Bitcoin - A Bad Christmas Present

Bitcoin is the biggest bubble in history right now. So fight hard to avoid the FOMO (Fear Of Missing Out).
Bitcoin - A Bad Christmas Present

I’m writing this today, because a few people have asked me about Bitcoin over the last few months, and many more in the last couple of weeks.

We’ve Sold Today

My children bought Bitcoin in February 2016 … and sold it today.

We want to tell you why.

NOTE: This Post Is A One-Off

My blog at nlong.org will aim to help people invest their life savings in the most effective possible way, combining great returns with safety. Buying Bitcoin is pure speculation (aka “gambling”) so not something I would recommend unless you really know what you are doing.

Back in early 2016

My children were in their young teens and I was trying to think of a fun way of introducing them to investment. It had to be something that would be a bit of a rollercoaster in order to maintain their interest.

Bitcoin!

I advised them that they could each decide on how much of their pocket money savings they each wanted to put in bearing in mind the following:

  • The price for a Bitcoin was currently under £300 (but you could buy fractions so they could buy as little as they wanted).
  • There was a high chance Bitcoin would disappear into obscurity and they would lose everything they put in.
    • It was fun watching their faces as their brains clicked in to think really hard about that. It took a lot of work to save what they had in their piggy banks.
  • But, I said, there was a very small chance that Bitcoin would become a currency that could be used to buy stuff on sites like Amazon over the next 10 or 20 years. If that happened, it might go to (plucking a number out of thin air) £100,000.

They had to remember that this was for fun (speculation), not for serious investment.

The Fundamentals

Let’s be clear: Bitcoin has none. It produces nothing and makes no profits. It is just some coded numbers held on a computer.

The justification that is being used by the “experts” who value Bitcoin runs along the lines:

“If only X percent of the global population buys Y amount of Bitcoin, then due to its scarcity it will be worth Z. And there are so many more people who might decide to buy it”.

On the surface, this sounds logical, and some people might use some obtuse maths to value an asset that has no inherent value. Do what you want with X’s and Y’s and maths, but the simple truth is this: no-one knows the value of Bitcoin.

But note, the mysterious creator of Bitcoin, Satoshi Nakamoto, has no mention of it as an investment in his/her original paper. Neither should you consider it an investment.

One little sidenote: in 2013, Bitcoin watcher and head of cryptocurrency firm rsk.co Sergio Lerner wrote a series of blog posts explaining why he believes an account holding 980,000 Bitcoins belongs to Satoshi Nakamoto. This would value her at $18 billion today - i.e. one of the world’s richest people. Watch out when she decides to sell.

Blockchain

I am not arguing that the technology that Bitcoin is built on, Blockchain, will not prove to be huge, which it might. And people who invest in that technology and the companies involved may do very well.

But buying Bitcoin is not buying or owning any part of the technology. That is like thinking that buying something with your credit card gives you some ownership of the Mastercard company. In reality you’re just participating in a transaction using their technology.

Why Sell Now?

No-one can work out what the fair value of Bitcoin is. But we are in bubble territory.

Since my kids bought Bitcoin (at £268) it is today at (£13,350). That’s 5000% gain in less than 2 years. What a ride. Very much like the Tulip Bubble in the 17th century, and potentially just as mad.

What’s to stop it going up another 5000%? Nothing. And there is a very very small chance it might. But I know for certain that no-one can predict the markets, especially those like Bitcoin. All it will take is for a major theft by hackers to occur, governments to clamp down, which they will if Bitcoin gets anywhere near being used as a currency, or for Satoshi Nakamoto to sell that huge pile - any of which could happen with no warning - and the price will plummet.

One thing that I have learned as a professional trader is that you need to take profits along the way, because when a bubble bursts price comes down a lot faster than it went up.

My kids sold 2/3rds of what they had back in early 2017 when price had already gone up 6 times (to make sure they were in a no lose situation or in trader speak “to take the risk out”).

Today I recommended they sold another 2/3rds of what they have left. Their choice. My son took it, so basically he’s out now.

My children were hugely lucky, having had better returns on their first attempt than I’ve ever had on any (financial) investment in my life.

Take heed … the only buyers now are those who have FOMO (Fear Of Missing Out). That could last a while, but a lot of people may get hurt in 2018.

“The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak.” - John Hussman