Bitcoin has had a terrible 2018. Hyped beyond belief in the latter stages of 2017, and nearly reaching $20,000 in mid-December, the cryptocurrency has since fallen to $6,500 today. Year-to-date, it’s down over 50%. And it’s a similar story with other cryptocurrencies. Ethereum was trading near $1,500 in January yet today is under $300. Ripple was trading above $3 in early January but today’s it’s trading for $0.30, a decline of 90%. The entire market has lost almost £500bn in 2018, according to a recent article on Yahoo Finance.
Unsurprisingly, crypto ‘investors’ (I’d call them speculators) are panicking. Indeed, according to several recent articles, many are even on ‘suicide watch’. Earlier this week, one of the top posts on the popular Reddit bitcoin forum was information about suicide prevention hotlines. Make no mistake, it’s all gone wrong very quickly, with many people losing a fortune in the cryptocurrency market.
Beware a bubble
You see, as someone who has been investing for 20 years now, I’ve experienced a number of wealth-destroying ‘bubbles’. I’ve seen the dotcom boom back in 1999/2000 and had several friends who lost thousands there. I also personally lost a lot of money in the mining bubble of 2007, in which hundreds of small-cap mining companies soared in value, before crashing dramatically as commodity prices plummeted.
Bubbles really aren’t that hard to spot. So when bitcoin rose spectacularly from below $1,000 to nearly $20,000 last year, naturally, my bubble alarm went off.
All the classic bubble indicators
Bitcoin ticked all the bubble criteria. It was textbook stuff. First, the chart was insane. Nothing rises that fast forever. It’s simply not sustainable.
Second, every man and his dog were excited about it. Social media stoked the fire. Taxi drivers and hairdressers were investing, while friends and relatives who had never invested in their lives were getting involved.
Third, we had new cryptocurrencies coming to the market every day. Were any of them useful?
Fourth, we had outrageous price predictions. John McAfee, founder of the anti-virus company that bears his name boldly stated that bitcoin could hit $500,000 within three years.
Fifth, the bubble was a classic example of the ‘greater fool’ theory. With no earnings or income-producing ability, bitcoin is almost impossible to value. So anyone buying it was simply hoping someone else would come along and buy it from them for a higher price.
The bottom line is that bubbles always end badly. Sure, some people will make money on the way up, but plenty of others will lose thousands.
The key takeaway from all this is that there are no shortcuts to generating wealth. Try to get rich overnight and there’s a good chance you’ll lose your shirt. So instead of trying to achieve instant riches through high-risk investments, it’s much more sensible to focus on building wealth slowly. And that’s where the stock market comes into play, as stocks have proven to be one of the most reliable ways of generating wealth over the long term.
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