Last updated on July 15th, 2017 at 10:16 am
The following article represents the author’s opinion only and should not be taken as investment advice. Whenever investing in Bitcoin your capital is in risk. Make sure to read this post in order to educate yourself better on Bitcoin investments.
First, I don’t want to be overly pessimistic. Bitcoin has become one of the greatest investment assets in the world, but whenever bitcoin prices approach historical highs, every investor should consider the currency closely. Consider the end of 2016, when bitcoin approached $1,000 dollars. The first time bitcoin had broken the $1,000 dollar mark was back in late 2013, and as many experienced bitcoin traders will remember, prices suffered a dramatic collapse after peaking, then rebounded, then suffered a long-term collapse shortly after.
Many bitcoin investors lost a lot of money in that collapse. Some lost fortunes. So are bitcoin prices destined for a collapse every time they approach historical highs, or was 2013 a one time occurrence? First, let’s look at the Bitcoin historical price chart:
Now, before we go any further, it’s important to note a key difference between the first $1,000 dollar boom, and the second surge in 2016. Look at the chart above, notice how the first time bitcoin skyrocketed from less than $250 to $1,000 over a matter of just weeks? Now look at the second half of the chart, the build up was much slower, and more steady.
In hindsight, the first $1,000 dollar peak was a case of obvious over exuberance. Bitcoin was new, it was hot, money was pouring into it. Bitcoin investors got excited. Too excited. This caused a price surge. As prices started to surge, a lot of people jumped on the bandwagon, hoping to tap into rising prices.
Then, savvy and cautious investors started to realize that the price surge wasn’t due to the fundamental value of bitcoin (at the time), but instead over exuberance. They started selling. As more people started selling, prices began to drop, then more people began to panic, creating a stampede that led to prices eventually collapsing. Those who didn’t get out early enough lost a lot of money.
If prices are surging at unnatural rates, as an investor you need to keep a close watch on markets.
As a “Safe Asset” Bitcoin Can Suffer from Fleeing Investors
Exuberance driven surges aren’t the only reason prices can rise unnaturally. One of the most appealing aspects of bitcoin as an investment currency is its emergence as a “safe haven” asset. When stock markets and other more traditional financial markets are rambled, people have a tendency to pour their wealth into safe haven investments, such as gold, and now bitcoin.
In late 2016 a lot of people began to pour money into bitcoin because they were worried that stock markets and other assets were due for a drop. For investors, it’s essential to figure out whether or not these fears are actually founded. Safe haven assets are great investments, but they are prone to suffering from “bubbles.” People get scared, pour their money into gold, or bitcoin, then realize that their fears were unfounded. Then, bitcoin prices could plummet.
The most important lesson here is to pay attention to why prices are rising. At the end of 2016, bitcoin prices rose largely because of the election of Donald Trump and also fears over the global economy (e.g. India banning its largest banknotes, Venezuelan inflation, etc.). As a safe haven asset, many investors felt their wealth would be safer in bitcoin.
Was this price surge justified? Perhaps, but a lot of economic indicators at the end of 2016 were also pointing to economic growth and positive developments. Thus, people looking into investing in bitcoin had to not only look at bitcoin itself, but also state of the global economy. This makes investing more difficult, but if you do your homework, it will also make investing far safer.
So why is Bitcoin going down after the peak?
I’ve recently came across a video by Chris Dunn that explains the recent price trends very simply. It also shows that the recent crash of the Bitcoin price back to around $840 was to be expected. I suggest taking a look at this video all the way through, it will be worth your time.
Conclusion: Always Be Critical When Prices Reach or Near Record Highs
As an investor, you should always be critical of whatever you’re investing in. Even if you’re very confident in what you’re investing in, whether that’s stocks or bitcoins, you should take some time to examine your investments from a contrarian point of view. Why might a company under perform and suffer a stock price drop? Why might bitcoin markets be distorted, and prices unnaturally high? Remember, markets will always correct themselves.
Bitcoin has been and still is one of the best investment vehicles in the world. Regardless, as an investment asset, it will suffer from prices drops, and will also enjoy price increases. The trick, as an investor, is to buy low and sell high. If bitcoin prices are at or near historical highs, then it might be time to sell. And if prices do drop substantially after markets peak, that might be the best time to buy. People who investing in bitcoin after its price collapse in 2014 would have made a lot of money when prices recovered and surged towards $1,000 dollars in 2016.