From Penny-Farthings to Pounds: The Great British Bicycle Bubble of 1896

From the infamous stock market crash of 1929 to the speculative land frenzy in Florida during the roaring twenties and the crypto craze of the 2020s, the narrative of financial bubbles remains eerily similar.

A novel idea or technology takes center stage, early adopters rake in the profits, and the fever catches on, infecting a growing crowd of unsuspecting investors. You can apply this to countries (the “China Miracle”), currencies (crypto), or technologies (AI or Electrical Vehicles)

The mantra of "This time it's different" fuels the fire, pushing prices to dizzying heights.

Those who dare to question the status quo are brushed off as out-of-touch.

Freshly minted experts in the field add fuel to the fire.

And as sure as the sun rises, the bubble bursts.

The cycle repeats with a new generation and a new idea or technology.

The actors may change, but the script remains the same.

One example of many is the largely forgotten...

A Brief History of the Bicycle

It's hard to fathom that something as commonplace as a bicycle could ignite a full-blown financial bubble.

But that's precisely what transpired in the late Victorian era in Britain.

A quick history lesson...

The bicycle's humble beginnings can be traced back to the "dandy horse" - a pedal-less bike patented in Germany in 1818. Over the next half-century, inventors tweaked the design. In the 1860s, a French enthusiast added pedals and a rotary crank to the dandy horse, creating a rudimentary version of the modern bicycle.

However, the later penny-farthing design, with its oversized front wheel, proved hazardous and cumbersome. It wasn't until the 1890s that the innovations of chain-driven transmission captured the British public's imagination. It was also when John Boyd Dunlop invented the pneumatic tire in 1887, making it easy to ride bicycles on hard roads.

Overnight, the bicycle became a technological marvel and a revolutionary new mode of transportation.

Launching a Transportation (and Social) Revolution

What accounted for the bicycle’s remarkable early success?

First, the bicycle liberated the British public from the constraints of railway schedules. The bicycle became synonymous with the freedom to travel when you want, where you want.

Second, the bicycle was cheaper to buy and maintain than horses. It also provided a much-needed solution to the horse manure-laden streets of London.

Third, even women could ride bicycles. That alone doubled the size of its potential market. By 1895, the bicycle came to represent feminine independence.

The bicycle had a large effect on Britain’s infrastructure.

Much like their counterparts did for railroads 60 years before, cycling organizations began to lobby for a network of good roads to connect cities and rural communities. The first roads were built for commuters and travelers on cycles, not in cars.

With every successful new road, the pool of consumers and their need for a bicycle grew. Predictions of hypergrowth abounded. Companies were keen to meet the seemingly endless demand.

Businesses and manufacturers began to focus on mail-order bicycles, bicycle parts, and bicycle tires. You could buy a bike on credit and pay in installments over time. The Wright brothers—those who invented the airplane—funded all their nascent aeronautical escapades with the recycled profits of the bike shop they set up in 1892. 

Great British Bicycle Bubble of 1896

The venture capitalists of their day in the United States and Britain quickly pounced. They bought up Bicycle companies. They bolstered balance sheets with vast amounts of intangible goodwill and patents. This financial sleight of hand allowed them to leverage companies up to invest in increased production.

As a result, the 1890s saw a tremendous boom in bicycle shares in the Birmingham stock exchange, not dissimilar to today’s EV boom.

In 1896, there were roughly 20 British bicycle companies. But demand was quickly outpacing supply. Enter Ernest Terah Hooley, a property dealer from Birmingham, who saw an opportunity. He bought a company called Pneumatic Tyre for a staggering 3 million pounds, a hefty premium given its modest profits.

Thanks to Hooley's sales prowess, shares in the newly renamed Dunlop Pneumatic Tyre Company skyrocketed by 1,138% in the spring of 1896. Other British bicycle companies followed suit, with their share prices tripling. Speculators made fortunes overnight, and more and more people flocked to get in on future growth.

In 1896 alone, 363 cycle, tube, or tire firms were listed on the London Stock Exchange, with another 238 added in the first half of 1897. The British press hailed the bicycle as a revolutionary technology. The Financial Times even dedicated a daily page to the share prices of bicycle companies.

A more cautious writer at The Economist warned that one bicycle company's offering demonstrated "a very robust faith in the gullibility of the average investor." But investors turned a deaf ear to the skeptics.

The Ineluctable Bust

Then, the narrative began gradually to shift.

Cycles were made not just in Birmingham but also in the United States.

Suddenly, advances in manufacturing meant new bicycles flooded the market.

Investors learned that expansion in the market did not necessarily translate into the same profit growth.

Competition soon drove prices down. Profit margins fell.

Investors began to question sky-high valuations. Previously, rock-solid "fundamentals" suddenly became suspect.

The bicycle companies had become overleveraged. Vast orders anticipated that failed to come through. You only need to buy a new bicycle every five or ten years. The market became saturated. Sales growth entered a slow-motion collapse. Intense competition led to oversupply and plummeting prices.

Meanwhile, technology had advanced. Other competitors emerged. The automobile was even more of a game-changer than the bicycle. The fortunes associated with the bicycles’ promise of hypergrowth dissipated rapidly.

Only with the benefit of hindsight did it become clear that bicycles were a bubble.

And as predictably as night follows day, the bubble burst.

By December 1897, an index of bicycle-related stocks had plummeted by 40%. In 1898, bicycle stocks traded at an average of 71% below their peaks. More than 80% of the companies participating in the 1890s British bicycle boom went bust.

The Bicycle vs. EV Stocks

The British bicycle bubble of 1896 bears striking similarities to today's EV stock bubble. Both share...

·             A technology that took decades to reach critical mass. ·      

·             A legion of die-hard early adopters devoted to "the cause." ·      

·             A disregard for traditional valuation metrics, replaced by lofty promises of infinite growth. ·      

·             A surge of new market entrants offering shares at sky-high valuations.

The End of the Road, My Friend

Indeed, the bicycle was a transformative success. It revolutionized the lives of the average Briton. But the same can be said about railroads, automobiles, electricity, radio, moving pictures, the internet, and, yes, EVs. Each of these technologies followed the predictable trajectory of boom and bust.

The takeaway for investors?

New technologies are invariably overhyped.

They attract vast amounts of investor capital, most of which evaporates when the boom turns to bust.

As long as investors have the opportunity to fund innovation, the arc of the story remains the same. Human psychology never changes.

You can't avoid the boom, and it takes extraordinary luck or foresight to dodge the bust.

My forecast?

The EV stock market will follow in the footsteps of the great British bicycle boom of 1896.

Today's market darlings like Tesla (TSLA) will see their valuations crumble. The EV market will crash. Scores of new entrants will go bust. Most EV investors will be left out in the cold.

A century from now, the average investor will think no more of EVs than they do of bicycles today.

And one of your great-grandchildren may recount the tale of the great EV bubble of 2023.

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