I believe in bitcoin.
It’s a solution to a real problem seen in all paper currencies: inflation.
Over time, governments end up destroying your savings through inflation.
That’s true in every currency. Dollars. Euros. Francs. Pounds.
That’s because the cost of printing money is less than the value that it buys. In other words, it’s a good deal for the government.
It’s also an easy solution for any government because all you have to do to spend money is print it. Not to mention that it gets people’s approval and helps to win elections.
Of course, if you’re a saver, you get put through the wringer.
Inflation makes suckers out of savers.
But if you buy into this way of thinking, then you can understand how bitcoin’s success was inevitable.
I only wish I had understood this concept earlier. Because if did, I would have bought bitcoin myself.
But because I didn’t know what I didn’t know, I missed bitcoin’s surge to $5,000. The price has now come down from that point. I realize that some of you may be looking at that decline and wondering if you should get in. Here’s what I believe…
A Bad Investment
Despite my belief in bitcoin, right now, I’m staying away from it.
The reason being is that bitcoin has become too popular. By that I mean, there’s been too much buying of bitcoin.
See, because of how I evaluate investments, I know that buying into something that’s too popular is a bad move. Because often times, when too many people own one thing, it means the price has gotten too high.
This exact situation is how bubbles are formed.
And right now, it looks like bitcoin is a bubble that’s about to come crashing down.
Bitcoin’s massive run-up from $970 to a peak of more than $5,000 earlier this year are exactly the kind of parabolic gains you see in a bubble.
Ditto for the copycat initial coin offerings (ICOs) that were launched to take advantage of people who missed out on bitcoin.
So far in 2017, an estimated $1.25 billion was raised in ICOs. In July alone, 34 ICOs launched for a total of $665 million.
And total market capitalization of virtual currencies or cryptocurrencies has gone from less than $20 billion at the start of 2017 to about $120 billion.
That’s incredible for a market that’s barely a decade old… and where no one knows what the long-term supply or demand is.
That’s the critical thing for me. Because in the end, all investments, including bitcoin and any other cryptocurrency, are still set by what someone is willing to pay for them.
That’s what supply and demand represent: the price at which one person is willing to buy and another person is willing to sell.
Not a Straight-Line Decline
When an investment becomes too popular, people buy too much, and they pay too much for it.
When it becomes clear that the buyers are all-in, and no more high prices are coming… that’s when a collapse happens.
We saw that happen in 1999 to dot-com stocks, and to real estate in 2008.
Thus far, bitcoin’s collapse has been unspectacular, with a total decline of about 18%.
However, the evidence is building that bitcoin and its fellow cryptocurrencies are going to experience a bubble-style collapse.
If that’s right, then you should expect bitcoin to go down by as much as 80% from its peak.
That would put it at a level of around $1,000. However, bubble collapses can overshoot or undershoot this target by 5% to 10%.
A bubble-style collapse is usually interrupted by incredible rallies. So, people expecting a straight-line decline are going to be disappointed.
The other thing about bubble-style collapses is that they last a while. My best guess is that when the cryptocurrency collapse, if it happens, it will last at least five years.
By then, bitcoin, and whatever few cryptocurrencies survive, will be deeply unpopular… and that’ll set the stage for a new bull market for these investments.