The Bitcoin Bust

bitcoin_bust

There were talks of $200,000. Investors said that currency as we know it today would cease to exist and we would be using digital money. Bitcoin was supposed to be the digital currency to rule them all. The defacto measure of wealth in the whole world. Alas, none of those predictions are coming to fruition.

A couple of years ago, the rise of Bitcoin was all the rage. It was an easy way to get rich and if you weren’t on the boat then you weren’t investing properly. At least that was the notion of all the so called Bitcoin “experts”.

What many people were doing wasn’t investing. It’s called gambling. And the results can be devastating. Yes, there are some people that lucked out and got out at the top, but for the majority of the people who piled on when the price went asymptotic, they’ve been taken to the cleaners. No doubt over the next few years we’ll hear stories and 60 Minute episodes of retirees and Millennials that bet big on Bitcoin only to see their fortune evaporate. This is what happens when people gamble on something with no fundamentals.

Lacking Logic

All the rhetoric of Bitcoin being the next global currency was just talk. It was a great way to argue that Bitcoin had a place in the world’s economy and that it was actually a legitimate investment. Unfortunately, those that preached this idea were just great marketers. Good advertisers who lured unbeknownst individuals into investing.

There was never anything fundamental about Bitcoin that made it an investment. If we follow Robert Kiyosaki’s, writer of Rich Dad Poor Dad, definition of an investment, it would have been defined as an asset that generates positive cash flow by owning it. If we look at Bitcoin it never did that. Owning a Bitcoin never generated monthly cash flow. It never paid interest, nor did it ever give a dividend for holding.

On top of that, Bitcoin never generated revenue or profit. There was no way to measure the value of a Bitcoin through any form of analysis. Was the value growing for a specific reason? No. It was totally based on supply and demand and scarcity. But why was it scarce? Because of a hard math problem? If that was the case why aren’t 12th grade calculus teachers worth a billion dollars?

Bitcoin was never going to replace global currency because of its volatility. It didn’t make sense for any retail store to accept Bitcoin when the valuation of it was so volatile. What store would accept Bitcoin just to see it drop 10% the next day? That’s like selling for a discount when you didn’t want to put your product on sale. And what shopper would want to pay with Bitcoin when it kept rising 10% a week? Instead of paying $1000 for an iPhone, the consumer would end up paying $1100 after one week. It made no sense.

Classic Greaterfool Theory

Many people don’t even know about the Greaterfool Theory of investing, but we preach it to each other almost all the time. “Oh, this is a great investment, you need to jump on it”. “This is worth more, everyone is buying it.” This greed and lust mixed up into one bad investment.

Essentially, the greater fool theory follows the premise that a buyer or investor will purchase an asset without regard to its quality (revenue and profit need not apply) in the belief that another individual (or “greater fool”) will come along and quickly buy it for a higher price because of the same belief.  This type of behaviour is what forms the classic “investment bubble”.

greaterfool_theory

The classic bubble or greater fool theory graph, pretty much mirrors the Bitcoin price chart above. Bitcoin was a classic bubble. Many people pumping it and getting rich, and then at the very end when enthusiasm wanes things capitulate. The last one holding the bag is always the loser. Always is, always will be.

Delusional

As a means of achieving financial independence Bitcoin failed miserably. Who do you know that is living off Bitcoin right now and paying their rent with that investment? Probably no one. The fact is speculative investments with very little fundamentals rarely make turn out to be a good idea. They are a gamble like the casino.

The lucky few who made a lot of money achieved what some people achieve at the roulette table. They joined the table when their number got hit a couple of times. That’s a 32 to 1 payout for their bet. People who saw the winner celebrating started to join the table because they though it was hot. But in the end the house always wins. Those that joined late lost everything. The one that got in early and won two rolls escaped by making a lot of money, but now that one trick pony is gone. Where’s the next hot table?

This is how people invest, or I should say gamble. They look for quick wins and chase big gains rather than trying to build a sustainable investment portfolio. Instead of gambling with stocks like a casino, the average Joe should use time to their advantage and build a balanced passive investment portfolio that becomes a winner over the long run. This never seems to happen though because history always tends to repeat itself over and over. Fools just like to keep losing their money over and over again. Oh well…

If you lost big on Bitcoin, let this be a lesson. Don’t go chasing things you don’t understand or believe media hype that has very little substance. Let the fools jump in with their money while you grow your money slowly. It’s OK if a few people score big. Don’t be jealous. Remember that slow and steady is what wins the race. Just be glad that you aren’t taken for an emotional ride when the bubble starts to burst.

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