Last year was the year of the unexpected. From shocking political outcomes to the Atlanta Falcons blowing a 28-3 Super Bowl lead, the feeling that anything could happen in 2017 was pervasive. This was no different in the world of finance.
While the stock market had a banner year — with the S&P 500 posting roughly a 16 percent gain — it is a drop in the bucket when compared to the wealth created by bitcoin and its cryptocurrency compatriots.
{mosads}According to Coin Market Cap, bitcoin has skyrocketed from around $1,000 on Jan, 1 of 2017, to just over $19,800 at its recent December peak. That’s close to a 2,000 percent increase, or 125 times better than the S&P’s performance. With numbers like that, calling 2017 the year of bitcoin’s gold rush makes for an apt comparison — but let’s be honest about what that means for the future.
The historical reality of the Gold Rush of 1848 was quite different from the romanticized metaphor that most of us use today. When many reference the Gold Rush, they are hoping to invoke images of immense treasure waiting to be discovered, but there was much more to it than just that.
Fraud, the Wild West and fool’s gold
The Wild West earned its name for a reason. In those areas invaded by the famous 49ers in their frenzied search for gold, fraud and criminality ran rampant. This is no different in the world of cryptocurrency today, but not in the way you might think.
Bitcoin to many — and cryptocurrency writ large — is associated with the darker recesses of the internet. For years, bitcoin was largely thought of as the currency of thieves, drug dealers and dark web criminals, mostly due to its association with Silk Road — the infamous online black market. But the fraud alive in crypto markets today is one of a different, much more sophisticated variety.
The allure of astronomically high returns in so-called “altcoins” — smaller cryptocurrency “alternatives” to bitcoin — has led to immense wealth destruction as many initial coin offerings (ICOs) for new altcoins have resulted in hacks, or turned out to be Ponzi schemes, leading to billions of dollars in losses.
On rare occasions, an ICO may end up becoming a billion-dollar idea, but many will attract millions of dollars of speculative capital, and, in the end, turn out to be nothing more than fool’s gold.
Long-term value creation and innovation
When most think of the Gold Rush, few remember what was left once the mines went quiet. California held its Constitutional Convention, eventually becoming a state in 1850. Transportation routes by steamship and railway expanded faster than ever, and technological advancements like the compressed air drill resulted in tremendous positive externalities, all the result of the search for gold.
This is the real long-term value of the Gold Rush, not the thousands of pounds of shiny rocks, but the flourishing of communities like San Francisco.
This too will be the story of bitcoin’s gold rush year. Years from now it is highly unlikely that we will remember the price of bitcoin in 2017, but we may remember the blistering speed of new tech solutions based on systems similar to Bitcoin’s new Lighting Network.
We may not remember what the best performing altcoins of 2017 were, but we may remember how 2017 marked the beginning of big banks looking to take advantage of the speed and reliability of blockchain, as evidenced by the data quality control project launched by Barclays, Credit Suisse, and UBS on Ethereum — one of bitcoin’s main competitors.
The list of exciting technical advancements that will likely blossom as a result of bitcoin’s gold rush is extensive, but it is not the only boon to come from block chain’s rise. bitcoin and other crypto-assets like it have shaken the world of institutional finance to its core in 2017, with Jamie Dimon calling those who buy bitcoin “stupid,” but also opening up to the viability of cryptocurrencies in general.
It is both a healthy and welcomed challenge for traditional finance to have to adapt and test itself on innovations like crypto-assets, and already we are seeing signs that the rise of crypto-assets has tested and evolved our present understanding of concepts like valuation and risk.
Bitcoin and its fellow crypto-assets have made many rich in 2017, but, as the effects of the Gold Rush reverberated years after 1848, we are just beginning to see what changes block-chain will bring to the world.
Paul Jeffries is a financial engineer in Washington, D.C., with extensive research experience in international finance, researching at both Cambridge University in the UK and Sciences Po in Paris.