As far as fads come and go, cryptocurrencies have had a pretty wild run.
This time last year, cryptocurrencies such as Bitcoin & Ethereum made headlines as Bitcoin prices spiked 300% in three months from US$6,000 in Oct 2017 to a peak of US$19,650 in Dec 2017. Numerous articles from popular and well-reputed media covering the new electronic currencies and how to “invest” in them lured in “investors” looking to make a quick buck.
No doubt the early movers in cryptocurrencies who sold at an opportune moment must have made handsome returns on their trades. Still, a large number of the public have been caught with their pants down as Bitcoin sank to a new 15-month low of below US$4,000, as of December 2018.
The cryptocurrency bubble is reminiscent of one of the most infamous bubbles in investing – the tulip mania. At its peak, a Semper Augustus tulip bulb was worth 5,500 guilders back in 1633. Four years later, the sum had nearly doubled to 10,000 guilders. You do not have to look far to realise that while history does not repeat itself, it tends to rhyme.
It was interesting to observe how some of my friends with minimal investing experience were seduced by the short-term returns seen by cryptocurrencies in 2017, and made considerable investments with levels of enthusiasm not seen in buying shares. As Warren Buffett puts it eloquently, unlike buying stocks, bonds or real estate, buying bitcoin is not an investment.
Cryptocurrencies are a form of electronic payment and purchasing bitcoin is not akin to an investment or buying an asset. Bitcoin by itself does not produce any returns, and buyers are speculating on the fact that the currency can be sold to another person at a higher price.
The Foolish takeaway
Bubbles come and go, but the truth remains. Investing for the long run is a far more prudent and rewarding strategy than speculating in trends one is not familiar with or betting against traders in the financial markets with far greater access to market knowledge on a short-term basis.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.