Bitcoin - Breaking down a "bubble"

What is a 'Bubble' in investment terms?

A bubble is a specific economic cycle that is characterised by an accelerated surge in the "asset's" price followed by a massive deflation. The bubble is created by this surge because it is typically unwarranted, specifically when looking closely at the fundamentals of the asset. It is largely driven by the speculative behaviour of the masses of individuals buying the asset at rapid rates.

What this means is that we see mass buying of the asset and rapid rise in it's core price, much like what's been happening with "Bitcoin" at this very moment, we have seen Bitcoin's value increase by over 300% since September 2017! This is not due to more active miners of bitcoin but to all the intermediary traders of Crypto-currencies that have popped up here, there and everywhere. They tend to work on multi-level marketing business models, with new entrants buying a percentage of what's actively mined and the introducing members gaining a percentage because of the new referral. None of these members are actually actively mining new Bitcoin.

Let's get back to the fundamental stages of the "bubble"... What happens next in the bubble lifespan is that a lot of people see the exponential growth and now jump at the chance to get into the asset. Sadly this is normally emotionally motivated and obviously based on the idea that the growth will be maintained and continue at the same exponential level. In reality once the asset has reached it's ceiling price level i.e when no more new investors are willing to buy in at the grossly elevated price, we will typically see a huge collective sell-off at this highly over-inflated price. In these sell-off phases only the first to the party get the gift of reaping the profits, as the price plummets just as quickly as it rose, which unfortunately in turn leaves those who were late to sell, left holding the empty bag and they tend to suffer huge losses.

Big Bubbles Throughout History

Believe it or not but bubble's have been around for centuries, we(humans) as the driving force in the market just can't seem to learn from old mistakes. The main reason, in a word, is greed. People traditionally get caught up in the mass frenzy and the promise of instant wealth and then fail to get out quick enough to actually get the gains. Recent history has 2 of the most consequential bubbles namely, The dot-com bubble of the 1990's and then of course the more globally detrimental housing bubble in 2007-2008, which lead to a global financial crisis and recession. Funny enough the very first recorded speculative bubble occurred in Holland almost 280 years ago, it lasted from 1634 to 1637 and was based on Tulips, yes a bulb for a flower. Commonly this bubble is referred to as "Tulipomania" and it provides us with a hard lesson about speculative bubbles that still applies today.

I am by no means saying that Crypto-currencies will die out and disappear in to the ether. Money has value because we decided it does, consumers have created Crypto-currencies because there was a demand for alternative ways to trade and do business, people had given up on the traditional banking systems and wanted to be able to capitalize on the massive opportunities that technology and the mass amounts of data transmission on the World Wide Web offers us. In my personal opinion Crypto-currencies will survive and prosper long after the bubble bursts.

The only advice I would give to any individual investor wanting to get into Bitcoin, would be that should you choose to get into Bitcoin now, whilst 1 Bitcoin is valued at over 10,000 USD I would urge you to only get in by using your capital to buy hardware and mining your own coins. Do not invest capital into a percentage of what is being mined in the cloud.