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Investopedia describes investment bubbles to go through five stages:
- Displacement—innovative new idea or technology that has the potential to change the status quo.
- Boom—exponential price growth, much media coverage, and increasing individual investors piling in fearing missing out on a once-in-a-life time opportunity.
- Euphoria—the price continues into the stratosphere and caution is thrown in the wind and much of the logic to justify the skyrocketing valuation is the skyrocketing valuation (circular logic).
- Profit taking—smart money begins taking profits and often, such relatively small events become the needles that prick the bubble. Popped balloons do not re-inflate!
- Panic—the return down to earth becomes fiercer than the ride to the moon, with sellers overwhelm buyers, further deflating what air is left in the balloon.
It may be unfair to amalgamate Bitcoin and the other band of crypto-brothers with historical ‘investment’ frenzy like the tulip mania (17th century Europe, Dutch Republic), the South Sea Bubble (early 18th century England), or the ostrich feather bubble in the late 19th early 20th century. The reason for this, however, is not because of the current price of a particular cryptocurrency. After all, most detractors claimed that Bitcoin, for example, was in a price bubble when it hit almost $750. The same was said when it surpassed $1000, and again, the same caution was voiced all the way to $3000.
However, without a doubt, the cryptocurrency mania that is starting to gain mainstream recognisability certainly shares a number of similar traits and characteristics with other historical investment fads. In fact, I don’t think that an honest investor (who takes the time to study history) will be oblivious to the fad-status of some of the more popular crypto currencies available on the market today. For the sake of clarity, my light critique is not blockchain technology. I believe that the technology undergirding cryptos is brilliant and it is here to stay and it will change the world in more ways than anyone can imagine. Rather, my focus in this blog is on specific brands of cryptocurrency (be it Bitcoin, Litecoin, or Ripple), and whether they are in price bubble territory.
In all honesty, no one knows the life-cycle of the Bitcoin trend, or the Ripple fad, or, when a particular brand of crypto bubbles will pop. Is Etherium in bubble territory? Is Bitcoin? Will they last beyond the next few years, or are they merely the prelude for something else; something more technologically stable that solves the problem more efficiently? Again, no one really knows. Those invested in cryptocurrencies must draw their own conclusions and manage their own perceived risk relative to their investment. As Charles Hugh Smith put it, ‘There is no way to predict the course of specific cryptocurrencies, or the potential emergence of a new cryptocurrency that leaves all the existing versions in the dust, or governments’ future actions to endorse or criminalize cryptocurrencies.’
In the light of the above, readers may be forgiven for thinking that I am cautioning against cryptocurrencies in favour of physical precious metals. Since I am a precious dealer, it may be natural to assume that I may see Bitcoin as competition to silver and gold. But that is not entirely true. While I still believe in the idiom, ‘if you don’t hold it, you don’t own it’, and I am convinced that silver and gold are superior long-term assets to hold to anything on the planet, I think cryptocurrencies and precious metals are fighting in the same corner and attempting to achieve the same ends. In fact, logical scrutiny permits drawing the following conclusion: the most recent parabolic price movement of some of the more popular cryptocurrencies is a prelude to the future price movement of silver and gold, once the government sponsored price manipulation and suppression comes to an end. Once this takes place, there will be a massive number of people flooding into physical precious metals. Cryptocurrency owners will probably be doing the same as they attempt to lock in profits by exchanging cryptocurrencies for silver and gold. After all, silver and gold still remain on top of the food-chain in terms of safe haven assets given that they have no counter party risk. Bitcoin, and all other cryptocurrencies do indeed have numerous counter party risks associated with them!
I suppose what I am trying to caution against is not that purchasing cryptocurrencies for the purposes of speculation is unwise. Diversification is always wise and prudent. However, I would seriously caution discerning investors from sacrificing physical silver and gold on the altar of crypto currencies, especially since majority of those who invest in these digital currencies do not actually fully comprehend the intricacies of the technology itself. And to those who were lucky enough to enter the Bitcoin trade early and make large profits over the past couple of years, perhaps there is wisdom in taking the original capital invested, convert it to physical silver and gold, and then use those profits only to continue riding the wave. If indeed the bubble does pop (or a black-swan event occurs that does cause a catastrophic price contraction of the particular cryptocurrency held), not all is lost. Only the profits, which is palatable given that purchasing the cryptocurrency was a speculative trade in the first place.
