Bitcoins are the hot new investment topic. Anecdotes about fortunes made overnight abound, and everyone wants a piece of the action. That kind of reaction should send up red flags. It’s the classic definition of a bubble –– and bubbles inevitably burst.
First introduced about a decade ago, bitcoin was touted as an international currency for the digital age. Unregulated and untraceable by governments, it would facilitate transactions across borders, eliminating the need to pay currency exchange fees or cut through a lot of red tape. It also guaranteed users anonymity.
In practice, it has become the currency of choice on the dark web, where it’s used to pay for illegal purchases and services, to evade taxes or perpetrate financial fraud. In the general population, it’s most widely used not to buy things but as a highly speculative investment vehicle that seduces with the lure of easy money.
Can you make money trading on the bitcoin market? Sure. Are you taking a huge risk? Absolutely. Here’s why.
Bitcoin was hyped as a stable currency for international transactions with no currency conversion costs. But in fact, it is wildly volatile, climbing from $1,000 a coin to $17,000, just in 2017. With that level of fluctuation, it’s useless as currency. And it’s backed by nothing –– no government, no laws, no company’s earnings. So investing in it is pure speculation.
According to bitcoin peddlers, this cryptocurrency is supposed to be more secure than Fort Knox. Ask the people who invested in Mt. Gox, once the world’s largest exchange for decentralized virtual currency. In 2014, when the company filed for bankruptcy protection, reports claimed that bitcoins worth $27 million had been stolen by hackers. Or possibly $450 million. Since bitcoins are unregulated, nobody really knows.
Unregulated. Untraceable. These may be sexy come-ons, but think about what that means for investors. Your invisible bitcoins cannot be insured. If they’re lost, stolen or destroyed, the FDIC is not going to come to the rescue. They’re just gone.
Many financial heavyweights have weighed in against climbing on board the bitcoin bandwagon. Warren Buffett calls it a mirage. JPMorgan Chase CEO Jamie Dimon says it’s a fraud. Yale University senior fellow Stephen Roach warns it’s a “toxic concept for investors.”
We believe that when the bubble bursts it will be dramatic. If bitcoin corrects to its Janaury 2017 price it will mean a loss of 94%. This could happen in as little as a 15-day trading period.
History is full of cautionary tales about fad investments turned catastrophes. Within recent memory we’ve seen the dot.com debacle and the housing market meltdown.
Yes, bitcoin fever is contagious. Everybody’s talking about investing in it. But be smart. When anything becomes so popular that your Uber driver starts recommending it, it’s probably a good time to head for the exits.