BitCoin Bubble


Bitcoin Price Chart
Source: Bitcoin Charts, April 5, 2013

I learned to recognize bubbles from William Bernstein’s short history of bubbles in the The Four Pillars of Investing…  here are a few, along with some more I found on Wikipedia…

  1.  Tulip Craze
  2.  South Sea Company
  3.  Mississippi Company
  4.  Railway Mania
  5.  Florida Land Boom
  6.  Stock Market Bubble
  7.  Poseidon Mining Bubble
  8.  Japanese Bubble
  9.  Asian Bubble
  10.  Dot-Com Bubble
  11.  Uranium Bubble
  12.  U.S. Housing Bubble
    2013.  BitCoin Bubble?

I like the idea of the Bitcoin currency, and it certainly does have an advantage that nobody can just print it so normally it should hold it’s value because it should maintain it’s rarity.  People are looking for alternatives to their local currency.  People are afraid because of situations like Cyprus where your money is confiscated, or the United States where your government is so far into debt you don’t see an outcome where devaluing of the dollar doesn’t occur.  So people start buying Bitcoins, which drives the price up (supply and demand), and now everyone is seeing the value of Bitcoins rise so it becomes a speculative investment just like Tulips or Real Estate.   Bitcoins will go much higher in value than they’re worth and at some point when someone realizes they’re not worth that much everyone will try to get out.  Bitcoins may go up to $200 then crash or may go up to $1,000 or higher then crash.  But, with near certainty at some point in the future it will come crashing down in value overnight.  Of course, I could be wrong.