Sunday, November 5, 2017

Bitcoin Following The Greater Fool Principle

Since making its debut in 2008, bitcoin has gone from no value to a fraction of a penny by March 2010 to over $7,500. Early investors have watched $1 in bitcoin expand to millions today. And, the majority is piling in. New companies are popping up everywhere selling you on buying bitcoin for your retirement, selling newsletter, and groups touting every positive aspect of bitcoin as a get rich quick scheme.

Nothing clouds investment judgement faster than watching friends and neighbors getting rich quick.

The game of musical chairs will continue as long as the primary trend in upside alignment

Reading the Tape #Bitcoin $AAPL, $AMZN, $ATR, $BABA, $EBAY, $GBTC, $NFLX, $NVDA, $TSLA

Headline: Greater fool Theory: The bitcoin bubble

People are not buying Bitcoin because they intend to use it in their daily lives. Currencies need to have a steady price if they are to be a medium of exchange. Buyers do not want to exchange a token that might jump sharply in price the next day; sellers do not want to receive a token that might plunge in price. As Bluford Putnam and Erik Norland of CME wrote

Wouldn’t you have regretted paying 20 Bitcoins for a $40,000 car in June 2017 only to see the same 20 Bitcoins valued at nearly $100,000 by October of the same year?

Indeed, the chart is on a log scale to show some of the huge falls, as well as increases, that have occurred in Bitcoin's history. As the old saying goes "Up like a rocket, down like a stick."

People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory. Someone responded to me on Twitter by implying the fools were those who were not buying; everyone who did so had become a millionaire. But it is one thing to become a millionaire (the word was coined during the Mississippi bubble of the early 18th century) on paper, or in "bits"; it is another to be able to get into a bubble and out again with your wealth intact.



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