CMU: Why most people will lose money in Bitcoin

By Jani Ziedins | Free CMU

Nov 29

Cracked.Market University

A person would have to live under a rock if they haven’t heard Bitcoin breached the psychologically significant $10,000 barrier today. What started as a libertarian experiment a few years ago has gone mainstream. It launched as a proof of concept. Morphed into drug dealers’ favorite payment tool. And has now become the latest speculation frenzy. And what a frenzy it has been, up well over 1,000% this year alone. Everyone expects it to keep running and so far everyone has been right.

The financial media barely acknowledged Bitcoin 12-months ago. Now every financial outlet devotes significant coverage to cryptocurrencies. Given how strongly prices shot up, it isn’t a surprise everyone wants to get in. And so far everyone is getting rich. Despite plunging more than 50% half a dozen times over the last several years, it keeps coming back. Jump in any BTC forum and fanatics acknowledge and expect this volatility. But they are not worried because every dip bounces. Rather than fear the next dip, they cheer because it allows them to load up on even more BTC.

Bubbles happen all the time. Dot-com stocks, real estate, oil, gold, and even Dutch tulips. It doesn’t matter what it is, if people are making money on it, others want to get in. Humans are herd animals and we cannot help but be infected by the enthusiasm of the crowd. What starts as a good idea often spirals into a buying frenzy where greed conquers common sense. People are more worried about being left behind than what could go wrong.

While everyone is getting rich in Bitcoin, unfortunately it won’t end that way. Read accounts of any financial bubble and it always lays waste to everyone who believed in it. And sometimes it goes even further and takes out entire economies. There were a lot of dot-com millionaires in 1999, but there were very few dot-com millionaires in 2002. For every millionaire who survived the dot-com bust, there were a thousand who ended in tears. It was no different in real estate. Lots of real estate millionaires in 2006. In 2009 most of those millionaires were financially ruined. And Bitcoin will be no different. Those who are most excited about BTC’s rise will be the same ones who bear the brunt of its collapse.

The psychology that inflates bubbles is also what makes them so destructive. Right now the only mistake anyone made in BTC was selling. This goes all the way to the beginning when someone paid 10,000 Bitcoins for two pizzas. In today’s prices that is $50 million per pizza!!! And the same feelings of regret are felt by anyone who sold at $100, $500, $1,000, and $5,000. If there has been one thing anyone learned trading Bitcoin is that you never, ever sell because it always goes higher. And to this point that has been correct.

Now don’t get me wrong. I’m most definitely not calling this a top because bubbles always go so much further than anyone thinks possible. And to be honest, I thought Bitcoin was overpriced when it was $100 several years ago. While I don’t know when BTC will top, I do know a top is coming because it always comes. Maybe we peaked today, or maybe we peak at $50,000 or even $100,000. I don’t know and it really doesn’t matter how high it goes. That’s because almost no one will get out at the top and everyone who rode the ride higher, will ride it back down again. The same behavior that turned people into BTC, real estate, and tulip millionaires is the same behavior that will cause them to lose everything in the crash.

The most successful BTC investors are the ones who held through every dip and even had the courage to add more. While that approach works brilliantly on the way up, it is suicide on the way down. Those who were lucky enough to take profits near the top will be seduced into buying the dip so they can make even more money on the next bounce. Between riding prices down and reinvesting in the dips, most of the people who made money on the way up will give it all back on the way down. That’s the way every bubble ends and this one will be no different. Good luck.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

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(4) comments

Martin November 29, 2017

I keep telling this to all bitcoiners every day. They laugh at me, telling me that I do not understand, missed the boat so I am angry hater, don’t have a clue about a world changing technology, and that the value in BTC is because people want it…

I am not sure if in 2000 and 2008 people were such idiots (sorry for the language) but it could be that I couldn’t interact with them so much because there was no Facebook back then. But the lack of ignorance out there is astonishing and shocking. They are missing basic elementary knowledge of investing or trading. Something what took me years, cost me tons of money, and rebuilding my portfolio again and again, they dismiss with laughter and calling me names. Incredible…

Reply
    Jani Ziedins November 29, 2017

    I agree. Bitcoin’s most fervent supporters are also the most inexperienced. Anyone who lived through a bubble would never be so bold.

    Reply
Matt S. December 8, 2017

I lived through and participated in the dotcom bubble in Seattle and the housing bubble in California. I’ve spent over 12,000 hours reading financial blogs and 5,000 hours day trading in just the past decade in my spare time. I’ve made and lost fortunes many times over. A career in IT and a few thousand hours researching this technology over the past 14 months has convinced me we are in the early stages of the largest bubble ever. THIS TECHNOLOGY IS THE DIGITAL EQUIVALENT TO THE SPLITTING OF THE ATOM. The new models for governance alone will radically change how societies are organized. On the flip side, this tech can create a world many times darker than Orwell’s 1984, or usher in the domain for a Skynet that cannot be killed or censored. Bitcoin is AOL.com and the in the digital desert from which it rose there are now 1,200 new projects and growing. 3rd generation distributed ledger tech such as what is being pioneered by Iota, Ardor, and Cardano will bring new waves of innovation and use cases. Even if you don’t invest a single penny, simply following and learning about what these projects are trying to accomplish can breathe new life and hope into those of us in despair about humanity’s current path.

Reply
    Jani Ziedins December 8, 2017

    It will be interesting to see the new uses for blockchain and it definitely has the potential to disrupt the way banks operate. But I struggle to see how Bitcoin and its cousins will ever be more than the digital equivalent of gold. Paranoid people horde gold, but its role in day-to-day transactions is almost non-existent. The vast majority of people are content using dollars, so it is hard to imagine a wholesale switch to a digital currency. But time will tell.

    Reply
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