But if it’s a bubble, how do you make money on it?
Let me wipe the egg from my face.
Last Wednesday I published Bitcoin is Bitshoit. This was my hotly anticipated take-down of Bitcoin, following on from the earlier Basics of Bitcoin, and my wild-eyed spruik, Bet the House on Bitcoin. (I’m debating myself, for your benefit.)
But last week I gave the Bitcoin market a mauling. And what happens? Bitcoin surges to record highs, blowing through the US$5,000 mark.
Whoops.
So was I wrong?
Maybe. Maybe not. But I’m not blind to the irony.
The other thing that struck me as strange was that the comments to my for and against pieces couldn’t have been further apart.
When I wrote the pro-side piece, I got 29 comments. That’s a pretty lively conversation.
But when I did the take-down, I got two. That’s a quiet day on the Knowledge Source blog.
What does that mean?
I’m not sure. Maybe people had just moved on. But to me it also seems to be typical of the whole Bitcoin story. When I did my pro-side piece, I just pilfered ideas from bold-horizon cryptopian manifestos, and wrapped it up in talk of technological revolution and infinite upside potential.
It’s exciting stuff. It makes for fantastic blogs.
But when I did the take-down, I actually dug into each of these arguments, and said, utopian dreaming aside, what is actually going on here?
It was more thorough, more grounded, more realistic. And therefore probably more boring. So maybe that’s why I didn’t get any comments. But then where were the people who were singing Bitcoin’s praises the week before?
And I’m not being cheeky. That’s a genuine question. Remember I was doing this as a self-education exercise. I was eagerly waiting for the Bitcoin fans to show me the error of my ways. Show me the holes in my argument.
*crickets.
So I don’t know. Would still love people to show me where my thinking falls down.
The other funny thing about this market is that the internet seems to have polarised into two asymmetric camps – there are the people who love Bitcoin, and people hate Bitcoin, but don’t really get it.
It was REALLY, REALLY hard to find intelligent critiques of crypto-currencies – critiques that were awake to the potential of block-chain technology, but not caught up in the hype of a crypto-future.
It’s a funny market.
But the million dollar question is, is it a bubble?
Look, on balance, I’ve got to say yes. To be fair, once central banks just started printing money with gay abandon, pretty much everything became bubbly to one degree or another. But the key bubble flags are all there when it comes to Bitcoin.
What are the bubble flags?
First, all bubbles have a seed of truth. They have something that did have value at some point, but then it gets blown out of all proportion. The dot.com boom had the digital revolution. The tulip bubble had pretty flowers.
Bitcoin has the block-chain.
This opens the way for the “this time it’s different” narrative to take hold. Old valuation methods are thrown out the window. There is infinite upside potential. Trees will keep growing forever.
In time, the madness sweeps up everyone in its path. Players come to the table knowing that the game is rigged, but it’s the only game in town.
Remember former Citigroup CEO Chuck Prince, talking about his bank’s leverage just months out of the GFC:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
That is, bubbles will draw in the whole financial sector eventually. If your business is to make money for your clients, you can’t sit it out. You need to be outperforming the market. Soon, everyone is dancing.
A few die-hards will refuse to participate. They’ll write blogs and complain as uncritical beginners make fortunes around them. In turn, they’ll all be condemned as dinosaurs.
Remember JK Galbraith:
“Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
He was writing that in the 70s! Before the dot-com boom, before even the 80s stock market bubble.
I know that when I say that Bitcoin is a bubble, people are going to say that I’m just too dense to appreciate what a profound and revolutionary technology the block-chain is.
(Note to self – Idea for a book title: Investors Who Run With The Dinosaurs)
Finally FOMO sucks even the most critical into the fold. At that point, once there’s no greater fool to prop up the bottom of the structure, the whole thing collapses.
It has happened before, it will happen again.
To me, this is exactly what’s going on with Bitcoin. There’s a seed of truth, like any bubble, but after that, the whole thing is built on future expectations of infinite growth, with a this time it’s different narrative at its heart.
