Selling Shovels in a Gold Rush
How to profit from trends
Who got rich in the California gold rush of the mid 1800s? Seems obvious- the gold miners’ Duh!
Well yes, the early miners did do very well, but they tended to be the minority. It was the folks who sold tools and supplies to the 300,000 people who scrambled in hoping for riches. Many shrewd business owners, like a certain Levi Strauss, made fortunes, while those panning for gold left penniless.
170 years on, the pattern has repeated itself in both the crypto space and during the global pandemic. As we will see those who deployed what is known as Second-Level Thinking have profited.
‘’History doesn’t repeat itself but it often rhymes’’ — Mark Twain
Digital Gold
For about seven years from 2009 to 2016 Bitcoin flew under the mainstream radar. Dismissed as a Ponzi scheme, a currency for drug dealers and a new Tulip mania it has been written off time and time again. In the early day’s Bitcoin was being thrown around like monopoly money, changing hands in games like Satoshi Dice and famously 10,000 coins were used to order what became the most expensive pizzas of all time.
Back then the early miners were operating in a blue ocean with very little competition. As the world’s focus shifted to Bitcoin the price appreciated as did the number of miners. As you probably know mining Bitcoin requires racing to solve fiendishly complex algorithms with those first across the line rewarded for solving a block. This led to an arms race to secure most processing power. Graphics cards quickly became the modern equivalent of pickaxes and shovels.
Two companies Nvidia and AMD have a stranglehold over the market. For years they have competed to produce ever more powerful graphics cards used by PC gamers to play the latest titles; Call of Duty, Grand Theft Auto or Crysis. This has been a profitable business as there is a constant demand from customers to increase graphic horsepower.
Then came Bitcoin mining. The digital gold rush led to a stampede to get hold of high-end graphics cards. Even now you find second-hand cards changing hands for exorbitant prices. Now that the dust has settled the reality is that the vast majority of these back-bedroom amateur miners didn’t even break even. They simply couldn’t compete with underground cooled caverns stacked with mining rigs, fueled by dirt-cheap electricity.
As I write this Nvidia stock has posted a record eight straight weeks of gains. Back in late 2016, the shares were trading at $70 and today they are nearing $800. If we run the numbers; $1,000 invested back then would have turned into $11,000 a total return of 1000% -not bad for 5 years. The AMD and Nvidia share charts look a lot like the post-industrial CO2 levels in the atmosphere; hockey sticks.
Today, there is a whole sector of crypto-support services from hardware wallets like Ledger. To the trading platforms Binance and Coinbase (which recently IPO’d.) For those with stacks of coins, Xapo provides off-grid underground cold-storage vaults containing customers’ private keys.
First vs Second-Level Thinking
The pandemic has been one of those rare events that had affected everyone on the globe. There has not been a sector of the economy that hasn’t been touched. In many ways, the last 18 months have accelerated trends that had already been in motion. Take the shifts to working from home, grocery home deliveries, the end of brick and mortar retail (as we know it) and the decline in high street banks, I could go on.
This created a unique opportunity for investors, business owners and entrepreneurs. Many retail investors shorted airline stocks, others loaded up on Cineworld after the crash. They looked to the future and anticipated a quick rebound once society re-opened. This may still transpire but as I type this many of these beaten-down stocks have traded sideways.
So who has made the real profits? To get a handle on this let’s introduce second-level thinking. The concept was coined by Howard Marks in the excellent investment book- The Most Important Thing.
First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.
The trading examples above are examples of first-level thinking.
Beer Gardens
Pubs in the UK have recently opened back up, with punters having to sit outside in small groups to meet social distancing requirements. Publicans wanted to get back to pouring pints as quickly as possible.
So what did they need?
Apart from the obvious hand sanitiser and face masks. They needed to keep their customers comfortable in the typical British summer weather. As a result, there has been a huge demand for patio heaters and markees.
Here’s what one heater supplier said:
‘’We’ve been in this business 55 years and never seen demand like the last three months’’
As you can well imagine they have been able to increase prices.
Other examples:
- Selling fixed up bicycles on Gumtree
- Anything dog related- kennels, dog walking etc
- Building outbuilding offices
What’s next?
All well and good you may say, Bitcoin mining and the pandemic are in the rearview mirror. So what might the next gold rush be?
It sort of doesn’t matter.
The key is to decide which camp you want to be in. Would you rather be a prospector using knowledge and first-mover advantage to stake a claim on a new sector? Or would you be better suited to being a shovel seller selling products or services into a defined market hungry to use them?
Deciding ahead of time makes it much easier to focus, avoid getting caught up in the hype and think strategically about how you can profit.
