People who like money, and like talking about making it, are currently divided along an issue that is hard limit. It is called Bitcoin; or if we extend it a bit, it brings under the same umbrella many crypto currencies.
There are the trusting optimists who dabble and believe crypto currencies are a splendid opportunity to make some money though not all consider these a viable, long term investment.
There are also the doubting cynics who are standing on side-lines repeating that crypto currencies are a financial bubble.
Which camp do you belong to?
I am with the dabblers while suspecting that the crypto currency market may be a financial bubble.
You see, the key here is the ‘may be’. I’ll explain but let us first remind ourselves what are financial bubbles.
According to Investopedia:
During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset.
So, the doubting cynics claim that Bitcoin, and by implication all crypto currencies, are a bubble because there is no obvious value behind their cost. And I’ll stop you right there, by asking how is Bitcoin different from any fiat currency in this?
You see, we have got into the habit of seeing our money as valuable when really it is not; or shall I say, money’s ‘value’ is not linked to any real value since the gold standard was abandoned and all currencies became ‘fiat’ currencies.
Any value that our money has comes from the trust in the competence of our politicians and, to a lesser degree, our central banks. Then our central banks go and print some money; which could possible make money not worth the paper it is printed on.
So there. Therefore, whether Bitcoin is a financial bubble, or not, doesn’t matter much in the larger picture of fiat currencies, inflated house prices and FX trading – these are all bubbles that may burst under certain conditions.
What matters is that you don’t see it as a solid investment and don’t take money out of your pensions to buy cryptos. What is wrong with buying some Bitcoin, or another crypto currency, and see it as another visit to the casino; or another night at the bingo. You may win and you may lose, but you know that you are playing with your ‘blow money’ not with your dignity in older age.
More importantly, financial bubbles unveil their true nature only ‘after the fact’. Put simply, this means that we are sure what is a financial bubble and what is a unique investment opportunity only in the past; the present is not that clear.
Remember the ‘tulip mania’ of the 17th century? (Well, I don’t expect you to remember it but you may have read or heard about it.) It lasted several months and some tulips, like The Viceroy and the Semper Augustus, were selling for the price of a house. Vast profits were made, and many tulip bulbs were treasured more than precious stones.
This all collapsed within three days in February 1637 and tulip bulbs became flowers again. Many famous gardeners lost everything that had.
You see, this is what happens when there is a financial bubble: the price of the asset goes down so fast that very few insiders survive relatively scattered.
Sometimes, as in the case of the sub-prime mortgages in 2007, most everyone loses. Remember, we, the tax payers, bailed the banks that got us into this mess in the first instance.
On the other hand, there were people who stood on the side-lines when the first railroads were being build, sagely saying that this nasty, smelly thing would never take off. They didn’t invest in the railroad; for that matter many, including myself, didn’t invest in Apple and I remember the night when my husband said that the iPad would never take off. We all know what we happened with those, right?
But enough about that.
This is important to remember:
#1. We don’t know whether, or not, crypto currencies are a bubble.
#2. They may as well be.
#3. Don’t see Bitcoin and crypto currencies as an investment; at this point it is a big gamble.
#4. Buy Bitcoin if you want some excitement in your life – it goes up and down like a yo-yo. Use only money you can lose and not suffer for it.
Now, if you are interested in some of the major financial bubbles in history, and their relative size, my friends at ETX Capital have prepared this cool IG.
I think these crypto currencies are indeed in a bubble, but you could be on to something that (at least for the time being) it might not matter. Interesting!
@Money Beagle: Glad it made you think. I find the emotive debate around crypto currencies very frustrating.