The great irony of the bitcoin craze is the digital currency is acting nothing like a currency. True currencies function as dependable stores of value, and bitcoin’s meteoric rise has turned it into the hoarder’s shiny object du jour.
It’s not an object, though. It lives through blockchain technology and independently of any central bank, which explains its popularity among libertarian-minded people. The brilliance of this invention is in its programming, which ensures the integrity of each transaction.
But bitcoin is in the wild-west stages of formation, and those seeking to make money off it at this juncture should heed the lessons of previous crazes, from the Dutch tulip mania in the 1600s to the recent housing bubble.
That The Gazette ran a story Wednesday (Page 3A) about bitcoin should be red flag—a signal this so-called investment perhaps has reached its saturation point.
Bubbles end badly, though it’s difficult to predict when they will burst. Only in retrospect does the “top” become obvious to those people who entered the game late, racking up the largest losses. We’d hate to hear stories about Janesville residents who put their life savings into bitcoin only to have the coin’s value evaporate overnight, maybe in a few seconds—bitcoin is that volatile.
The balance of evidence suggests bitcoin is in a bubble, the best indicator being the plethora of copycats (Litecoin, Namecoin, SwiftCoin, Dogecoin, Lisk, Ethereum, Zcash, Dash, Ripple, Monero, etc.) now entering the market. At least bitcoin can be used to make transactions, but many cryptocurrencies haven’t been tested and seem about as useful as digital tokens collected in a Super Mario Bros. video game.
Bubbles burst amid oversupply—often constituting cheap rip-offs of the original. What began as a legitimate idea can quickly turn into a con as the number of players trying to profit multiplies. When the last sucker tosses in the last dollar, and there’s no more money left to keep the bubble inflated, that’s when the party’s over.
Some prognosticators say bitcoin could still rise 20-fold in value, while financial advisers are understandably skeptical, as they’re used to dealing with stocks, bonds, annuities and other traditional investments vehicles.
“What does it tell you if something has gone up 1,600 percent since the first of the year?” Uncommon Cents Investing adviser John Berkley told The Gazette. “Do you maybe think that the easy money has been made? Or perhaps that the risk has gone way up? Or could this end badly?”
Bitcoin could still become the stable, alternative currency its creators had envisioned, but probably not until the speculators have been purged from the currency’s blockchain. (After all, the dot.com bubble yielded many great companies that today drive the economy.)
If you bought bitcoins at $100 each or less years ago, congratulations. You are what the financial world calls the “smart money.” You got in early and made a killing.
But if you’re like the rest of us (the “dumb money”) and wondering whether to drop $20k on digital ether, think hard before you do—and be sure you can afford to lose it all.