Hockey stick-shaped price action is one of the telltale signs of a bubble. Bitcoin’s sevenfold rally this year fits the bill. It started the year at $973 and rocketed north of $7,245 as of Friday, up 644% in 10 months. In Zimbabwe -- the currency crisis mecca -- the cryptocurrency blasted to $12,400 on Halloween.
Investment strategists and financial advisors warn Bitcoin is another bubble akin to the tech boom of the late 1990s to early 2000s, the housing crash of 2006-2007 and the commodities bust of 2008-2009.
“A month before the 1987 crash, my cab driver said he started day trading,” said Scott Kelly, CEO of Black Dog Venture Partners in Phoenix, Ariz. “A month before the real estate crash in 2007 in Arizona, my cab driver said he was getting into flipping real estate. Last week, my Uber driver said he just started trading Bitcoin.”
Since debuting nine years ago, Bitcoin has graduated from the wild west of fintech to the mainstream. The crowd is piling in. CME Group the past week announced it will create futures products based Bitcoin. New companies are popping up everywhere selling you on buying Bitcoin for your retirement. Newsletters tout their Bitcoin trading strategy could make $1.64 million in 72 hours. Stories of overnight cryptocurrency millionaires abound.
The brightest minds in business and economics are shouting from rooftops that Bitcoin is in a bubble: Mark Cuban, Warren Buffet, Robert Shiller, Jamie Dimon.
“But it is anybody’s guess what inning. It looks to me like we’re well ahead of the 7th-inning stretch,” said Jason R. Escamilla, CEO of ImpactAdvisor, an investment advisory firm in San Francisco. “The price level and energy usage are unsustainable. There is far better technology emerging to meet the same needs.”
Those include Ethereum, Bitcoin Cash and Ripple, which top the list of 1,255 cryptocurrencies on the market tracked by CoinMarketCap.com. Bitcoin wields first-mover advantage, accounting for about 61% of the cryptocurrencies market that is nearly $200 billion strong globally, according to CoinMarketCap.com. There is nothing to prevent any of the alt coins from usurping Bitcoin.
Speculating Versus Investing
Bitcoin -- or any other currency, whether paper money, precious metal, or solely digital -- is speculation -- not an investment, says James B. Twining, CFP, CEO of Financial Plan, Inc. Bellingham, Wash. with $400 million under management. By definition, an investment pays a dividend, interest, or rental income. Given that Bitcoin pays no income, it should be seen as a speculation, like precious metals, precious gems or artwork, and a risky one at that.
“Speculations may appreciate or depreciate over the short term and at times dramatically,” said Twining. “However as a whole, they do not grow in real, inflation-adjusted terms over the long term. For this reason, they are not desirable for an IRA or any long-term holding period.”
Bitcoin buying is for those who have no faith in central banks or governments or those who want to engage in financial transactions without legal monitoring, says Lex Zaharoff, a senior wealth advisors at HTG Investment Advisors with $500 million in assets under management in New Canaan, Conn.
“I put more faith in the U.S. and European, U.K. and Swiss governments and central banks than a currency, which was created eight years ago,” said Zaharoff. “If there is hyperinflation across all major currencies -- riots in street, starvation, government expropriation of private capital -- it is highly unlikely that people will look to Bitcoins as the stable means of transacting business. At least gold has a 2,000-year history as a store of value.”
Zaharoff added: “Both bitcoins and gold offer no interest, so they lose purchasing power unless their exchange rate appreciates. Some of the appreciation in the exchange value of Bitcoins to real currencies is possibly due to demand from people who want to or need to transact outside of established markets. We have no interest in helping them do that.”
Buying Bitcoins for retirement seems to be all the rage lately. However, that’s very risky given its track record of disappearing into a puff of smoke. By design, Bitcoin cannot be hacked, and it has yet to happen. But the exchanges or banks that hold Bitcoins can. Hackers made off with $460 million in Bitcoin from the Mt. Gox exchange in 2011 and only a small portion was recovered.
“One cannot afford to roll the dice with one’s retirement assets,” said Robert R. Johnson, Ph.D., CFA, CAIA, president and CEO, The American College of Financial Services in Bryn Mawr, Penn. “Bitcoin is a speculative play. People should only speculate in Bitcoin with money they can afford to lose. It isn’t sexy. But the best way to invest over the long term for retirement is to invest in a broadly diversified portfolio of common stocks via a low fee mutual fund or ETF.”
Cryptocurrencies are only for trading not investing, says Michael J. Sicuranza, CFP®, AEP®, an investment advisor at Milestone Wealth Advisors in Greenville, Del.
“If someone has the time, discipline and understands technical analysis, trading cryptocurrencies could be profitable,” said Sicuranza. “But most investors and even most advisors don’t have all those qualities, so most should avoid.”
Although Bitcoin is a speculation, that doesn’t mean it won’t continue to gain in popularity and broader use, says Michael Farr, president and CEO of Farr, Miller & Washington LLC in Washington D.C.
"Since Bitcoin is not backed by a government, bank or commodity, it is nothing but a bubble," said Farr. "It has no intrinsic value. But if everyone trading Bitcoin continues to agree it has value, even if that value is arbitrary and extrinsic, then the bubble never bursts."
Seven-Stage Innovation Cycle
The cryptocurrency based on blockchain technology is following a seven-stage life cycle typical of tech innovations, says David La Placa, CEO and founder of Intellectus, a financial advisory firm in San Francisco.
- It debuts and very people know about.
- It attracts early adopters, who confirm its usefulness.
- The doubters arrive. “This is the phase where the adoption begins its ascent on the S curve,” said La Placa. “The ‘smart money’ begins to identify it but are uniformly negative. This was 2012-16.”
- Mainstream adoption ensues. “This is where the hype cycle really turns up, and the smaller investors tend to jump in,” La Placa said. “These phases commonly see a very rapid acceleration in price appreciation.”
- A significant event scares the market players. Everyone leaves the party.
- The re-group. “This was the internet at the end of 2000 and 2001,” said La Placa. “This is when the next large opportunity to make money as an investor arrives.”
- The dominance period. “This is when all of the early promise, hype and hopes become real. The technology infiltrates industry,” said La Placa. “This is where the average person has given up. But those that recognize the importance of the new technology regroup, analyze and invest. This is generally when the large money is made.”
So even if the Bitcoin bubble bursts, there’s hope it will bounce back eventually.