This post is was originally published on Investor Junkie
By: Larry Ludwig Updated: December 10, 2017
I can’t believe how many people are asking me about Bitcoin in the past week alone.
Even this past weekend when my wife and I went out to dinner, I overheard a conversation about Bitcoin at another table.
Besides asking what is it, the second question I usually get asked is should I invest in it?
Let’s get this simple fact out of the way.
Everyone is calling Bitcoin an investment. Even media pundits are calling it that.
They are wrong!
The secret is Bitcoin not an ‘investment’; Bitcoin is a form of currency.
Currencies are a store of value. The stability and universal use of Bitcoin is a whole other topic.
With Bitcoin you are making bet, hedge or speculation. Things like gold also fall into this same category.
I have nothing against speculating, but realize what you are doing when you purchase Bitcoin.
Bitcoin is worth what a counterparty is willing to pay, or otherwise known as the greater fool theory. Unlike a company stock, Bitcoin has no dividend, nor productive assets tied to it.
All new technology, like Bitcoin, follows the graph down below.
Possible path of Bitcoin
The idea was first coined in the book “Crossing the Chasm” by Geoffrey A. Moore.
Right now we are at the Peak of Inflated Expectation. I hear people stating how it will eliminate government-controlled currencies, purchases are anonymous, the price will only go higher, and it will cure cancer.
Ok I lied about the curing cancer part…
I don’t know where the bottom is but we nowhere near the disillusionment stage.
It’s hard to call the exact top, but I think we are much closer to the top.
Especially with many people in the mass population asking about it or people who otherwise would never invest. That is typically a sure sign of a top.
If you are old enough to remember, this isn’t the first time in we’ve had a mania like this.
Nor will it be the last.
This reminds me of the late 1990’s dot-com era.
You had people thinking companies shouldn’t be evaluated by traditional metrics like earnings but by eyeballs (I shit you not).
Companies like Pets.com were spending millions on commercials. Nevermind the fact that when Pets.com shipped a bag of dog food there were losing money on every order.
I have one of those Pets.com sock puppets by my desk to remind me daily how stupid people can be with investing psychology.
With Bitcoin, we are right now at the 1999 period. Or more recent the 2005-2006 period with housing. We had multiple reality TV shows showing real estate flips and people making money hand over fist. At the time, I personally knew four friends who were doing flips.
Gold a few years ago had a similar mania, but not as bad.
So where is the bottom for Bitcoin?
I’m thinking the bottom will be $1k, but who knows..
So what should you do?
Do what I’m doing and try to figure out the next new “IT” thing is before it is and then ride that wave.
If history is any indicator, you’ll experience multiple ones in your lifetime.