Dear PropellerHeads: Tell me the truth; is the bitcoin bubble about to burst?
Answer: It is hard to miss the avalanche of news about cryptocurrencies. Let me catch everyone up.
The most famous of these is bitcoin, which first appeared in 2009. I wrote a bitcoin PropellerHead article in 2012 when they were trading at $6. I updated the article two years later when trading hovered at $600 per coin.
Today a bitcoin will cost you about $10,000 after a peak in late 2017 at $19,000. If you don’t think that is a bubble, maybe it’s time to stop and smell the tulips (bit.ly/2nHTMXm).
There are many opinions on where this will head. The Sage of Omaha is not a fan (bit.ly/2COh4Au). Forbes concludes (bit.ly/2F0yVKB) there is a lot of upside, but “if you do invest, you should go in expecting to lose all of it.” Bill Miller, respected fund manager, respectfully disagrees (bit.ly/2Fa08ts).
In the “beware of zealots department,” there are a lot of bitcoin evangelists out there and the requisite urban myths. Just ask 50 Cent who was said to find $7.5 million in bitcoin he forgot about (he really didn’t).
For those who need a primer on cryptocurrencies like bitcoin, these are digital/virtual currencies that are transferred with public ledgers (block chains) reflecting their transaction history. They are decentralized and provide some level of transaction anonymity. Since bitcoin showed up, Litecoin, Ethereum, Ripple and others have surfaced. All have seen wild fluctuations in price and enjoyed meteoric rises.
By the way, decentralized means no bank or governmental control. Thus, the buzz that you may have heard about how this makes some folks nervous. It also explains why much of the current cryptocurrency usage is reportedly for supporting underground economic activities (drugs, sex and rock ’n’ roll).
There are about 16 million bitcoins in circulation with 21 million planned by 2041. New currency is created using an elaborate and expensive computer “mining” process. Because of the high mining costs and scarcity, you can impute “value,” just like gold. To give you a sense of the high cost of mining a coin, there are computer viruses that can latch onto your computers to mine bitcoins using its processing power (bit.ly/2FIc9UU).
Cryptocurrency banking is not without controversy. There have been some widely publicized thefts, government seizures, frauds and clearinghouse failures (cnnmon.ie/2BlGj19). But many say these are to be expected in something this new. This is not for the faint of heart.
I don’t know what is going to happen in the future, but I can give you my experience. When I wrote my first article on the subject six years ago, I opened the requisite accounts, traded, bought and sold some coins. When it was all said and done, I made about 10 times my initial (very modest) investment then decided to get out. Due to timing issues, I had the tiniest fraction of a bitcoin left and that bank eventually went bankrupt. Mark me lucky.
I decided to dip my toe in again last fall, this time buying Ethereum. After doubling my investment in 30 days, I cashed out my initial deposit. It doubled again, I cashed out half again. It did so again, and I cashed out the rest.
Since then, the price has dropped almost in half. So again, I was lucky. In my case I was making modest investments mostly just to have a bit of fun and do research. I do not have the makings of someone who would risk my 401(k) on any of these — yet.
So, I don’t know if you have missed your opportunity, or if there is a bubble. OK, I am lying. You did and there is. Watch your eyes, she’s going to blow.