Bitcoin – yep, it’s a bubble – and how you can still profit – wisely

Only an inexperienced investor would tell you that we are not seeing a bubble around bitcoin and cryptocurrencies. We’ll discuss solid reasons why this is a bubble, but also give you ways on how to profit anyway and limit your risks whilst doing it.

If someone’s telling you that this isn’t a bubble, don’t trust any more of their investing advice. Bitcoin has just passed the $10,000 mark – making this year one of the fastest growth periods you’ll find out there – up 1,258%. Bitcoin covers about half of the entire cryptocurrency market, which is somewhere around $316 Billion.

There’s perhaps only one other asset that saw such a growth – Tulips. And that didn’t last long. Of course, every case is different, especially if one involves a vegetable and another a very complex cryptographic asset or commodity used to exchange value.

Solid reasons why is bitcoin experiencing a bubble

 

Euphoria – people who have no idea how to use it, still buy it.

Maybe we are not seeing mass-euphoria, but we’re not far from it. But we are far from mass-adoption. Those two are a very different thing. A bull market (many people feeling positive about an investment and buying it in masses) like this one keeps the price growing mainly because “fear of missing out” – FOMO. The investment is showing such returns, that people are prepared to forget all investing rules, just to join in on the gains. Even people, who don’t invest in solid investments, like index funds, are willing to put some money into bitcoin. How did cases like that end in the past? Ask anyone who joined some scheme promising unusually high returns. The demand is growing, because more people want to profit from the demand growing. A financial perpetuum mobile perhaps, finally?

The real value can’t be estimated yet – it’s very early days – who actually uses the technology? Speculatory market.

Bitcoin and the blockchain technology (or it’s alternatives) are very promising and will change the way we transact internationally. But it’s very early days and not many average people have use for it. It’s a good chance that bitcoin price is rising, because people are just buying it to profit (see FOMO above), not because they are using it.

Low adoption / high hype.

Think of a day in the last few months when you haven’t heard about bitcoin. Yep, you probably heard less about your favourite hobby, sport or other topic, than you’ve heard about bitcoin. Now think about all the ways you see people using it around you. Yep, you can’t – because so far only technology enthusiasts know how to navigate the buying and holding process (although it’s not that complicated – see basics about cryptocurrencies and how to buy them here).

Key sign of a bubble? A spectacular growth that no one can explain in solid analysis. It’s based on positive future use and potential. Anything “blockchain” and “bitcoin” / “crypto…” surges in value.

In every bubble before (tulips, dot.com bubble, housing bubble) we saw spectacular and fast growth of the asset in question. Lots of superlatives and great future ideas. But eventually it comes down to the real indicators – is it really adding value? Can we measure it’s success not just by euphoric investors but also by wide-spread usage and adoption?

The greater fool theory

You can profit in any bubble, even if you’re selling rubbish, if you can find a greater fool who values the rubbish more than you. Bitcoin or blockchain technology aren’t rubbish. But there will come a point when many investors will get scared by how high the price has raised and will start selling – triggering a possible spectacular downfall, in line with the spectacular growth we’ve seen so far. The question is – how deep will it fall? A correction (when the growth of an asset stops and reverts, when many investors start questioning it) with bitcoin is going to happen. But it’s hard to estimate how strong – it is likely not going to be as bad as the tulip bubble burst – because it is a solid technology and it’s value is not inflated out of nothing (sorry tulips). There is use for this technology, it brings good value to the table, but eventually there might be development that will slow down the growth – leading to a cascade of drops in the price:

  • growth slows down, leading to many speculators cashing out (selling whilst it’s up)
  • this will drive the price further down, which will lead to panic selling – others freaking out about the dip in the price and selling too
  • again, pushing the price even lower, freaking out even more investors… you get the gist

This only stops, when the price of the asset will be seen as more accurate by the majority of investors and they will start buying again.

Which brings me to the last point:

Majority of investors don’t know the real value and probably think today’s value of bitcoin is inflated.

Which therefore means, that there will be a correction. Until then, you can still profit and limit your risks by investing – but be aware, it’s not your average investment, it’s very volatile and unpredictable. Don’t put your life savings into it.

How can you still profit in the bitcoin bubble?

Even if we say we’re in a bubble – we don’t know at what stage. $10,000 per one bitcoin might be the top or half way there, or 20% of it. It’s happening so fast that it could double next year (it grew from $700 to $12,000 in 2017 and still only a small percentage of the world knows about it).

Whilst the bubble is inflating – ride the wave, but limit your exposure to risk if it bursts. Here are a few ways how you can do that:

 

1. Don’t buy bitcoin – lend your money to others to buy it

We have described the details in our separate post Cryptocurrency investment strategy 4 – Bitfinex lending – earn ~30% return on investment without risking your capital

In short – you can minimize your exposure to the bitcoin bubble bursting and any swings in the price by not buying cryptocurrencies directly. Instead, there’s lending opportunities over at Bitfinex.com or Poloniex.com.

Others will pay you daily interest for your money that they use to trade cryptocurrencies (and risk more than you). Your money is protected by a system / logic that closes their positions soon enough should the price start dropping, so that they can still pay you your money back.

Potential profit? It’s been around 30% in my case, which is confirmed by other websites writing about the same topic.

2. Buy various other cryptocurrencies, let bitcoin be just part of your portfolio

Bitcoin has risen the highest and can therefore fall the lowest. The correction has more “room” at a price of $11,000, compared to a price of a few cents. Still – in percent it’s the same – a 50% drop in $11,000 or $0.24 will result in a 50% drop of whatever you invest regardless of the cryptocurrency. But the likelihood of a $0.24 cryptocurrency losing 50% might be smaller than an inflated bubble price of $11,000.

Of course, not every altcoin (alternative cryptocurrency to bitcoin) is worth it. It should have solid technology behind it and needs to address or solve a real problem (that many see as problem, not just a small bunch of people or segment of business) in today’s world. You need to choose – and I help you do that here – which cryptocurrencies to invest in? Bitcoin alternatives.

 

 

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