The Bitcoin bubble
What is a bubble?
A bubble can essentially be an “asset”, “asset class” or “object” that receives huge volume and attention in a very short amount of time whereas said “asset” or “object” has no intrinsic value.
To demonstrate intrinsic value, may I refer you to my Tom Ford sunglasses. These cost me US$475 while on Rodeo Drive, Beverly Hills (there is a story about the lady taking my card and me getting confused and finding out the real price when I got back my internet banking at the hotel). Now the intrinsic value of these is probably US$25 or less when we look at the actual value of the materials. I paid for the brand.
A common comment people make about speculative bubbles is usually “but this time it’s different” as they transition from “enthusiasm” to “greed”.
Just do a google search of the .com bubble or tech crash. It’s nuts. People were paying millions of dollars for any company that launched a website and there was no intrinsic value or asset.
Stop talking about flowers, I’m trying to get rich
The most popular bubble that Bitcoin is referred to is from Tulip Mania. This was in the 17th century and is commonly cited as the first ever speculative bubble. Essentially, the recently introduced tulip gained too much attention, prices increased and the graph says the rest. I like tulips.
What are they key signs of a bubble?
You have yourself a bubble if:
- Everyone is talking about it, particularly those who have otherwise invested nor understand complex financial instruments (in my first article, I talked about my builder neighbour).
- When someone challenges or is skeptical and the ‘pro asset’ person carry’s on like that person is dumb and “just doesn’t get it”.
- When extreme predictions are out there e.g. “Bitcoin will get to $150,000”.
- There is lots of availability of said asset, which allows gambling etc.
- There is more leverage which allows people to gain greater access (such as the futures market).
- New types of assets available (i.e. thousands of different types of crypto currencies).
But this time it’s different!!!
I do not believe it’s different to any other bubble in the general sense; I would say it may go on for longer than the average bubble in the “greed” or “delusion” stage as when liquidity stops, the show is over. For financial markets it’s the government or regulator stepping in to protect people etc which basically causes liquidity issues. In this case this is the wild west and crypto is pretty much unregulated.
There is no shortage at the moment of people wanting to get in on the action. So as long as demand is there with liquidity – it’s fertile soil for bubble making.
What I believe makes this so much different than the .com or tech bubble is that technology now days allows people who otherwise would not have purchased shares in an online company are able to easily buy crypto from their smart phone without having to have a brokerage account set up. This means more people getting in on the action. Also, the fact that main stream apps in your palm can make things feel “legitimate” and “real” cause' it’s an app and it looks good.
Could we actually still be in the awareness phase of a bubble? It adds to my “it’s different comment”, too – as there has been so much media attention but institutional investors have been a little shy. Probably the intrinsic value issue.
How do you value a Bitcoin?
What is the intrinsic value of a Bitcoin? Ummm… Hmmm… I don’t know how to answer my own question.
While there is no doubt Bitcoin may become the gold standard for other crypto coins and the use of the blockchain technology is here to stay – we still don’t know what the real value is at this time. At least I could grow a tulip and sell it?
The good news about Bitcoin having no intrinsic value is that it could go to $1.5m dollars or $2.
How does one get in on the action?
Let me be clear. I’m not actually telling you to buy any crypto. Would you after reading this? It’s the wild west and your guess is as good as mine! Full disclosure, I do personally hold crypto and I now use coinspot (do your research as there has been some issues with transactions & ASIC in the past). If you are hell bent on purchasing, I would suggest considering coinspot if you are an Aussie as coinspot is Australian and also has 2FA (two-factor authentication). You can also withdraw to your Australian bank account whereas other international exchanges will not allow this. I am not recommending you use this product or service though. You do so at your own risk.
For those in the United States, Conbase is also of use. I also use Coinbase this and their transaction costs are pretty good. It probably wouldn't hurt to diversify your holdings for security. Coinbase also offer 2FA. I am not recommending you use this product or service though. You do so at your own risk.
Where do I (Glen James) hang my hat?
I’m excited for the future of blockchain technology and love the idea of using crypto day to day; however, the way the crypto is at the moment it’s not a currency it’s acting more a commodity - but with no real intrinsic value. Gold, iron ore and coal are also commodities and I don’t by my coffee or groceries with coal. I’m not emotionally invested in these things and I certainly know it will not make me rich. If you have a get rich quick mentality to anything you will do your cash.
Be careful with this stuff. It’s so easy to get an account with coinspot and start trading. That in itself means it’s not that different to a gambling app. Some of these companies will even allow you to purchase currency direct from your credit card. On that note, if you have any type of consumer debt - you shouldn't be buying currency you should be getting out of debt.
If you want to know how much you should be exposed to if you are going to buy please ensure you read my other article here.
If you're thinking of throwing $100 into crypto this time of year, would you put half in cyrpto and donate half to charity? Hedge your bet! 50% of your "investment" will have an absolute return!