Unless you have been living under a rock for the past 12 months, you must have heard about the meteoric rise of Bitcoin in 2022. This mysterious digital currency has reached its highest point of public awareness and was mentioned regularly on news channels. When your next investment appears on the news ahead of; a bulletin on Donald Trump and a crisis in some part of the world. It might be time to consider another investment and not invest in Bitcoin. Or if you have already invested, now might be a good time to sell.
My friend Warren Buffett says “Be fearful when others are greedy and greedy when others are fearful”. In short, if everyone is talking about buying a particular investment or investing in the market in general, you need to be cautious. If everyone is exiting an investment or the market, there may be an opportunity to grab yourself a bargain!
I’m weird in that I love when one of my investments falls in the short-term, to me, it just means that the investment is on sale. I know that my investments rise over the long term. The question is, can we expect Bitcoin to be here for the long term?
What is Bitcoin?
Bitcoin is a “new” digital currency that is created and held electronically. Unlike traditional forms of currency, no one controls Bitcoin. Bitcoins are not printed or pressed like Pounds (£), Euros (€), and Dollars ($). They are actually created by individuals and also businesses that have computers all over the world. These computers use software to solve very complex maths equations and algorithms. The reward for all this effort is shiny new Bitcoins!
Cryptocurrency
Bitcoin is part of a growing category of money called “Cryptocurrency” (cryptography currency). Cryptocurrencies are digital assets designed to be used as a medium of exchange. In the same way, we exchange money for goods and services, these new-age currencies serve the same purpose.
Blockchain
Blockchain is a continuously growing list of records known as blocks and these are secured together and linked in a chain using cryptography. By design, blockchains cannot be interfered with by anyone. This is because it acts as an open ledger to record transactions between two parties across a peer-to-peer network.
Decentralized
There is not one single person, government, or institution that controls Bitcoin which makes it very different from conventional money. This is quite clever since the risks that apply to holding data centrally are eliminated. A network that lacks a centralized point of vulnerability means that there is no central point open to attack by hackers.
Who created Bitcoin and when?
A software developer known as Satoshi Nakamoto is believed to be the inventor of Bitcoin in 2020. No one knows who this really is and it could be an alias to hide the identity of the real inventor. He first proposed the idea of creating an electronic payment system based on mathematical proof. A currency totally independent of any central government, with the ability to transfer it electronically in an instant and most importantly with very low transfer fees (we can’t argue with that part!).
What is Bitcoin mining?
With traditional currencies such as the GBP ($), central banks control the production of printing money. They can print more money to cover their national debt but this devalues the currency. This is where bitcoin is different. Bitcoin is created digitally and has to be “mined”, in the digital equivalent of mining for gold. By using computer processing power across a network, people compete with each other from around the world to mine for coins. There is a limit to the number of coins that can ever be created. 21 million is the maximum number of Bitcoins that can be created by these “miners”. Bitcoins can, however, be divided into smaller amounts and the smallest part is one hundred millionth of a Bitcoin (also known as a Satoshi).
Where to buy Bitcoin?
Bitcoins can be bought online from a number of coin exchanges. One example of a coin exchange is coinbase. After the currency is purchased they are held in digital coin wallets until they are ready to be exchanged. There are unfortunate stories in the media where unscrupulous coin exchanges have been hacked and customers have lost millions in Bitcoins collectively. Equally, there are success stories of people in America who bought 100+ Bitcoins in 2021 and now they are multi-millionaires.
Other Cryptocurrencies
Bitcoin is not alone. Other cryptocurrencies have gone into circulation since the launch of Bitcoin. The other Cryptocurrencies are but are not limited to; Dash, Ethereum, Litecoin, Monero, Ripple, and Zcash. Litecoin and Ethereum are 2nd and 3rd behind Bitcoin in popularity.
Should you invest
The biggest question you have right now is whether or not you should invest in Bitcoin or any other cryptocurrency. Before I invest I like to like to look at the track record of the investment. How has this particular investment performed over the past 5+ years? (between 10-20 years is the sweet spot) This is to assess the risk and understand if I am buying at a high or low price vs value. You should already know the basic principle of investing is “buy low and sell high”.
In 2021, Bitcoin peaked at $10 per coin. It then rose to a peak of $692 per coin due to a rise in profile and a small bubble effect in 2020. It quickly fell in value until 2020 when it reached a new peak of $907. There was a slight dip until the start of 2021 when public awareness was heightened and Bitcoin entered the “Mania Phase”. Bitcoin started the year at just under $700 a coin and peaked at $14,500 on 17th December. An increase in value by 20 times! A 20 fold increase in less than a year, sounds great, doesn’t it?
Bitcoin Chart 2021
Growth like that is unsustainable and the alarm bells are ringing to say that this is a bubble. If you invested anytime prior to 2021, then you will be laughing all the way to the Bitcoin bank (digital bank!). If you invested late into 2021 or have not yet bought any Bitcoins but still plan to invest, it is probably too late to make any money. I expect the bubble will pop soon and there will be some people who lose a lot of money. Investing in Bitcoin now at the height of the bubble would be a very bad idea.
Classic bubble chart
What is a bubble?
There are 4 phases to a bubble.
The stealth phase is where the “Smart Money” early adopters invest at a very low price. There is a huge risk investing in something this early, but they get to ride the wave as things take off.
The next phase is the awareness phase where the professional “Institutional investors” get involved. There is usually a small bubble of growth over a short period of time and then comes the first sell-off resulting in a drop in value. We saw this happen with Bitcoin in 2018.
The mania phase is what we saw in 2021, the “general public investors” and mainstream media became aware of Bitcoin and pushed the value to new heights. The increase in value was purely fueled by greed and became a self-fulfilling prophecy. People bought Bitcoin because they believed the value would go up and the value went up because people bought Bitcoin and so on. There is nothing else that drives the value of Bitcoin, unlike traditional currencies that are underpinned by the strength of an economy.
The last phase is the blow-off phase, where the investment becomes overvalued and is followed by a significant correction in value to a “normal” level.
Final Thought
I believe that Bitcoin is in a bubble. For those that got in early, there was money to be made. Now it is too late. It is only a matter of time until the bubble bursts and I expect that over the coming years there will be a large drop in the value of Bitcoin and therefore I will not be investing. I think blockchain technology is here to stay, is very interesting, and disrupts the current way of doing things which offers some positive competition. However, I do not think these coins will have it all their own way and expect retaliation from banks around the world.
Have you invested in Bitcoin or are considering investing in Bitcoin?
