Are we in a Bitcoin Bubble?
This year Bitcoin and other crypto-currencies have gone through the roof. Bitcoin has gone up around 900%.
Is this a Bitcoin Bubble:
The term “bubble,” in the financial context, generally refers to a situation where the price for an asset exceeds its fundamental value by a large margin. During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset. The terms “asset price bubble,” “financial bubble” or “speculative bubble” are interchangeable and are often shortened simply to “bubble.”
Another important term is ‘Bull Market’:
A bull market is a financial market… in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, currencies and commodities.
It is important to understand that there is only one rule in investing whether you are investing in stocks, bonds, real estate, etc.: BUY LOW AND SELL HIGH! The opposite of this is BUY HIGH AND SELL LOW which means you are losing money.
That is it. So easy to say, and so hard to do. When do you know when an investment is going to go up or going to go down?
One rule of thumb in any investment is that the more you see uninformed buyers coming into the market without a jot of skepticism the more likely that you are seeing the end of a Bull Market, and perhaps the collapse of a Bubble if that is what is going on. In other words when everyone is buying with unbridled enthusiasm, it might be a very good time to cash out at least some of your profits.
When you point this out to Bitcoin people, they mostly just try to make you feel stupid by telling you how much money they have made. The problem here is that Bitcoin is not unique in showing outrageous growth. Many investment assets have shown the same type of growth, sometimes with justification and sometimes because of complete hysteria. Example: if you had invested in Microsoft in the early 1980s because you thought it was selling small batch ice cream you would be a very rich person right now even though you knew nothing about the company. If you had invested in Apple because you thought it was selling fruits you would also be rich. If you had bought Amazon stock because you thought it had something to do with Wonder Woman you would also be incredibly rich. And I am sure there are many people who did something like that; they bought the stock because they liked the name! However, that method of investing is probably not the basis to continue a successful investing program. Do not confuse Luck with Intelligence! Most people lose money by investing like that.
I think a lot of people who have made money in Bitcoin have been lucky. Nothing wrong with this. I would rather be lucky than smart any day. But you cannot always depend upon luck!
I am going to say something that is gong to make a lot of Bitcoin Fans upset.
I think investing in Bitcoin right now is very risky. There are too many uninformed investors getting into the market. I have no idea what the upside of the market can be. No one does. There is no inherent value in Bitcoin, so that means the only bottom is zero. It is not even clear what it is: is Bitcoin a method of exchange or a store of wealth?
The only reason to invest right now is based upon an irrational fear: FEAR OF LOSING OUT ON THE NEXT BIG THING!
Not a smart way to invest if you ask me. You may have already missed out which means if you invest now you are buying high… it might keep going higher but it also might go lower. You probably also missed out on Microsoft, Apple, and Amazon. Does that mean you are stupid?
I do not know if Bitcoin is a bubble or the beginning of a new paradigm for investing. If you invest in Bitcoin and other crypto-currencies you should understand that any investment can go down. In this case it could collapse which would mean total loss of your money. There is no inherent value in Bitcoin other than what investors are willing to pay.
My advice: Don’t invest more than you can afford to lose.