The Bitcoin Bandwagon

First of two parts.

Ain’t it grand? Stocks have surged up almost 30% in the full year since Donald Trump stunned even himself by winning the presidential election. GDP growth, mired below 2% growth for ten years, suddenly is at 3%-plus for two quarters in a row—and the New York Fed now forecasts growth of four percent in the fourth quarter that just ended.

How’s that for a new “New Normal”?

Oh, who cares? Everybody would rather talk about bitcoin. JP Morgan Chase CEO Jamie Dimon calls it a “fraud,” Fed Chairwoman Janet Yellen says it is a “highly speculative asset” that “doesn’t constitute legal tender.” Bitcoin responded by rising $3,000 or 18% in the four days after she spoke, to approach the $20,000 mark.

A TV-news makeup artist in Los Angeles, a gardener in Chicago, a struggling Burning Man fan in New York, a waiter at speakeasy fronting an unnamed alley in Detroit—they all want to talk about bitcoin, too. Or invest in it.

If you were brave enough (or crazy enough) to get in on bitcoin in January 2017, when a bitcoin sold for $800 apiece, that $800 coin now is worth about $14,000, up almost 18-fold in a year. And if you were brazen enough to bet on bitcoin way back when, maybe you should get out now. Why let it ride and expose your gains to what some people fret may be the Next Great Meltdown?

This Bitcoin Bubble surpassed the crazy valuations of Tulipmania weeks ago. Now more than 13 million accounts have opened at Coinbase, a digital exchange that is to bitcoin what the NYSE is to stocks. That eclipses the 11 million accounts at Charles Schwab & Co. Futures have begun trading on the Chicago Board Options Exchange and the CME, based on bitcoin price movements. ETFs are in the works, and even a rank rookie with the lightest wallet and no expertise can trade cryptocurrencies on his or her smartphone.

When I first heard of bitcoin, sometime after its manmade, mystery-shrouded creation in 2009, I imagined a weightless, invisible currency valued mainly for its elusiveness and its ability to escape any tracking. If ever I needed to sell a kilo heroin to someone, bitcoin might be the way to go. Or maybe you would invest in it if you believe bitcoin will surpass all the 800 or so other digital currencies clamoring for investor attention, and rule the world and supplant the U.S. dollar as the fiat currency of the 21st century.

Nobody is thinking that way about bitcoin now. It is a speculative poker chip whose only value lies in the potential that someone will come in later and offer an even higher bid for it. Which has been happening a lot, lately, luring in more later-arriving bidders bidding higher prices, and those increases then draw still more bettors cramming into the crowded casino, even later and even more eager.

You know this will end badly, and then you wonder: Can I get in (and out) in time?

This isn’t investing so much as it is gambling. Hence the first rule of investing in cryptocurrency: Bet only money you can afford to lose. Stocks rarely go to zero. Buying bitcoins or rival “altcoins” such as Ethereum and Litecoin is a wilder gamble, so invest only sums that you can do without. And now a few other rules:

  • Never borrow from a credit card or take out a mortgage to play in this casino.
  • It may be smarter to spread your risk over bitcoin and a few rival cryptocurrencies. Bitcoin follow-ons such as Litecoin (LTC) and Ripple (XRP) may lack the longevity and widespread use (for speculating, not for paying for things) that bitcoin is displaying. A few weeks ago the founder of Litecoin reportedly sold out his entire stake, at a 9,000% profit, causing the coin to plunge in value.
  • Bitcoin’s copycats may rise higher in percentage terms from a much smaller market-cap, yet bitcoin’s price may fall less sharply than that of its wannabe peers. Therefore, it may be better to load up on more bitcoin and then split the remainder among a few other cryptos.
  • Even bitcoin may be a short-term play. A 17-fold rise like the one that just happened in the past year seems ever more unlikely: How long will it take for bitcoin to rise another 17-fold to $2740,000? So if you do make a wager, watch it closely and constantly, and be ready to bail. 
  • Avoid Bitcoin Bubble Bankruptcy by using this rule: If your stake doubles, sell half of it to recover the original sum you invested, and leave the other half in crypto. This way your principal will be preserved, yet you retain a stake in betting on the next round of upside. If there is a next round.

Preservation of the gains you already have logged, rather than bigger and riskier bets in search of more gains, is the pathway to building wealth. That will remain true even in the wilds of the bitcoin bubble now captivating so many of us.

Next: I just bought into bitcoin. Consider it a sell sign.

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