So am I an investing genius, or what? Before you cast your emphatic “or what” vote, let me take you back to a time when I got it colossally wrong, even if my reasoning seemed solid. In an article I wrote for U.S. News & World Report, I cautioned investors to “beware of bitcoin.” I cited among other things its mysterious origins and lack of center value-wise.
Shows what I knew. On Jan. 21, 2015, the date that piece ran, a single bitcoin was priced at $226.30. Just days ago on Dec. 1, 2020, that same chunk of cryptocurrency fetched $19,759.30, an all-time high. How about that? I didn’t put my money where my mouth was (or coulda-shoulda-woulda been), so I get to eat my words instead.
I don’t blame you if you doubt that high-water mark is sustainable. And despite blowing it big time with my 2015 call, I’m wondering the same thing. For starters, the timing of this recent summit sure resembles another post-Thanksgiving peak. Back then, bitcoin doubled in price in roughly a month to $19,650 on Dec. 15, 2017. Then over the next three months it fell 60%.
Yes, bitcoin was volatile then — and still is now. The question revolves around whether that matters as much in 2020 as it did several years ago. In other words, is this latest price spike a keeper? Or the 21st century version of Tulip Fever?
Looking for Bitcoin Clues in the News
At least the news cycle offers clues as to where bitcoin might head. For now the price has stalled a bit after bitcoin bulls failed to push the crypto past the mouth-watering psychological mark of $20,000.
If you ask me, it was as though they were a bunch of gamers trying to beat a high score in Tetris. As the Norwegian crypto-market analysis firm Arcane Research wrote in a Dec. 8 report, “The overly confident market has been dampened.” Yes, but by how much and for how long?
Arcane offers metrics to extrapolate this, from the number of search engine inquiries about bitcoin to the activity and volume of institutional investors. The Chicago-based CME Group “was for a brief moment last week the largest bitcoin futures market, a historical day for institutional bitcoin trading,” they wrote.
Trying to Pinpoint the Value Proposition
I find tremendous, tremendous problems with trying to gauge bitcoin’s future. It in no way resembles a traditional investment. It may be the pioneering cryptocurrency, dating to 2008. But how do you determine bitcoin’s market worth beyond just the price of buying one? For starters, no central government backs it. And speaking of “there’s no there there,” good luck finding an underlying asset from which bitcoin derives its value. Because there isn’t one.
Thus bitcoin represents the hottest and oddest investment of the last 100 years or more. Its price is 100% driven by speculation, the perception of value and the ubiquity of its use. It is worth simply what those who hold it and pursue it think it is worth. Nothing more. Here’s a slightly tangential metaphor: A Beanie Baby is made up of maybe 90 cents in fluff, felt and fuzz. But if many collectors are willing to pay $42,500 for a 1996 Peace Beanie Baby, well then they’ve just created its “value” via consensus. (That’s nuts. That’s not only worth about 2.2 bitcoins, it’s also the median value of a home in Detroit. Imagine the look on your spouse’s face when…).
Thus with bitcoin, you must use phrases like “market sentiment,” “investor momentum” and even “greater fool theory,” where price gains depend upon someone else in the future willing pay more than you did today. That’s ever-connected to FOMO — which stands for “fear of missing out,” and, I would posit, “founded on mythical opportunity.”
So, Should You Buy It?
And yet, does any of this disqualify bitcoin out of the box? Not so. The general public has lately shown a susceptibility for submitting to viral phenomena and accepting appearances as reality. It only takes a few social media posts and a compelling backstory to turn something like the QAnon fairy tale into a full-blown conspiracy theory many now accept as fact.
To be fair, bitcoin is no illusion in terms of its use. You can, I am told, purchase a Burger King Whopper with it. (How much you wanna bet the teenage cashier has to go get the manager?) You can access it via PayPal. You can even start a bitcoin IRA; go ahead, wager the nest egg on it. I dare you. Maybe you’ll wind up retiring to a mansion. Or a studio apartment in International Falls, Minn., you supply the heat. Either way, you’ll need nerves of titanium and the constitution of a professional poker player every step of the way.
That said, bitcoin has more critical mass now than when I wrote about it five years ago. As such, its current foundation in theory makes it less vulnerable to wild price swings. So if you’ve got enough to buy some fractional bitcoin and enough discipline to avoid checking the price day to day (because I doubt it’s good for your heart), go for it. You may well ride a wave where the current price of bitcoin lands near $50,000 in 2021, the high end of a Bloomberg forecast. Then again, they also argue for a low end of the range at $10,000.
Meanwhile, you can make fun of me all you want. Ah, but at least in 2015 I was in very fine company. Five years before I became your 23rd-favorite InvestorPlace writer, seasoned financial analysts, a university professor and even a Federal Reserve veteran agreed with me. Then there was this fearless forecast: “I’d never recommend anyone ‘invest’ in bitcoins … It’s barely even a functional currency, let alone an investment vehicle, and the risks of volatility are enormous.”
That, dear friends, was then-editor Jeff Reeves of InvestorPlace.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.