A Case Study In Mass Speculation 

A Case Study In Mass Speculation 

It is 1989… You just graduated from college and you’re off to London to study abroad for a year.
You inherited $20,089 from your grandma, which you plan on using to buy a new BMW 325i when you get back. You know the exact one you want, but it’s gonna have to wait as you spend the next year in London. In the meantime, the money will sit safely in the checking account until you get back.
 
A year later, you come back to the United States to take that financial analyst job in Chicago. It’s time to buy that BMW, but when you get to the dealership, you’re shocked to find that the price of the BMW is now $126,470.67. What?
 
You’re even more shocked that the price only applies to you. Everyone else can buy it for the $20,089 price you were expecting to pay.
 
You may be scratching your head wondering why a car that costs $20,089 a year earlier now costs $126,470.67. And why does it only apply to you?
 
If you owned Bitcoin in 2017, you might know what I’m talking about.
 
In December of 2017, the price of one Bitcoin hit an all-time high of $20,089. Just a year later, the price had dropped to $3,191.00 – a decline of almost 630%. That’s like experiencing 630% inflation – IN ONE YEAR! In our example, instead of costing $20,089, the BMW now effectively costs $126,470.67 in Bitcoin.
 
In the U.S., the average inflation rate over the past 20 years is around 2.5%. Something costing $20,089 one year would cost only $20,591 a year later – an increase of only $522, which is reasonable. You can conclude that the buying power of the U.S. dollar remains relatively stable over time.
 
In the last 50 years, the highest rate of inflation in one year was 13.3% in 1979 – a high rate but nothing compared to 630%. Based on this stability, you can rely on the U.S. dollar as a stable medium of exchange.
 
It’s why it’s a widely accepted form of currency outside of the U.S. Its buying power doesn’t change much from year to year. Bitcoin, on the other hand, is a different story.
 
Touted as the wave of the future for currency, Bitcoin fails miserably in the minimum standards a currency should meet as a medium of exchange – stability and security.
 
Bitcoin is neither stable nor secure – the two criteria that its supporters have touted since it came on the scene in 2009. It remains unregulated and unbacked by the full faith and credit of any government and tens of billions of dollars of Bitcoin are stolen every year with no means of recovery. It’s far from secure and it’s also highly volatile. Over the past five years, there hasn’t been a year where Bitcoin hasn’t been up to or down less than 72%.
 
Not only is Bitcoin unstable and not secure, but very few businesses also accept it as a form of payment. To me, it has little value and this value is not going to change.
 
​​So how do you explain Bitcoin’s recent price surge?
 
As of this writing, the price of one Bitcoin is $37,069.90, an increase of 650% since March. So, if the value of Bitcoin as a currency hasn’t changed since March, what explains its astronomical rise in just nine months? The only thing that has changed is what people are willing to pay for it.
 
The recent rise in Bitcoin is a case study in mass speculation.
 
Investing in Bitcoin is speculation with money to be made purely from timing the rise and fall of its price. And just like with options, where volatility is coveted because it offers the promise of hitting it big from wider price spreads, the same also holds for Bitcoin. Investors are drawn to Bitcoin because its extreme volatility offers gamblers a chance to hit it big.
 
Adrenaline junkies craving volatility and investors suffering from fear of missing out are what is fueling the recent Bitcoin surge. This bubble is bigger than the one in 2017 when it dropped 650%. This bubble has further to fall and the investors who come last will be the ones to pay.
 
Sound familiar?
 
​​Sounds like a pyramid scheme where the early investors are the only ones making money and the last ones are the losers.
 
I don’t want to sound cynical, but I prefer to invest in assets that take human irrationality out of the equation – where the price of the asset increases because of a product or service it provides and not because of what the masses are willing to pay for it.
 
Aren’t we supposed to learn something from case studies?
 
If 2017 was a case study in mass speculation on Bitcoin, why didn’t anybody learn from that?
 
​​Just three years later, Bitcoin is approaching double the price of the peak in December 2017. This bubble should be scaring everyone, but apparently, it’s scaring no one.
 
I’m staying away. I’ve always stayed away from speculative investments.
 
I prefer investments I can touch and feel that provide some kind of value – like offering products or services or providing housing or office space.
 
They’re more stable, secure, offer reliable cash flow and predictably increase in value over time – all benefits speculative investments fail to provide.

About The Author

John Turley
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