynaston’s City of London: The History.
It refers to the railway mania of the 1840s, an investment bubble that collapsed in 1846 after a corn drought forced the Bank of England to raise rates. The hike put an abrupt end to the preceding period of excessively cheap money, which eventually meant more than a third of the railways the government authorised were never built. According to Wikipedia:
…the companies either collapsed due to poor financial planning, were bought out by larger competitors before they could build their line, or turned out to be fraudulent enterprises to channel investors’ money into other businesses.
A related factoid from Kynaston is that by the peak of the frenzy hardly any resources were needed to set up a railway firm venture: “A solicitor or two, a civil engineer, a Parliamentary agent, possibly a contractor, a map of England, a pair of compasses, a pencil, and a ruler, were all that were requisite to commence the formation of a railway company.”
The lawyers and contractors servicing the needs of the boom were in the end the ones to really profit from the mania.
That was then, but what about now?
Well, now we have the latest fad that has gripped the cryptocurrency community: the near-exponential rise of the initial coin offering, informally known as the “ICO”.
Judging by this reporter’s inbox, ICOs are now propagating at an unprecedented rate, fuelled in part by the cheapness of setting up such systems and in part by the growing abundance of unmaterialised paper profits in the sector. To the casual observer’s eye, all that’s needed to make an ICO investment “a go” is a website, a white paper, a PR agent, and possibly a coder. The reward? Potentially unlimited access to a pool of similarly contrived liquidity already circulating through informal dark economy. The fact much of this funding — due to the growing complexity of cashing it into the official realm — lies trapped within a closed informal network does little to quash the appeal of the investment case.
The rhetoric is also uncannily similar. Crypto offerings are not investment schemes based on vapourware: they’re opportunities to invest in the digital rails of the new decentralised financial system.
Admittedly there is one notable difference between now and then: the glaring absence of staggers (also known as flippers). For now at least the majority of ICO investors tend to be — or are certainly being encouraged to be — buy-and-hold-forever investors, content with mark-to-market valuations for their riches. Whether the smart money is thinking the same is yet to be determined.
What the dynamic undoubtedly does echo is what Keynes reflected upon in his 1919 opus Economic Consequences of the Peace in connection to the sort of investor temperament that drove the foundations of the industrial economy: