Joe Kennedy avoided much of the impact of the crash of ’29 by using some common sense. When taxi drivers, shoe shine boys and even beggars were giving him advice on what stocks to buy, he knew it was time to move to cash.
Well, I think there’s something similar going on with the raging bitcoin price. Lately, people have been talking to me about it — and these are often people who’ve never had investment discussions with me in the past (although, no beggar has talked about the bitcoin price — at least not yet).
All this should not be surprising, as the headlines showing bitcoin at $10,000-plus price levels is more than enough to catch people’s attention.
Yet I’m not predicting when there will be a massive crash. Let’s face it, manias and bubbles can continue for prolonged periods, as the dotcom boom showed.
But the thing with bubbles is that the end is often unexpected and sudden and severe. For many people, there is not enough time to bail out. The result is financial devastation.
This can have a lasting impact on an asset class. For example, with the ’29 crash, there was a generation of American who distrusted the stock markets. This meant missing out on big gains as the U.S. economy roared back after World War II.
And yes, the dotcom boom was another case study. After the bubble burst in 2000, the digital industry became a laughing stock as people preferred to focus on other businesses, like real estate, and we know how that ended.
I think something is likely to happen with a crash of the bitcoin bubble — and this is actually unfortunate. I think the underlying technology of bitcoin is far-reaching. In fact, it has proven to be useful with sophisticated systems like blockchain, which are having a big impact across industries like financial services and healthcare. As I’ve noted in in my articles here, there are several companies, including International Business Machines Corp. (NYSE:IBM), Microsoft Corporation (NASDAQ:MSFT) and even JPMorgan Chase & Co. (NYSE:JPM), that are pushing innovation with this technology.
Bitcoin’s Price And Futures Trading
Isn’t a validator of the bitcoin price that the Cboe Global Markets Inc has allowed trading on its futures exchange?
Definitely. This move will probably mean that the bitcoin price chart will continue to be bullish — at least in the near-term. Consider that the exchange was hit with outages because of the intense trading at the launch yesterday.
But for retail investors, it is probably better to avoid this bitcoin futures. Like all futures contracts, these involve substantial leverage since you only put a small fraction of the value as margin. Then if the price falls, you will have to put up more capital to cover the position.
The problem is that even low levels of volatility can mean receiving margin calls. And if you do not send a payment, your broker will close out your position (keep in mind that the broker will not accept bitcoin as payment).
In other words, if you want to play the bitcoin price, you might just want to buy it outright, as I recently suggested here.
Bottom Line On Bitcoin’s Price
It’s certainly temping to play bitcoin right now. The futures markets have made it much easier.
But I would be very cautious. Bitcoin has only been around for about eight years and has been marked by drama. Just look at the fiasco of Mt. Gox in 2014, which involved the theft of $470 million in bitcoin. There have also been other hacks.
Besides, whenever a market goes parabolic, there is inevitably a crash at some point, if history is any indication. True, predicting the timing on this is nearly impossible. But as Joe Kennedy demonstrated ahead of the 1929 stock market crash, sometimes it’s better to wait.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