Key criticisms (like my last blog), if they are understood by the average investor at all, are glossed over or simply ignored in favour of sexy sales hype.
And now the big funds are getting involved, simply because they have to. They might not like it, but they’ve got to get up and dance.
Bubble.
So what would I recommend?
Personally, I’m looking at betting that Bitcoin will fall. When a futures market is established and it sounds like it’s on the way, then there’s an opportunity to short sell.
The Bit Short.
But I don’t know that I’d be recommending that to everyone. It’s a risky game.
And it’s a game where timing is everything. I don’t think we’ve passed peak-crazy with Bitcoin yet.
And that means if you’re up for some short cycle speculation, you could make decent money in the short term. But I’d have my eyes on the exits.
But this is the thing about bubbles. By the time the market is giving you clear signals, it’s already too late. You need to be a step ahead of the herd to avoid getting stomped on.
But herd dynamics are incredibly difficult to predict.
For now, if you’ve got some beer money you want to gamble on Bitcoin, go for it. Why not?
But I really can’t recommend making it a central plank in your wealth strategy.
The risks are just too big.
Anyway, that’s been my exercise in self-education. Hope you found it useful. Still more than happy to be educated if you think I’m missing something.
I’ll keep an eye on it and let you know if I see anything that changes the story here.
And if there’s anything else you want me to look at, let me know. Always happy to throw some half-informed opinions around.
Do you think it’s a bubble? What did I miss?
NoelA says
Great work John and thanks for putting in the work to provide both sides of the story, I also noticed the lack of input on your “against” side of the discussion and thought that the fans who had a lot to say in the previous article must have been sipping on their coolaid while counting their money.
Chiao Kee Lim says
I’m the dinosaur who views Bitcoin-mania in a similar vein as tulip-mania. My reasons are simple:
– Bitcoins have no fundamentals. Unlike shares on the stock market, which are valued based on a company’s performance and profitability (from providing goods and services of value to society), Bitcoin’s value is entirely dependent on herd mentality.
– the fact that its value fluctuates so erratically makes it an unstable currency to trade in/transact with.
I’m not on the Bitcoin bandwagon and will unlikely to get on it.
Macca says
I agree it will blow up soon, but not because it has no intrinsic value – no currencies do and they can be a good (mostly short term) investment. But national currency prices rise and fall based on tangible things to do with economies. The rise of Bitcoin is pure speculation – betting on continued hysteria. It really is a 21st century run on tulips.
I’ll also give you my 2c on Blockchain, as someone who works in IT and has experience of IT in the banking sector; It’s a neat new way to bring together several pre-existing IT concepts, and it’s got a few obvious uses which will take certain existing digital processes to a whole new level, but it is absolutely not going to change the world. Maybe some financial transaction processing, in a way that is invisible to most people, but that’s about it. It’s over hyped. And I would bet that the vested interests in the fin sector and their buddies in the IT sector will find ways to essentially co-opt it. Yes, it offers a neater way to move money than simple point-to-point, but a truly brave new dawn for everything online it isn’t.
Marty s says
May I add to the take downs of bit coin by referring you all to this site.
https://99bitcoins.com/bitcoinobituaries/page/9/
Cheers Marty Skiadas
Paul Kenny says
Hi John, thank you for blogs, they are very informative.
My limited knowledge is that Bitcoin is brilliant however the banks are not making any income from it so they tried to get the government in various countries to ban it, the major banks have been working on Blockchain for some years now and it is a copy of Bitcoin with its own changes so it can be different to Bitcoin.
Blockchain will make money with fees charged by financial institutions so it will be the one that will be accepted and will completely disrupt the way banking is done forever, instant settlements on real estate transactions, and EFT transfers from your account to another institution within seconds
Blockchain will be the one because the big end of town is behind it.Cheers Paul
Tom Marshall says
Thank you very very much for mentioning you had 29 comments about your ‘for bitcoin’ and 2 about your ‘against bitcoin’.
