In 1848, James Marshall stumbled upon a shiny, metallic substance near his sawmill in Coloma, California and set in motion a movement of wealth-seeking speculation that turned into the California Gold Rush. In 2008, Satoshi Nakamoto published a whitepaper on a new digital cryptocurrency, Bitcoin, and set in motion a new movement of wealth-seeking speculation, this time a “digital gold” rush. While there are many differences between these two gold rushes, there are also important similarities. I will lay out a few of the similarities and will highlight my thoughts on how investors and business entrepreneurs can navigate a high risk, high reward gold rush opportunity.
By present-day United States population proportions, the magnitude of the California Gold Rush would roughly equate to more than 4 million people packing up their bags and relocating to look for gold. To put this in perspective, this is equivalent to every single person living in Chicago and Dallas moving to California to search for gold.
Before we dive in, I’ll provide some context on the magnitude of the California Gold Rush. I’ll do so by extrapolating the percentage of the entire United States population who moved to California seeking gold to the present-day population of the United States. In total, over 300,000 people picked up their lives and moved to California seeking their golden fortune. By present-day United States population proportions, the magnitude of the California Gold Rush would roughly equate to more than 4 million people packing up their bags and relocating to look for gold. To put this in perspective, this is equivalent to every single person living in Chicago and Dallas moving to California to search for gold. In short, the movement was massive. And the cryptocurrency movement is equally as massive. As of the time of this writing, the total market capitalization of Bitcoin is approximately $650 billion and cryptocurrencies broadly is roughly $2.5 trillion. And many of the brightest minds around the world are chasing new cryptocurrency dreams, many of which are in Silicon Valley, not too far from where the prior Gold Rush occurred some 170 years ago.
The prospect of making a fortune can become an intoxicating allure. We saw that during the California Gold Rush. We saw it again in the .com frenzy of the late 1990’s. And we see it again in today’s cryptocurrency rush. But all too often there is a wide gap between hope and reality. For example, in the California Gold Rush, a surprisingly small number of miners made fortunes. James Marshall himself, overrun by the influx of people and the rising cost of living in mining country, eventually declared bankruptcy. Many cryptocurrency speculators who purchased Bitcoin (and other alts coins) at peak hysteria are sitting on significant losses. As a rule, when hysteria is high likely risk is equally as high. And when risk is high, it might be prudent for investors to think differently. Instead of following the crowd of gold-seeking miners, it could be a better idea to pivot to a “picks & shovels” approach. The below is helpful as a decision-making framework when evaluating investment opportunities.
As noted in the framework above, for a given high conviction opportunity (California Gold Rush or cryptocurrency technology advancement), the level of inherent risk should inform the best way to approach investing/profiting. If risk is low or manageable, you might be best served by taking a direct approach (mining gold or buying alt coins/launching a crypto business). But if risk is high, which it was for the Gold Rush and is for picking winners in the cryptocurrency markets today, a picks & shovels approach might be a more prudent, risk-aware approach. Why dig for gold when you can sell picks & shovels to 300,000 miners who need these tools to dig? So how did this picks & shovels approach work out in the California Gold Rush?
Instead of digging for gold, some astute entrepreneurs took advantage of the frenzy. These savvy business and merchants won the Gold Rush. Mark Twain said it best, “During the gold rush is a good time to be in the pick and shovel business.” The demand for basic goods was so high, and the supply so low, that ridiculously high prices were charged. In today’s dollars, a single egg was $25, a pound of coffee was $100, and a new pair of boots was $2,500. With this backdrop, the largest fortunes were made by entrepreneurs who thought differently. Levi Strauss & Co. is a household name. But what may be less known is that Mr. Levi Strauss was an entrepreneur that headed west during the Gold Rush to set up a dry good store. He developed a heavy cotton work pant and overalls that became standard issue clothing for gold miners. Henry Wells and William Fargo created Wells Fargo & Company to offer express transportation and banking services between the East and West coasts. John Studebaker, “Wheelbarrow Johnny”, made his money providing wheelbarrows for miners and then later invested his profits to build Studebaker Corporation. The picks & shovels approach may not have been as flashy as digging for gold. But the longest lasting successes came from the lower risk path.
“During the gold rush is a good time to be in the picks and shovels business.”
Mark Twain
How might a picks & shovels approach work in today’s cryptocurrency gold rush? What business or investment opportunities exist to support those in search of their digital gold fortunes? Applying a picks & shovels strategy first necessitates an understanding of what is required for cryptocurrency industry to thrive. I see two primary angles for a picks & shovels strategy.
First, there is the infrastructure needed to “mine” for digital gold. However, the picks & shovels of the digital age are networks and what is required to build those networks: computers, processor chips, wallet storage and network exchanges. Second, there is the knowledge industry that surrounds the cryptocurrency age. In the Gold Rush, peddlers sold maps to the best areas to dig. Today, there is a huge opportunity to sell educational “maps” to the many speculators who want to get up a very steep learning curve in order to be players in the cryptocurrency markets. According to a survey by Finder, the number of Americans getting involved in cryptocurrency has risen by 61% over the last 2 years, up to 23% of all Americans. This creates a significant opportunity to offer educational newsletters or educational courses. These approaches require little to no capital to start yet offer attractive opportunity to create near term, cash-flowing businesses. This less risky approach may not result in an outcome that allows you to buy a private jet. But it could put you in the first-class cabin.
The development of cryptocurrency technology could become as impactful as the advent of the internet. If so, there are countless ways to ride this multi-decade long wave of growth without taking the high risk associated with betting on alt coin winners and losers. A picks & shovels approach can increase your odds of success in the current day gold rush. Why search for the needle in the haystack when you can use a magnet? When everyone is digging for gold, it is a great time to sell picks & shovels.
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