The Bitcoin Lunacy Continues
If it sounds too good to be true, then it probably is.
This is one of my favorite adages of all time. Some believe the inherent skepticism behind this little proverb keeps people from taking advantage of excellent opportunities.
How optimistic of them.
I know that sounds rather cynical, but we live in a world where predacious people prey on the unsuspecting dreamers and believers. To be fair, they do make easy targets.
But it’s high time to start thinking like a realist. And in the investing world, we could all use the protection a little common sense has to offer.
My gut feeling from the start was practically screaming at me that Bitcoin’s rise was one of those things that was just to be too good to be true.
And whether you like it or not, Bitcoin is in a gigantic speculative bubble.
The father of all cryptocurrencies is being bought for its speculative purposes only, as opposed to being purchased for the reason it was created in the first place: as a digital currency.
As long as its astronomical price growth continues to be driven by speculators, it’s in a bubble.
There’s no doubt about it.
The Question Every Investor is Asking…
The price of Bitcoin broke the $8,000 barrier just a few weeks ago, prompting even more excitable speculation and leaving every investor asking, “Will Bitcoin hit $10,000 before year’s end?”
It stinks of irrational exuberance: It is incredibly volatile, and not only does its price continue to increase, but it is doing so at ever-accelerating rates.
Year to date, it has gained over 750% and is now valued at more than six times an ounce of gold. By comparison, this year’s top-performing U.S. stock index, the Nasdaq composite — which is home to some of the most high-octane tech stocks, like Facebook, Apple, Amazon, Netflix, and Google — is only up 26%.
However, its value is regularly volatile. But despite its several steep falls this year, it has now surged tenfold from around $800 at the beginning of the year to more than $8,000.
It’s pretty remarkable and somewhat frightening how, no matter how much Bitcoin is pummeled by sellers, it simply bounces back even stronger.
Even billionaire investor Warren Buffett has warned numerous times that it is a dangerous investment, saying you can’t value Bitcoin because it’s simply not a value-producing asset.
He calls it a mirage, basically laughing at the idea that it has some huge intrinsic value. Bitcoin’s value lies only in the mania its speculators have produced. And the only real thing about Bitcoin, he says, is the bubble it's in.
With Bitcoin, there’s just no guarantee of anything. And that just reiterates the fact that its monumental run is solely speculation driven, not inherently valuable.
Its monumental run — whose bumpy ride included five rallies of more than 20% and four short-lived “bear markets,” or drops of 20% — even dwarfs the Nasdaq’s 86% rise in 1999. That run, of course, ended with the bursting of the internet stock bubble.
In 1999, it was easy to single out the lofty tech valuations. You could refer to income ratios and balance sheets and historical norms.
Bitcoin lacks all of that.
The Breakdown of the Bubble
There is no denying that Bitcoin is getting all the hype these days. And the continuing rise in its value attracts the attention of people who are primarily interested in getting rich quick.
This, in turn, strengthens the belief of experts about the Bitcoin bubble.
To be clear, Investopedia defines a “bubble” as such:
An economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy the elevated price, a massive selloff occurs, causing the bubble to deflate.
The relatively high volume of turnover, against limited real-world use, suggests that Bitcoin buyers are seeking speculative gain, never intending to use it to make a legitimate transaction.
With each of the other characteristics of typical bubbles in evidence — a 20-fold increase in price in just two years and an absence of any fundamental economic banking — Bitcoin prices are, as I’ve said before, certainly in a bubble.
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Experts are predicting that the Bitcoin bubble is near its bursting point, and all types of people in the financial technology world are having mixed reactions.
Don’t feel bad if you’re having mixed feelings, too... Bitcoin is definitely confusing, but you can find clarity in its reiteration of your stereotypical textbook definition of a bubble. In fact, it's too clear to ignore.
Bitcoin enamored investors with its never-before-seen paradigm (check); its prices slowly rose at first followed by huge momentum when more participants entered its market (check); euphoric investors threw caution to the wind and prices literally skyrocketed (check)…
All that's left for Bitcoin now is its reversal, when a huge panic selling of coins ensues, resulting in the busting of its bubble. And it will happen. You’d have to be a fool to believe Bitcoin could ride this wave of massive gains forever.
After all, what goes up must come down. Market history has proven that to be true time and time again.
A Better Option
The point of this article is not to bash all cryptocurrencies.
Setting aside Bitcoin’s speculative popularity, there are other options available if you wish to try your hand at crypto investing.
Bitcoin certainly is volatile, unstable, and severely overvalued, not to mention an incredibly risky gamble at this point.
And though its revolutionary run may be nearing its end, there are other smaller cryptocurrencies that have the potential to reach Bitcoin-like market capitalizations of their own accord.
Many of these “altcoins” are much more advanced than their predecessor and contain built-in protections against the dangerous volatility that Bitcoin is experiencing right now.
And I promise you, this option isn’t something that’s too good to be true, either.
My colleague Alex Koyfman has spent months researching and sifting through the hundreds of altcoins out there.
He has hand-selected two potential winners for the next rightly deserved crypto bull market.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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