By Jason Zweig | Dec. 24, 2017 4:17 p.m. ET
Image credit: Martin Johnson Heade, “Florida Sunrise” (ca. 1890), The White House, via Google Art Project / Wikimedia Commons
Here’s a guest post on Medium I wrote for a roundtable discussion on NewsPicks, the business-news curation service.
Dec. 21, 2017
Earlier this month, Vanguard Group, which manages nearly $5 trillion, announced that it will use blockchain technology to improve the delivery of market prices for its index funds and other assets.
To me, this epitomizes both the promise and peril of buying bitcoin.
Blockchain technology is being adopted rapidly by major companies and seems likely to make many other ways of organizing, delivering and storing information obsolete. The potential market is immense, and digital currency is all but certain to benefit.
But which digital currency? It’s far from clear that bitcoin will prevail as the currency of choice across blockchain networks. The technology of blockchain can be adopted by almost anyone and adapted to almost any purpose. What would happen to bitcoin, and other existing digital currencies, if the Federal Reserve launched FedCoin?
Investors often blur the vital distinction between what is obvious and what is inevitable. It’s obvious that blockchain and digital currency have a bright future, but that doesn’t mean that it’s inevitable that any particular cryptocurrency will dominate.
Think back to 1999, when it was obvious that the internet would change the world. That wasn’t just obvious; it turned out to be an understatement. But it wasn’t inevitable that any particular stock tied to the internet would make you rich. In fact, most of the earliest internet companies blazed brightly for a few months or a couple of years, then fizzled. You Google all day long; you don’t Lycos or AltaVista or WebCrawler or Excite (and probably don’t even Yahoo!). Those were the companies with “first-mover advantage.” Instead of paving the way for their own success, however, they ended up paving the way for Google’s.
“The early leaders in a dynamic industry almost never turn out to be the victors in the end,” I wrote in 1999. Centuries of financial history suggest that “this is not some antiquated rule of how companies used to behave in the days when men wore powdered wigs and wooden dentures; it’s more like a universal law that governs how companies evolve in any industry, at any time. Nor does the fact that everything moves faster on the internet nullify this law; actually, the high velocity…is likely to enforce this law of corporate destruction even faster and more forcefully.”
First movers, or pioneering companies and technologies, often have a disadvantage: Their early success proves the practicality and importance of what they’re doing, which attracts competitors who ultimately supersede them.
By the same token, the early leaders in cryptocurrency may well be swept away by new rivals. I could be wrong about that, but history suggests otherwise. And if all you know about bitcoin is that you want to own it because it’s been going up, you shouldn’t be buying it at all.
For further reading:
Jason Zweig, Your Money and Your Brain, especially Chapter Four, “Prediction”