The Big Bitcoin Short

History is full of financial bubbles. From Tulip Bulbs to the Dot Com Boom, bubbles follow patterns of rampant speculation and collapse that are, in retrospect, almost formulaic. Each time this occurs, there are voices of reason who see through the euphoric mirage of riches and glory to the underlying value. Sometimes, these people leverage their understanding to become extremely wealthy.

Bitcoin’s meteoric rise in 2017 has made a number of people very rich. However, this only represents wealth in the traditional sense when they sell their Bitcoins or exchange them for other goods/services of value. While this fact is contested, given that cryptocurrencies are marketed as currency and thus supposedly have intrinsic value, the market value has been far too volatile to function effectively as a currency. There will need to be a major stabilisation of the market for cryptocurrencies to function as a mainstream currency (outside of the black market, where they have more clear advantages over other currencies).

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XBT:USD chart from www.xe.com
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XBT:AUD chart from www.xe.com

While the value at which Bitcoin will stabilise is open to speculation, there is little to support a continuation of its trajectory to date. Media coverage has reached saturation point – with Bitcoin’s price featuring in mainstream news broadcasts, everyone who would potentially invest already knows about it. While there will undoubtedly be plenty of new investors, the tipping point will be when new investors are outweighed by those looking to cash in on their investment. With so many respected voices predicting a price collapse, it’s hard to imagine many early investors forgoing millions in profits for the possibility of slightly more. With the most bullish predictions placing Bitcoin’s peak value at $60,000 (with a subsequent crash to $1,000), would you risk an appreciation of 1,000% for a slim chance of a further 400%? What will happen when the big players take their winnings?

This looks an awful lot like Tulipmania.

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This article represents the author’s opinion only. Before obtaining any exposure to the markets you should be sure to understand the potential risks. Never risk more money than you can afford to lose.

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The Barefoot Investor is a refreshingly accessible take on personal finance for Australians. While it can easily be read cover-to-cover in a day, it’s true power lies in carefully following the 9 simple steps Scott Pape lays out in the book. You don’t need to have any background financial knowledge to understand this book and none of the steps require any great investment of time or money.

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