With every economic boom comes the theory that a crash is impossible — a bubble, as most call it — that leads most people to believe that it’s permanent. In October, 1929, economist Irving Fisher wrote in The New York Times that stocks had “reached what looks like a permanently high plateau", only days before the beginning of the Great Depression. Most recently in 2017, John McAfee wrote on Twitter that “those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the Blockchain”, while the value of Bitcoin now hovers at less than $4,000 USD.
Just last year when Bitcoin was rising in value, it was a trend that everybody was clinging onto — with people being able to use it for their morning coffee, making purchases at Microsoft and thousands of other retailers and even pay for hotel rooms. Though there were clear signs that the Bitcoin craze wouldn’t last forever — it was mostly gaining publicity for its soaring value, rather than the actual features of the currency — and the FOMO element helped dupe the public into believing it was more than it actually is. The Long Island Iced Tea company announced that it would be pivoting to blockchain — the tech behind Bitcoin — for no apparent reason, temporarily sending stocks soaring 289 percent before failing miserably and causing the company to become delisted from the Nasdaq stock exchange.
Bitcoin hits $10,000 for the first time
In November 2017, Bitcoin hit $10,000 in value for the first time, taking only two weeks to go from $7,000 to $8,000, then only a week to $9,000, before hitting $10,000 only days later.
Bitcoin rises in value to nearly $20,000
Then Bitcoin hit $19,511 in December 2018, before beginning a spectacular downward slide that saw the cryptocurrency lose more than 80 percent of its value since the publishing of this column. Latecomer investors to the currency will definitely get a learning experience out of this, but it’s important to note that if you invested in Bitcoin anytime before the bubble began to form — around half way through 2017 or earlier — you’ve still managed to make a decent profit from your investment.
A lesson to be learned from this bubble (and all bubbles, in a financial sense) is that if not careful, they can make your money disappear very quickly. Bubbles are abrupt increases and decreases in value and can be unpredictable; there was no reason to believe that Bitcoin would hit nearly $20,000 in price before plummeting down to less than $4,000 less than one year later. For financial know-hows, the scariest thing is that there was no competitor that overtook Bitcoin, no government crackdown on the currency and no flaws in the framework of the currency itself — it simply collapsed in value, similarly to other assets like stocks or even ETf’s and GIC’s.
The biggest reason for the demise of Bitcoin is the fact that so many new and inexperienced investors flooded the market, causing it to temporarily rise in price as more people seeked to purchase it before falling back down upon these people realising they didn’t know how it worked, didn’t want to wait for it to rise in value or simply lost interest. Another reason is that Bitcoin advocates thought that it might replace cash and cards as the default currency used, which is flawed thinking because the mainstream public isn’t interested in purchasing their $2 coffee with a $4,000 virtual gold coin — long-term investments make a poor choice to use for short-term purchases.
Most importantly investors need to know that with all investments, there’s no “sure bet” or guaranteed return on investment for anything. There’s no harm in diversifying assets so that a portion of your portfolio is based on experimental income, but putting all your money into it isn’t a smart move. Just remember: if something seems too good to be true, be skeptical, because it probably is.