Bitcoin, Cannabis, Lithium- Verdict On Investment Trends

History is a guide as to whether hot plays such as Bitcoin and cannabis will change the world or are manias destined to die

- Greg Hoffman

Over the holiday season I was lucky if I escaped a social function without someone buttonholing me about lithium stocks, cannabis stocks or, of course, Bitcoin. I believe these are all potentially powerful illustrations of something that investors should be keenly aware of. That is, how financial bubbles form and grow, and the aftermath of their bursting.

The first key point is that almost every bubble is built on a kernel, if not a bedrock, of truth and logic. Take the British railway mania of the 1840s.

The world’s first modern inter-city railway was opened between Liverpool and Manchester in 1830. Apart from the death of parliamentary member William Huskisson, who was accidentally hit by the line’s locomotive during the opening ceremony, it was a tremendous success.

The railway was originally built for the transportation of goods but an unexpected enthusiasm for passenger travel quickly developed. This led to financial success well beyond initial expectations. The potential for expansion and future profits was obvious and a great investment boom began.

At this point, investors’ money was being transformed into useful, profitable infrastructure. Thousands of miles of lines were constructed, benefitting the nation and many early investors who were earning good dividends by the middle of the 1830s.

By the 1840s the industrial revolution was driving increased commercial activity and interest rates were going down. This meant investors were open to alternatives that might provide higher returns and the railways seemed a sure thing – a truly “disruptive” technology.