Heard about the Bitcoin phenomenon? Of course you have! Unless, you’ve been hibernating under a rock the past few months, you’re definitely aware of Bitcoin’s meteoric rise. I’ll assume that most people know that Bitcoin is an unregulated digital cryptocurrency,…blah, blah, blah. So, I’ll skip the rudimentary stuff and get right to the brass tacks.
Bitcoin began official trading in 2010, at the bargain basement price of just 8 cents. Fast forward seven years later and Bitcoin is now trading at over 16K! That’s an incredible return of 100 quatrillion percent (not an actual percentage) but you get the gist of the phenomenon.
An investment of just $500 in 2010, would currently net a staggering 100M dollars! That’s right. One. Hundred. Million. Dollars. It’s seem difficult to fathom such an incredible return, and I’ve personally never seen a commodity increase at such a dramatic pace in such a short period of time.
I’ve traded stock options over the past twenty years, and I’ve seen the potential to make a lot of money in a very short period of time. I was also a headhunter during the dotcom boom, where billions of dollars were made overnight from a sizzling IPO market — but I’ve never, never, never seen anything like Bitcoin.
The Good
The great part about the Bitcoin’s meteoric rise is that millions of people, including nascent investors are more educated about financial investing. You’ve probably heard your coworkers, bartender, barber, Uber driver, grandmother etc…talking about investing in Bitcoin. Most savvy investors have done their due diligence on cryptocurrency and will casually toss around terms such as mining, digital wallet and block chain.
The Bad
There’s an old saying that the best lesson for new investors is to lose money. This is a profound statement because it’s absolutely true — nothing clarifies your investment strategy like losing your hard-earned money. The scariest aspect of Bitcoin, is that many new investors have never invested in Forex, stock options, futures or any other high risk commodity. Despite Bitcoin’s ascension, it will fall. I repeat. It. Will. Fall.
The Ugly
There are numerous reasons why Bitcoin could fall, including non-regulation, computer glitches, hackers, market manipulation by bad actors (not the theatrical kind), irrational exuberance, but most importantly – shorting by institutional investors. Recently, the CBOE and Goldman Sachs, announced they would begin offering futures on Bitcoin. For those unfamiliar with futures, it’s essentially a bet. A bet that the price of a commodity will go up or down within a specified period of time. Based on the volatility of the commodity, investors can make or lose a lot of moolah. The reason that this is significant is because institutional investors have the ability to move markets with large infusions of cash. Markets vacillate on a daily basis, based upon hedge fund and institutional trading. With this knowledge and the ability to effect Bitcoin’s value, what position do you think these investors will take?
If you said “down” you’re correct – Ding, ding, ding!! Bitcoin’s rise has been based on pure speculation. There are no quarterly earnings, board meetings or any other logistical factors that’s driving up its value. It’s simply a gold rush to get rich quick. The problem for new investors will be when the digital currency starts to fall based upon large future positions.
This is a natural occurrence of high-risk commodities. Markets go up. Markets go down. Bitcoin has only gone up!
My best advice is to enjoy the run, cash out your “winnings” along the way, and don’t assume that Bitcoin will continue to rise (because it won’t).
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