The REAL Bubble in Bitcoin
...is in people calling it a bubble...
SO THERE I was on Sunday afternoon, doing what it is one does on a Sunday – very little in my case – and a notification comes up on my phone, writes Dominic Frisby at MoneyWeek magazine.
"Bitcoin rises over 10% to $11,800."
On a Sunday. When every other market is closed.
It's bad enough that Bitcoin is making every other market in the world look like a dirge when they're open. But to carry on rising even when they're closed!
What is happening is almost incredible...
I wrote the book on Bitcoin – I understand why it's a big deal. But...
I get all the Bitcoin arguments.
It's the money of the future. There's a finite supply in the face of increasing demand, a demand which is global. The technology goes far beyond alternative cash systems. This is about the "S curve" adoption of a new tech – like TVs or mobile phones – a tech, which also happens to be money.
I get all of that. I wrote a book about it, the first by a recognised publisher.
All that stuff is true and more besides. The arguments for Bitcoin get stronger and stronger as the narrative of the bull market evolves.
But this is now a mania. All the messages I'm getting about it – and having written that book a lot of people contact me with questions – are not from people who are interested in the new tech.
They're from people who want in on what is proving to be the most epic bull market in history. They do not want to miss out. FOMO is rife.
One arrived just as I was writing this article. The title read "Urgent Advice Please!" Note the exclamation mark.
It was from an old school friend.
"Want to go into Bitcoin big right now. I have started small using Coinbase. What are your views on this and what exchange(s) would you recommend?"
This guy is intelligent, experienced financier with 20 years experience in the private banking department at HSBC in Zurich, now working freelance in other fields. Is now, with the mania this evolved, the time to be going big? He clearly thinks so. How much research has he done?
I'm not calling the top. There is a bubble of people calling Bitcoin a bubble. Normally bubbles end when the shoe shine boy gets in. This one is the other way round. The shoe shine boys got in early. This one will pop when the institutions get in.
That's the remarkable reversed psychology of this story. The idea of an alternative money system, a money without governments, appealed first to anyone on the outside. It was especially appealing to those for whom, perhaps, life hadn't worked out quite as well as they hoped (which is, let's face it, most of us). Anyone who feels even slightly overlooked, alienated, left out or discontent.
Playing this bull market, a bit like voting for Brexit or even Trump, is a bit like getting one back. There was a similar trait common amongst gold bugs in that bull market. "Haha! Screw you, establishment! Your money system's going to die. We are the new millionaires!" The more Bitcoin has risen, the more this narrative has taken hold.
The mania has caught the zeitgeist of dissatisfaction that is currently sweeping the world.
I've made the bullish case for Bitcoin many times. I've shown how Bitcoin could go to $100,000. But I'm no permabull either (although ultimately perma-bullish buy and hold, or HODL as it's known in Bitcoin circles, has been the best investment strategy so far – it always is in bull markets).
In my book back in 2014, I said get familiar with the tech, try it out with small amounts of money, but as an investment the timing is not quite right.
I was right with the call. Bitcoin was in a bear market. When I was writing the book, Bitcoin was trading above $500, the bear market took it below $200 a coin. In spring 2016, with Bitcoin around $450, I said it's time to buy.
I've made both bullish and bearish cases at different times. But there is something about now – and maybe it's that email from my friend that did it – that has made me start thinking about what happens when this mania ends.
Plan your exit strategy now. Don't wait until the stampede starts.
When manias end, what is currently euphoria turns to pain. Another person emailed yesterday happily saying they've made $2000 in two weeks, smiley face. How will they feel when they start losing $2000 in two weeks?
Such pain will be spread among the hordes – and I mean hordes – of inexperienced investors who have only recently got into Bitcoin. Many of these people are kids who've never lived through bear markets before. The pain will turn to panic.
The Achilles heel in the whole crypto infrastructure is the point of transfer between fiat and crypto – getting your money in and getting it out. It's got better, but it is still not easy. One reason so many people have not invested as much as they would have liked has been the simple practical difficulty of actually buying the coins in the first place.
Selling them for fiat, when everybody is trying to do the same thing, and getting your money out, will be harder.
The deeper you're into crypto – perhaps you're into monero or dash or some other altcoin – the harder it will be to get out into fiat. The diehards will tell you you never need to leave crypto. That may be so, but many will not feel the same way in a bear market. If there is a rush into the arms of fiat, the point of transfer from crypto to fiat is where the issues are going to be.
At present there is a plethora of buyers. There won't be when sentiment changes. When Bitcoin comes down, they will all come down. The sector moves as one. The very liquidity issues that have driven the Bitcoin price so high so quickly could work in reverse.
So if you are long Bitcoin or any other crypto, my first bit of advice is this: sell a small amount now. Practise selling. Identify the obstacles in moving your money from crypto to fiat, and learn how to deal with them.
Have your escape strategy clearly mapped out so that, when there is a rush for the exit – and there will be one day – you know exactly what you're doing and you won't get caught out.
When liquidity dries up and the tide goes out, that's the point at which you realise who has been swimming naked. That's when the scams emerge, the frauds, the excessive debt and margin.
Do the exchanges you use have the wherewithal to deal with an 80% crash (there have been five of these in Bitcoin's history) and the overwhelming traffic that accompanies a stampede for the exit? Which of these ICOs and altcoins are the genuine article and which are just hype and BS? Which are the ones people will hold onto and which will they drop?
These are the questions you need to be asking now, during the euphoria stage of a bull market. Like I say, I'm not calling the top. I'm saying prepare for the top.
What happens in the aftermath of a bubble such as this bursting? A lot of pain, a lot of recrimination, a lot of new demands for new laws and regulations to make it impossible for such a thing to happen again.
And maybe that forgotten asset will start to look shiny and attractive once again: gold.