Is Bitcoin Too Good to Miss or Is It a Bubble About to Burst?
Many investors use instinct as a component of their decision-making process. In the case of Bitcoin, for many, it instinctively feels just too good to be true. Bitcoin, by far the largest cryptocurrency by volume, is worth at least 600 percent more at this time than it was less than a year ago, soaring from $9,000 and change to over $56,000 this week.
Bitcoin was, by far, the best performing asset of 2020. Although there have been some wild price swings, the rally has managed to defy fears that a price crash similar to 2018 is in the offing.
Eye-popping returns are prompting even diehard skeptics of crypto to have second thoughts. Long-term doubters are now considering investing in Bitcoin. JPMorgan’s Jamie Dimon, a long-time crypto bear has now turned bullish.
It is not just Mr. Dimon, cheerleaders now include Elon Musk, Tesla Motors chief, as well as a growing number of hedge fund managers who are now convinced that Bitcoin is the digital version of gold. The same managers believe the X-Rate against the U.S. dollar and other conventional currencies has room to soar even more.
The returns are prompting some to wonder if Bitcoin is nothing more than a big Ponzi scheme. Retail investors are wondering if they should give in to the temptation to jump in. For professionals in finance, there is a sharp divide in opinion.
The performance of Bitcoin over the last year has certainly turned some bears into bulls, however, some opine that a bubble, no matter how big it grows, is nothing more than a bubble. Even die-hard fans of crypto are holding back, many of which are limiting their crypto investments to only a couple of percent of their portfolio.
Regardless of how crypto turns out, today crypto is providing those intent on fraud with rich hunting grounds.
Is it Different This Time Around?
Since the beginning of the new year, Bitcoin’s value has risen by a staggering 85 percent. In mid-April, less than a month ago, it hit an all-time high of $65,000. Companies operating in the digital currency arena are attracting a great deal of money.
Coinbase launched less than 10 years ago, and is the perfect example. Investors in the recent flotation valued the company at $72 billion. Coinbase is now at par with BNP Paribas, a bank that dates back over 170 years.
Today, young people are investing like never before. Millennial and GenZ investors are far more likely to buy crypto than equities. Research undertaken by Charles Schwab shows that more than half of survey participants had traded digital currencies.
A Growing Risk is Debatable
With prices spiraling over the last year, bears are concerned that a collapse similar to what happened in 2018 is imminent. Bulls argue differently. Bulls suggest that price is being driven by demand from professional traders and instructional investors, both groups that tend to bring stability to the market.
Like most things, not everyone agrees. Canadian economist David Rosenberg, suggests nothing has changed, there are no “new eras.” Rosenberg says, “Asset price bubbles come and go, but never do they correct by moving sideways.”
While young people are keen on crypto, those in their mid-50s and above are not so convinced. People in this age group are staying on the margins. A recent survey indicated that fewer than eight percent of middle-age investors trade in digital securities.
This group may be very well right. Investors around the world have lost more than $16 billion since 2012 in scams and fraud associated with crypto, this according to disclosure platform Xangle.
The financial watchdog in the United Kingdom warned investors that they can lose all their money when “taking a flutter” on crypto. Although the Financial Conduct Authority has not sought to block dealings in crypto, it has forbidden the sale of derivatives on crypto assets to retail clients in the country.
Crypto markets are unregulated, as such, there is nowhere for investors to turn in the event they become a victim of fraud.
The most important rule for crypto investors is to be fully prepared to lose their entire investment. It was only a month ago when Bitcoin shed a full 23 percent of its value in less than two weeks.