It was a normal day and I was on the bus and I didn’t think that anything out of the ordinary would happen. I had an epiphany. This epiphany came while I was eavesdropping someone’s loud phone conversation. Oops sue me (don’t act like you don’t do it too)! He was talking to a friend about how, at the time Litecoin’s price, not value (key distinction), jumped from around $100 and is now hovering above $300. That’s a 200% return on an investment. These returns sound eerily familiar to the promised returns of internet companies in the Dotcom era. Already, a red flag should be waving in any sound investors mind. “If it sounds to good to be, it probably is.” Historically the S&P 500 has a return in the range of 7%-9%, not 200%. Granted cryptocurrencies aren’t the S&P 500. That’s really good news for any investor who values not losing money over ludicrous returns.
Bitcoin futures briefly halted after plunging 10%
Dado Ruvic | Illustration | Reuters The Cboe's bitcoin futures fell 10 percent Wednesday, triggering a two-minute…
Cryptocurrencies aren’t the S&P 500 and until just recently, see the article above, they weren’t really able to be publicly traded (more accurately speculated). Because these 2 things aren’t the same, we shouldn’t look at them the same. Bitcoin isn’t a stock. Every investment or speculation, should be approached from a framework.
Back to my eavesdropping, the guy said he was going to sell all of his stock to put into various cryptocurrencies. Any sane investor or person on the street would say you’re stupid to hedge all of your money on one thing. That exposes you to an enormous amount of risk, no matter what you’re investing in. What’s the difference between investing and speculating? Investing is done after thorough research and guaranteeing safety of the principal investment. Speculating more like throwing your principal and praying it gives returns.
Take Tommy, a 10 year old who has been selling lemonade in California the past 4 years and recorded all his revenues. He asked you for $100 to open a new stand in the next neighborhood over in return for a share of the profits and your principal returned after the summer. There is adequate research and he’s promised to return your principal, it has a guarantee from his parents. This is investing.
Take Timmy, he’s also 10 years old and sees Tommy making money selling drinks over the summer. He’s never done it and he thinks, “It’s not that hard.” He asks for $100 dollars and promises after he’s done he’ll give you $300 profits. This is speculation. There’s no guarantee of your principal’s safety.
That is what bus-guy was going to do with his money. He speculated that the price of bitcoin would hit $100,000 by the end of 2018, “AT THIS RATE”. The “At this rate” is key here to understanding his mindset. He is basing his thought process on past performance. *RING RING* This is the ’08 housing crash calling, “Housing is rock solid.” He’s assuming that bitcoin will continue to rise at this rate, about 1500% YTD. Has anything ever maintained that growth, ever in the history of markets, money and currency? NO! So it’s absolutely ridiculous that you would expect it to.
Bus-guy also said, “People said there was a bubble at $5000, $7000, and now at $15000.” This whole argument is based around one principal that will only leading unhappiness. Market sentiment driven investing. What does that mouthful mean? You react to what the market sees as hot. When the price goes up you buy and when the price goes down you sell. Ask any person that sentence and they call you an idiot. Yet, this is how so many people handle their money.
All of this is to sum up a few valuable pieces of knowledge. First, price and value aren’t the same. Price is what you pay, value is what it’s worth. If price > value, you’ll lose money. Bitcoin is a currency and currency’s value comes from utility. Until Bitcoin is accepted like credit/debit cards, I won’t believe that Bitcoin is worth $16000. Second, don’t invest in something you don’t fully understand. I’ll admit I don’t know how to value a currency, which means I shouldn’t invest in it. Third, when you’re seeking returns know whether you’re speculating or investing and don’t mix the 2. Finally, don’t follow the market sentiment because it only leads to mistakes. YOU must understand it in order to properly value it. Don’t blame anyone else for your lost money, you chose to invest in the market sentiment.
*This isn’t investing advice. This is only an opinion piece written about a conversation I overheard.