The Bitcoin bubble

2017-09-18 17:37

In 2011, I was often asked how one would go about investing in gold. At that time, gold had experienced a strong rally – rising from just more than $700 (R9 180 at today’s exchange rate) in 2008 to more than $1 700 by early 2011. As the value of gold is driven primarily by fear, the rally was a result of the global financial crisis and lack of confidence in the industry. 

On August 15 2011, I wrote a blog – titled Remember, gold bugs can bite – as a response to the many readers who were desperate to get into gold. I want to share that blog with all the people asking me about Bitcoin because, after 20 years in the industry, I have learnt that bubbles all end the same way – in tears.

I wrote: A few days ago, I received an email from a colleague asking me where he could by gold – “lots of it”. This took me back to December 1999. I was working for a stockbroking firm and a friend of mine, who had not owned a share in her life, wanted to buy shares in iExchange.

She had her childrens’ school fees saved and she was hoping to double her money by January. Three months later, the tech bubble burst and the stock market plummeted.

An asset bubble is actually quite easy to spot – it is when people start piling into an asset they have not invested in before because they believe it is an opportunity to make a quick buck. The reality is that, by the time the average investor has spotted an opportunity, the opportunity is long gone and they fall victim to the early adopters who are looking to offload before the crash comes.

A sensible investment decision is based on fundamentals, not on a get-rich-quick gamble. In the case of gold, it is a safe haven when everything goes pear-shaped.

If you were concerned that your investments were at risk and you wanted somewhere safe to put your cash, gold would have been a good option. However, if you buy gold because it has rocketed over the past six months and you invest purely on the premise that it will follow the same trajectory, you have, in fact, significantly increased the risk of your investment rather than 
reduced it.

A good rule to remember when investing is that your returns will be a function of what you paid for the asset. The more you pay for it, the lower the future return – if you pay less for it, however, you have a better chance of making money.

It is worth noting that, after peaking at just more than $1 800 in September 2011, gold entered a downward trend, losing 43% by December 2015. Gold now trades at about $1 300, which is a pretty bad investment six years later. We can argue the rand hedge merits of gold, but the reality is that there are far better opportunities, such as shares that actually pay dividends.

My concerns about Bitcoin are the same as they were with the gold rush and the tech bubble. We are losing all perspective on what is driving the price of an asset, how it is valued and, in the case of Bitcoin, what it actually means to the real world.

We are investing in it simply because it has already made other people lots of money – this is certainly dangerous territory. Of course, the gold bugs hated my article in 2011 and the Bitcoin investors will probably hate this one.

Over the long-term, after many booms and busts, Bitcoin may become the currency of choice. But, right now, it is more likely that you will lose money on Bitcoin than make it.

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August 18 2019