No one wants to hear words of caution when financial markets are booming. But when the good times stop — and they always stop — many people always ask, why didn’t someone warn me?
This is the case with Bitcoin, the bubbling cryptocurrency, and this is your warning.
Bitcoin has seen an unbelievably rapid increase in the value over the past year, jumping from $956 (Dh3,516) in January of this year to a high of more than $17,000 over the last weekend. With returns like that, and due to Bitcoin’s general availability and the novelty of owning a cryptocurrency, we are now looking at a Digital Age goldrush. The headline news, which really began in earnest in October, has also brought in the general public, which has caused Bitcoin to jump over $10,000 in just the past two months.
If you are thinking about buying Bitcoin, you should be very cautious. An inevitable rule of investing is that by the time most people become aware of the rush, the time to buy in has already passed.
Some people have already suffered for failing to follow that advice. Even though Bitcoin hit a high over the weekend — it touched $17,638 on the popular Coinbase exchange — prices on Friday fell almost $3,000 at one point. Since then, the price has been volatile, jumping back and forth between $15,000 and $16,000.
No one can really point to what is driving Bitcoin. Some point to wider acceptance, but it seems clear that what is causing people to buy is nothing more than the belief it will continue to rise in value and that a quick dollar (or Bitcoin) can be made. This means people are not investing for long-term gains. Investors who bought in early are now getting booking profits and getting out of the market. Whether Bitcoin will rally again — if investors will “buy on the dip” — remains to be seen.
The more disturbing question: Is Bitcoin a viable long-term investment? While we called the current rally a goldrush, Bitcoin and every other digital currency by their very nature have very little in common with physical currencies.
A Bitcoin at its most basic level is nothing more than an encrypted bunch of zeros and ones. It isn’t tied to any asset and it isn’t supported by any central bank.
That means Bitcoin has the possibility of falling just as rapidly — and suddenly — as it has risen. When that happens, you don’t want to be caught holding nothing but zeros and ones.