I have been on the sidelines re bitcoin but the responses to your articles plus the fact that “It was REALLY, REALLY hard to find intelligent critiques of crypto-currencies – critiques that were awake to the potential of block-chain technology, but not caught up in the hype of a crypto-future.” tells me it’s a bubble but with a long way to go to the top. More and more and more people will get on before this one busts.
OK – so the next bit of research is to how to manage investing in a bubble. I’ll be looking into it and maybe you can also John.
Thanks again.
PS I suspect that the other cryptos also have a long way to go.
Marty s says
I’ll bet Jamie D has 100 bitcoins at least.
Ben says
Thanks for your thoughts again Jon. Here’s a few of mine. Bitcoin has been humiliating the bubble claims for years. It has survived dozens of RIP crashes and is still making new ATH prices every few months, and will continue. If you’re looking for guarantees, just know that nothing in this space is a sure thing. Of course it’s speculation. It could bubble, or it could moon. But Bitcoins are not tulips. If anything they are more like gold – and much better than gold. I won’t go into the reasons, but think about it. Bitcoin will be worth 10k by the end of the year, easily. There will likely be one big correction in November, because of the updates in the code and record numbers of shorters, but it’ll be over quickly and smash all records shortly after. Is this certain? No. Is it likely. Hell yes.
Sarah says
well said Ben!
Marty s says
There are reasons why the bubble crash may not occur specifically smart contracts and automated companies which will use Bitcoin and cryptos to trade. These companies will proliferate simply by copy and paste of the code. Because we have never seen this before we don’t know. Moon or zero? Time will tell. Its a choice we can make.
Colleen says
Thanks John. I only have ever had the knowledge of bitcoin through a friend who has been with bitcoin for about 7yrs. She sings their praises and i am sure that if i was financial enough I would ve there. My friend is in USA and is refered to as the bitcoin girl. There have been a number of interviews with her and she does a lot of the promos….you may be interested to see. Not sure about the bubble burst being any different to any other investing….it happens and we all need to be prepared for the bursting of whatever comes along. Except may divorces that put us on the backburner…..
M Nasratullah Meah says
Yes, it is undoubtedly a bubble. Blockchain technology will survive and bitcoin will become history.
Dougal says
I like Bitcoin, have from the start and unfortunately didn’t have $100 to chuck at it when it was at US$0.01, US$0.10 or even when it hit US$1.00. C’est la vie
I’ll just leave this here:
There Never Was a Real Tulip Fever
https://www.smithsonianmag.com/history/there-never-was-real-tulip-fever-180964915/
Tracy Williams says
Hi Dougal if you are worried about using online exchanges as your wallet, then just use them as the exchange and use a desktop wallet such as Exodus or as you say a hardware wallet which is the most secure. Example is a Ledger Nano.
Sarah says
I am eagerly awaiting the delivery of my Trezor!
Marty s says
Bitcoin uses blockchain. They are not separate.
Rick Eason says
Jon, I said nothing about your analysis of the downside of Bitcoin because it seemed spot on. Perhaps others felt the same.
Tom says
Indeed Rick! “What of value can I add to that erudite discussion?”
Meanwhile, “All that glitter is not gold”.
For each gambler who wins, another loses. Only the very well informed win in the long term. Investment should rely on more than just the vagaries of chance (luck!).
Besides, unlike Jon, most of us never gave Bitcoin a second thought – until an interesting blog woke us up! Thanks for that Jon. Now we have another thing to distract us.
Marcel Leffers says
There is no mention of the bitcoin fork scheduled for the 25th… This would be an indication for the extra interest at present. Keep in mind though that the fork / split is not supported by bitcoin developers. Do your research and only put in what you can afford to lose. My gut feel is that yhete is money to be made on crypto currencies. Remember there are many others like Neo Ripple Enjin Etherium etc etc
Deborah Stephenson says
Interesting discussion and I’ve enjoyed these blogs, thanks.
