Created in 2008 by the mysterious Satoshi Nakamoto, Bitcoin (BTC) is the original decentralised, blockchain-based cryptocurrency. It remains the largest digital currency today. But the latest bubble in the BTC price terrifies me.
Bitcoin loves blowing bubbles
The Bitcoin price started 2011 at 30 US cents and closed at $5.27. At end-2012, one Bitcoin was valued at $13.30. Then the price went stratospheric, booming to $744 by end-2013. In 2014, this early Bitcoin bubble burst, as BTC collapsed to $310 by 31 December. But it rebounded in 2015, ending the year at $425. Then 2016 was another vintage year for BTC, which closed at over $952.
After that came the craziest year in Bitcoin’s short history of bubble behaviour. At its peak on 18 December 2017, BTC hit a record high of $19,783. Frighteningly, the BTC price had skyrocketed by 4,555%, soaring more than 45-fold in under 12 months. Back then, I warned everyone to avoid what was obvious an enormous speculation-driven bubble. Sure enough, BTC then crashed spectacularly, collapsing by more than five-sixths (84.2%) from its 2017 high to a 2018 low of $3,122.
Bitcoin’s latest and biggest bubble
2019 was another comeback year for BTC: the price more than doubled, leaping 128% to close at $7,119. Then came 2020 and Covid-19. Frenzied buying and home-trading speculation by the ‘Robinhood herd’ sent BTC ‘to the moon’ (as Bitcoin bros say). Three days ago, BTC closed at a $27,917, up over $20,000 in a single year and its biggest absolute gain ever.
When will this bubble burst?
Knowing Bitcoin’s history of bubbles, I’m shocked and stunned as I write, especially after the price action of the past three days. Earlier Sunday, BTC hit a new high of $34,545, surging almost a quarter (23.7%) since New Year’s Eve. This assigns a staggering market value for Bitcoin of $621bn, placing it among the biggest market bubbles in financial history. When this latest Bitcoin bubble bursts, it could wipe out hundreds of billions of dollars and inflict pain on millions of speculators. As Lord Rothschild allegedly remarked, “no-one ever went broke taking a profit.”
I prefer investing to speculating
In summary, I see BTC purely as a speculative asset with no fundamentals to support it, other than scarcity and mania-driven demand. For the record, I’ve never bought any Bitcoin and I surely never will. Instead, I much prefer to buy financial assets with intrinsic values that enable me to judge when prices offer value. In particular, I’m always on the lookout for fairly priced or cheap shares in high-quality, well-run businesses. When I buy shares in listed companies, I know that I’m buying part-ownership of that business. If the business does well over the long term, then so will I as an owner. For really great firms, I might buy and never sell. Who needs to trade when time (in the market) is on your side?
As a value investor, I think 2021 will be a great year for lowly rated FTSE 100 shares, so that’s where my capital is going this year. Finally, if I owned any BTC today, I’d sell, sell, sell before this monstrous bubble bursts!