I remember an investment commentator once making headlines by tipping a share to reach $1,000. I can’t recall his name or the stock, and that’s the point — both the tipster and the ‘get rich quick’ claim are long forgotten.
Today it’s the turn of Bitcoin, which reached an all-time high of $19,783 per coin in December 2017 before falling back. But now, some so-called experts are claiming the intangible currency is poised for a new run, as high as $50,000 — and that it could happen in the next two years.
Since the start of 2019, Bitcoin has indeed been rising once more, and it reached over $12,500 in July. That’s more than 60% of 2017’s high point, and doesn’t that show the naysayers that it’s not dead? Well, not yet, but the price is dropping once again.
Magic level
A fall over the past couple of weeks has seen Bitcoin slip to $10,140 at the time of writing. That’s still above the $10,000 level that a lot of chart watchers seem to think is important, though I really see no convincing explanation why. Despite the idea being thoroughly debunked by rational long-term investors, the idea of being able to use ‘support’ and ‘resistance’ levels to contribute to our investing decisions is still popular.
But you know, if you can’t beat the chart watchers, why not join them? If I do that, the Bitcoin chart looks eerily familiar. I’m seeing a classic pattern that’s been displayed by many of the overheated ‘bandwagon’ growth stocks I’ve watched during my 30-year investment career.
Early growth
You know, the ones that start to look like good prospects, attract attention from the markets, and then make that breakthrough into popular culture and even have people in the pub talking about them — and buying them, without a clue how to work out whether a share is good value. As it happens, I’ve overheard conversations about Bitcoin in pubs more than once, from people clearly without much clue.
Anyway, back to the chart. What typically happens is that a bandwagon stock reaches its peak, and when the initial rush of buyers finally dries up and the price wobbles a bit, everyone sees that as a sign to sell, and it crashes. Time and time again, there’s a second rush that doesn’t make it as far as the first, then a third… and, well, you can see the Bitcoin chart for yourself.
Next boom?
There’s always someone telling us what’s going to trigger the next boom. And perhaps ironically, some crypto enthusiasts reckon it’s increased regulation and wider mainstream uptake of such currencies that will soothe fears and send Bitcoin soaring again. I think such developments will do exactly the opposite.
We will surely have regulated cryptocurrencies, and they will be taken up by more and more of the electronic trading world. But I reckon that will pave the way for Facebook‘s asset-backed Libra (and similar currencies, even if Libra itself does not see the light of day).
And it’s surely going to count against early starters like Bitcoin, which have no fundamental asset backing whatsoever and will remain super risky. Buy Bitcoin now? If not now, when? My answer will always be never — it’s shares in quality companies for me every time.