Have you ever ask yourself what would happen to the world if we were in a Bitcoin bubble today? Some people have said that we could be in one right now resembling the tulip Mania of 1619. They even said that the price of Bitcoin could simply drop to zero tomorrow. But on which basis are they formulating their opinion? This couldn’t be further from the truth and here’s what I think of the possibility of a Bitcoin Bubble in 2017
“You won’t improve results by pulling out the flower and watering the weed” -Peter Lynch
To begin with, let’s use some wisdom from one of the world’s best investors, Peter Lynch. He ran a double digits return portfolio for 13 years before retiring. Peter Lynch told us that selling the best performing assets and keeping the worst one equal to pulling out the flowers and watering the weeds. Not so smart.
How about Warren Buffett, the oracle of Omaha, who held coca-cola and Geicko stocks for 20+years. When Warren buy a stock, it’s usually to hold it for a very long time. The proof of the pudding is in the eating. It’s clearly a trend for the successful portfolio manager to find a winner and to keep it.
Is Bitcoin the next Tulip Bubble?
Peter Schiff, a renowned gold bug, has compared Bitcoin to the next tulip bubble.
I respect a lot what Peter has to say but I totally disagree with him. Most people who dismiss Bitcoin do it because they simply don’t understand how it works. That’s fine, you shouldn’t invest in something you don’t understand.
But there’s plenty of information available out there on how Bitcoin works. You can read the original whitepaper from Satoshi Nakamoto, read the online forum on Bitcoin development or simply read my blog! The best way to understand something is to read more on the subject.
The Tulip Mania
During 1636-37, the dutch became more and more infatuated with their tulip bulbs driving the price to unprecedented heights before crashing down a few months later. The tulip mania really lasted 1 year and many people lost all their money. They were trading future contracts and no one actually owned the bulbs at any time. They were only trading pieces of paper.
Burton Malkiel, a successful Investor and Author of “A Random Walk Down Wall Street” would refer to this as Building Castle in the Air. People were buying bulbs only to sell them to a greater fool hence Building Castle in the Air.
Bitcoin, on the other hand, is actually owned by people. Investors purchase and store them for the long term. No one wants to sell their Bitcoin to a greater fool. Even if the value of Bitcoin were to stay the same, people would keep using it because of its utility.
Furthermore, the Bulb Mania lasted 1 year were Bitcoin price has risen for the past 8 years and is showing no signs of slowing down.
The South Sea Bubble
Some people also referred in the past to the South Sea Bubble when comparing Bitcoin. In 1710, the English governement gave the monopoly of all trades to be conducted in South America to a company called the South Sea Company. People where bidding the price of its stock on the only prospect of future trades and profits.
Unfortunately, the company never made a profit. This didn’t stop the share of the company to rise from nothing to 1000$ in just a few years. When all the investors finally realized that the company would never be profitable, they all exited making the stock plunged to nothing.
The South Sea Bubble problem was that the value of the company was all based on promises of future profits. It was a smoke show orchestrated by the owners of the company themselves.
In the case of Bitcoin, it is currently being use by people around the world to do transaction and as a store of value. Businesses are creating products after products using Bitcoin and because it is open source, any one in the world can create applications using Bitcoin. All those uses of Bitcoin are helping a healthy increase in price.
Bitcoin is too expensive now, which cheaper cryptocurrency should I buy?
This is a message I receive on a regular basis, but this is the wrong way of thinking.
You cannot valuate an asset based on its past price movement. You can see that the price went up or down in the past from a chart but it has nothing to do with its value.
You need to close those charts and ask yourself questions like:
- Do I think that Bitcoin answers a real problem today?
- Do I think Bitcoin will be more or less popular in the future?
- What is the potential growth in 3, 5 or 10 years for Bitcoin?
You can use those questions when evaluating anything.
The current price doesn’t matter. Even if the price increased 2-3x over the past few months, if you think that there’s a sound future for bitcoin and that its adoption will keep increasing, then it is a good buy.
Volatility doesn’t equal risk
The price can rise and fall in the short term but what matters is the long term trend. As long as the “story of bitcoin” hasn’t changed, then the price in the long term should keep rising.
For the same reasons that people will keep on drinking Coca-Cola as long as they love sweet beverage, people will keep using Bitcoin as long as they love transacting with each other without restriction over the internet.
History doesn’t repeat itself but it often rhymes.
We have had many massive increase in the price of Bitcoin in a very short period of time before. From just a few cents to a record breaking of 30$ in 2011, then from 10$ to 150$ in 2013 and then again from 100$ to an all time high of 1000$ that same year.
One thing is sure, you don’t want to be one of the people who sold their Bitcoin at the “top” back then. You’d be regretting today. I think that there’s a simple answer to this, they’ll just never be a top.