For the record, I'm an “Old Dog” and bitcoin is a “New Trick.” That creates a problem. The truth is, I can’t honestly say that I fully understand what bitcoin actually is or how it works, which technically means I'm in pretty good company with a lot of people who are actually trading it. And as a grizzled veteran (of the markets) there is a part of me that instinctively wants to dismissively shout “bubble” and walk away. It’s not like it hasn’t been seen before – tulip bulbs, the Nifty 50, silver, technology/dot.com stocks, interest only mortgages and so on.
Most of you know the drill:
- Some form of “investment” catches lightning in a bottle
- The investment world (for lack of a more professional phrase) “wet’s itself”
- Price soars beyond all rational levels
You know, sort of like what you see in Figure 1
Figure 1: Bitcoin.com
And then it all ultimately plummets painfully to earth.
Well, at least temporarily. I mean sure, tulip bubbles never ascended the heights again, but a lot of the Nifty 50 went on to thrive even after their stock cratered. The same is true of many of the major dot-com era companies. Silver is still trading as a serious commodity and real estate seems to have rebounded.
In sum: Is bitcoin forming a price “bubble?” It’s hard to look at a price chart and not think so. Of course, even if it is, the questions no one can answer for sure are “When” and “from what level?”
The other question is “if it is a bubble and the bubble bursts, will crypto currencies go the way of tulip bulbs (as an investment) or is there a future for them in the long run?”
A Recent Bubble History Lesson
In the late 90s into 2000 a bubble formed in tech stocks. And the bubble burst and it was ugly. And many “hot” companies folded and vanished. But not all of them and certainly not the major players. And certainly not the industry as a whole. Like I said, I don’t truly understand bitcoin and crypto currencies. So I can’t say for sure if they are a “craze” – like “Tulipmania” – or something more viable and sustainable, like technology stocks. To understand why this distinction matters, consider the stocks listed in Figure 2.
As you can see in Figure 2 through 7, each of these stocks experienced a “bubble” and a “crash.” Interestingly, the companies themselves ultimately rebounded and thrived.
The average “crash” was -87% and the average post-crash advance (so far) is about 16,000%.
Figure 3: Courtesy AIQ TradingExpert
Figure 4: Courtesy AIQ TradingExpert
Figure 5: Courtesy AIQ TradingExpert
Figure 6: Courtesy AIQ TradingExpert
Figure 7: Courtesy AIQ TradingExpert
Summary
The only thing we can say for sure is that some people will make a great deal of money from bitcoin/crypto currencies and others will likely get wiped out. The danger is obvious: whenever you have a lot of investors “chasing” something – especially something that many of them don’t even understand – it is a recipe for trouble.
That being said, in my (market addled) mind the real “long-term” question is, will crypto currencies still be “a thing” after the bottom falls out? If Bitcoin is a bubble, then if history is a guide we can look or a decline in price somewhere in the 80% to 99% range after the top is ultimately made.
From there, if history is also a guide then depending on whether or not crypto currencies prove to be a viable thing, we can expect them to either:
a) Vanish altogether
OR
b) Rise 15-20 fold from the bottom
So here is my Bitcoin/crypto currency investing guide:
*It is OK to pile in and buy Bitcoin in hopes of getting rich (as long as you do not “bet the ranch”, invest only a small portion of your capital and acknowledge that a 100% loss is absolutely a possibility and that you are willing and able to accept that risk).
*It is also OK to sneer and shout “bubble” and not invest. But if and when the bottom drops out and prices crater remember to peruse the wreckage. There just might be an opportunity there (remember, Priceline lost -99% when the dot-com bubble burst, then gained 32,000%).
In any event, hold on tight people, this is NOT going to be a smooth ride.