A year ago this week the whole world of finance was buzzing about cryptocurrency prices, as Bitcoin prices peaked at nearly $20,000. In a Market Monitor we published on December 15, 2017, we wrote about cryptocurrencies and urged our clients to proceed with caution, as the volatility of these coins was staggering, and an unsuitable means of diversification for an investor’s portfolio. Other financial journalists and pundits were falling over themselves telling would be investors how to buy cryptocurrency and posting predictions from “gurus” calling for Bitcoin prices to reach $1,000,000 per coin over the coming years.
Everything seemed great, and prospects were never considered better, and although many others were calling for caution and investor prudence they were shouted down from the believers in the new crypto revolution as dinosaurs and relics from a bygone era. But since last year, the price of Bitcoin is now down around 82% from its peak, while others are down 95%. Of the 2,071 different cryptocurrencies listed on coinmarketcap.com 320 of them are worthless, including my favorite PONZICOIN, which states in their white paper that the sole objective of their coin offering is to enrich the creator (click here).
If any of this sounds familiar, it’s because it has all happened before. Of course, in hindsight, this is easily diagnosed as mania that surrounded cryptocurrencies, but there have been many that have come before it. The South Sea bubble in 1720 claimed one of the brightest minds of its era, Sir Issac Newton who lost nearly $3 MM dollars betting on the day’s hottest stock. While there is no formal definition of an asset bubble, there have been no less than thirty such events that have happened over the last 400 years.
What makes investors throw all caution to the wind and believe that this time will be different?
That question alone has prompted the writing of many if not hundreds of books and diagnoses on the events leading up to and the aftermath of such financial bubbles. Rather than try to rehash the analysis of other authors, I think the chart below summarizes what happens very presciently.
In the end, if someone wants to invest into speculative investments like cryptocurrencies, it is paramount that the sizing of the investment needs to be commensurate with the amount of risk that you can afford to take. Working with seasoned financial planners that serve as fiduciaries can help guide you in the decision of whether or not you are financially able to take these kinds of risks as they come along. While I believe that there will be a future for the cryptocurrencies and the blockchain technology they pioneered that doesn’t mean that I need to sell all of my traditional investments for retirement and plow them into “coins”.
As we wrote last year, it’s difficult to know if Bitcoin and its peers will be a financial revolution or fail spectacularly, but it’s safe to say, in either case, it won’t be boring.