Bitcoin has gone off the dial in the last few weeks hitting a high of $3xxx a coin. It has fallen back since but the other cryptocurrencies have shot up in the aftermath.
Anyone who rode the dotcom boom will recognise the symptoms.
Up like a rocket and down like a rock.
There will always be bubbles, history is full of them.
Greed drives bubbles and when people see fortunes being made from apparently nothing they ultimately jump in blind to get while the going is good.
This is the end.
Boom, bubble, bust is a cycle we are still in. Equities have boomed and will no doubt bubble at the end of the cycle. Many say stocks are a bubble now, but when you look at bitcoin charts you will clearly see what a bubble in full flight looks like.
You cant short bitcoin, which is probably a blessing in disguise, because the thing about a bubble is, its impossible to guess the top and shorting a financial panic, where the crowd is rushing for the entrance not the exit, is a good way to lose a lot of money.
At least with a stock you can see there is an obvious problem with valuations. With Cryptocurrency there is no logic or much in the way of history to cling too.
A few things needs to be made clear. The first is the new financial instruments are the authors of financial bubbles. In summary, no one really knows how they work and few can value them correctly. The stampede of greed makes all that mute anyway. The new financial instrument, be it ‘options’ for Tulip bulbs, Fiat money in the Mississippi bubble of the 1700s, stock in the south sea bubble, leverage in 1929 or collateralised debt instruments in the credit crunch of 2017, the problem was the world was behinds the knowledge curve of the instrument and the power of greed drove the market wild and finally into collapse.
Bitcoin is a new financial instrument and it is taking the same path.
The second thing is, and this is very important, Tulips in Amsterdam remains a billion dollar industry to this day. The flotilla of new instruments that nearly sunk capitalism in 2007 are still trading in massive quantities today. Wall Street and the Dutch took a painful lesson in how their instruments worked and fix the problem.
Likewise Bitcoin and numerous Cryptocurrencies are here to stay. There are numerous problems. Cryptocurrencies look a lot like CO2, that right the bogie-man of the world. To make a cryptocoin you have to burn energy in what’s called a ‘proof of work.’ Energy is fungible and unless you are driving your bitcoin mining rig with your own off grid windmill, somewhere down the chain a bitcoin is throwing off the CO2 of 40 barrels of oil.
But this won’t stop bit coin, nor will a huge crash in its value if it comes. OK lets not hedge, when it comes.
Cryptocurrencies are here to stay and will be regulated and taxed into shape. Yes they said it couldn’t happen to the internet either, but it did.
Cryptocurrencies of which bitcoin is the leader will fall back in value and more than the fat drop bitcoin has already had.
The UK has about $100 billion dollars of bank notes in circulation, meanwhile as I write Cryptocurrencies have about $75 billion in currency out there.
That is way to much and will be the driver for a fall back.
Of course this time it could be different but that often proves to be the scariest investment position to take.
By the way, don’t forget to load up on Bitcoins a few months after the crash, when everyone says Bitcoins and cryptocurrencies are dead. Because the survivors of the crash, the Amazon and Apples of cryptocurrency will comes back and buying a crash is so much better than buying the bubble, a lesson the new generation of equity investors will sometime in the future find out the hard way.