In 2017, you would have had to been living on a deserted island not to hear about the Bitcoin craze. Priced at around $1,000 US Dollars a unit on January 1, 2017, Bitcoin hit an all-time high of $19,783 on December 17, 2017. Talk about a wild ride! With a return of over 1,800% in less than a year, many people were ready to go all in and had a major case of Bitcoin fever.
The Fascinating History of Bitcoin
Cryptocurrency has been around since 2009 when the Bitcoin software was made available to the public. The process through which Bitcoins are recorded and verified is referred to as mining on the blockchain. Bitcoin was valued for the first time in 2010 when someone traded 10,000 of them for two pizzas. They could have been worth several million dollars in 2017!
Despite the incredible rises in value, the cryptocurrency history is fraught with danger. Bitcoin has been through several crashes where the value plummeted. Rival currencies have come along already to threaten it. In 2014, the Mt Gox exchange was hacked and 850,000 Bitcoins were stolen. Investors who used that exchange lost their currency immediately. After the December 2017 peak, the value of Bitcoin fell significantly. Those who invested during the mad hype of December 2017 potentially were facing huge losses.
I do believe cryptocurrency is here to stay in some form. The technology is outstanding and there is value. The people who are bullish on cryptocurrency believe it is the future. Others who are skeptical think it is an outright scam and a bubble that will have a massive burst. We simply do not know who will be right at this point. I do feel that the risk with Bitcoin and other currencies is difficult to even quantify. What does the future hold? What will the coins be worth in a year? If Bitcoin is the current “go-to” form of cryptocurrency, will that be the case in 5 years?
Speculation or Solid Investment?
Because of the massive risk involved and the lack of history, cryptocurrency is a highly speculative instrument. There is a big difference between speculating and investing. Speculators are willing to risk nearly everything to hit it big. Investors typically use fundamentals, analysis, and historical data to make their choices.
Speculators have made big money with cryptocurrency. I know people that have done it. I also know people who have lost a ton of money. If you invest in cryptocurrency, you better have nerves of steel because it can crash and go up a crazy amount in the same week. We simply do not know what the future will bring. The vast majority of people I know who made money with cryptocurrency bought it years ago. They got in very early in the process. When you hear the term “bubble” with any commodity, it usually means there are big winners and big losers. There is rarely an in-between.
You can say that about any investment, but with stocks and bonds I have something tangible backing my money. What happens if Bitcoin or other cryptocurrencies go away as fast as they came? The United States government is cracking down regarding taxes, as are many other countries. Can you afford to pay the tax bill on your returns? The Bitcoin price plunge of late 2018 has brought many people back down to earth, but there is still a lot of hype around cryprocurrency. You have to be careful. If “easy money” sounds too good to be true from any investment, you have to use extreme caution.
Crytocurrency: Risk Versus Reward
There is a ton of risk right now with cryptocurrency. Even people with well-diversified portfolios have dabbled in the Bitcoin craze. I have met people that have a “Vegas” part of their portfolio. They take a small amount of money and put it into risky investments they are excited by. If they lose all their money, they have a lot of diversification built in so they are protecting the most important parts of their portfolio. Essentially, it is play money they can afford to lose.
I saw the same hype in the late 1990’s with tech and internet stocks. I told a story in my book “The Foundation of Financial Muscle” of a gentleman I met who almost lost everything in the dot.com bubble of 2001. That time period had very similar hype surrounding it. Tech stocks were the absolute can’t-miss investment. A few short years later, many of those hot companies no longer existed. One company I worked for had a stock price of nearly $50 a share in early 1999. By late 2000, it was down to less than $2 a share. Speculation drove the stock price sky high.
Be Fearful When Others Are Greedy
Times of unbridled optimism are dangerous for investors. When people make money so easily that they become millionaires almost overnight, there is the tendency to believe the good times will never end. History gives us many sobering lessons. Just as fast as the money came in, it was gone. It left a lot of people broke and wondering how it went wrong so fast.
Please be careful. I urge you not to get caught up in hype and “FOMO” – the fear of missing out. If something seems to good to be true, it probably is. Cryptocurrency may prove to be profitable for some people. However, you have to be very cautious. Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” In other words, do not get caught up in extreme hype and a belief that the good times will never end. Most people become greedy and fearful at the wrong times and end up losing big.