I took the discussion up with my, smarter at this, kids. They both had the opinion that the boat has well and truly sailed on Bitcoin. My son’s words were, “Mum, you’ve missed it. If you’d wanted to invest you had to get in early”. They were also extremely wary of the safety of storing Bitcoin. I trust their opinions on this as this is their technological playing field.
I don’t see Bitcoins in my future but I think I’m going to be okay anyway.
Sarah says
Hi Deborah, If you had asked my kids they would have said the same that it is possibly too late…. but there is a huge amount of gain to still be made especially if the analysis is true – heading the $25,000 in a couple of years! But still that would not be enough for me as I want more leverage so I use a fully automated trading platform where bitcoin is merely the vehicle for buying low and selling high between international markets. My kids couldn’t argue with 140% return in 140 business days. My daily returns of approx 1% are proof that there is money to be made!!!! I am a school teacher in Sydney so could only afford to inject a small amount of capital but I can see that this is going to help replace my income by mid next year!!!!
Dave K says
I think some are missing the point about bitcoin. Bitcoin is a new application of several technologies blockchain is only one part of it.
Bitcoin is a new way to decentralize this time in fiance. It is the next step in an old and important process the decentralization of power. The rise of the printing press, cars, personal computers, the internet, and many similar advances.
The thing is early on in each case some saw an advantage but most did not. Bitcoin is based on mathematical principle and consensus rules, its value is its rarity and the value of the work that has been put into it. It has great usefulness and is working to overcome its challenges.
I think what gets up most peoples noses it that there is no central authority you don’t have to ask for permission. Yet this is in fact it’s strength. Most attempts by existing authorities will fail due to a lack of decentralization. If you are a German or a Ukrainian would you be more likely to use a open system such as bitcoin or the new CryptoRuble or vice a versae?
I believe bitcoin is here to stay but any blockchain service that does not remain open and decentralized really misses the point.
Kathy says
There are still too few people who hold Bitcoin and the vast majority that do own less than one Bitcoin, for it to be in a bubble. Just my 10 cents worth.
Tracy Williams says
Thanks for your views on Bitcoin Jon, it has been interesting reading.
I totally agree with Marcel. The rapid rise at the moment is in part happening
as everyone is trading alt coin for bitcoin for the scheduled fork on
the 25th giving rise to Bitcoin Gold. Some exchanges/wallets will give 1
BTG for every 1BTC or fraction of. Expect a likely drop after that but
history as shown with previous forks that it will recover and continue
on. My strategy of “lending” doesn’t rely on the price continuing to go
up, that is only the cream on the topping. You have to be smart with the btc and not hold “hoping” for a rise although that will be the case in the long run in my opinion as more and more institutions and companies accept btc as payment. Already there are cards you can use which convert btc to AUD at payment.
I’m in it for the long haul…including the other lesser alt coins which are now starting to make their mark especially Etherium and Litecoin.
For those interested here is a simplified article I found explaining the upcoming fork:
https://squawker.org/technology/bitcoin-gold-hard-fork-simplified/
Sarah says
Who knows?! I am leveraging bitcoin in international auto-trading with a small injection of capital. I will be withdrawing my seed money gradually and will have all my money back soon…..all the while getting a very healthy approx 1% returns each business day. I say buy a bit, ask me for my link, reap returns and smile while it lasts!! Make hay while the sin shines. Personally I like pure passive income and cash returns each week…. and then playing ‘on the house’ !!!
Hugh Thyer says
Bitcoin has to be a bubble. It’s economically not possible for it to be any other way.
People invest in bitcoin because it will be the currency of the future.
However if it is going up in value nobody will spend it. They will hang onto it because their bitcoins will be worth more tomorrow.
If nobody spends their bitcoins it will not be a currency.
If it’s not used as a currency then the whole reason for investing in it is gone.
Catch 22
Tracy Williams says
They will not hang onto it cos you can keep earning more bitcoin from a leveraged seed investment. It becomes a passive income that you can use for anything. With an 80/20 strategy your initial investment does not deplete. 🙂