*None of what you are about to read is investment advice of any kind. You shouldn’t buy any cryptocurrency without deep personal research and consideration. Again, this is not investment recommendations.
Euphoria: is an affective state in which a person experiences pleasure or excitement and intense feelings of well-being and happiness.
Economic Bubble: When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”).
My last Bitcoin/blockchain post (Bitcoin Mania) has received a lot of attention. I talked about the forces that are fueling Bitcoins to record level. For many Bitcoin seems the easy path to riches. This is a pure sign of a bubble. However a bubble doesn’t pop just because you spotted one. You need a catalyst that will trigger the crash. Before we get to that I want to mention a few examples of pure irrational behavior related to Bitcoins, just to get a sense of how absurd the market can be. You can replace the word Bitcoin with dotcom bubble, 2007 real estate bubble, or the 1634 Tulip bubble if you are old enough. The overvalued asset might be different but the composition of the bubble is the same.
At the moment, there’s only one way you can make money with Bitcoins; you need somebody to buy it at a higher price than you (Greater Fool Theory). I buy an overvalued asset with the anticipation of selling it to other speculators (the greater fools) at a much higher price. Basically you need somebody more stupid than you.
Here are a few examples of extravagance:
Australian SBS News: Risky business?: How a pole dancing instructor found success with Bitcoin
Pole dancing instructor Dee Heath is riding the surge with her fitness business in western Sydney. She has spent $5,800 on Bitcoin since July and has more than tripled her investment.
“Look, I love pole dancing but lately my passion has definitely been Bitcoin,” she told SBS News.
She is now dedicating her time informing would-be Bitcoin investors about navigating the world of cryptocurrencies […]
“The good thing is when it goes down, you can buy some more, and you know it’s going to go up at some point.”
The message is Bitcoins = Path to Riches. If an Australian pole dancer is making it rain, you can too! Nobody wants to be the poor pole dancer. Expect more pole dancers to get to fuel this bubble before less. In behavior finance this phenomenon is called herding. We mimic the behavior of our surrounding to feel better and to fit in. It makes us feel more secure because everybody else is doing it. In the movie The Big Short, Steve Carrels figures out there’s a bubble in the housing market after interviewing a stripper in Florida. It turns out all her strippers friends are on it too (Youtube NSFW):
In finance portfolio managers have very similar investments because they are compensated on their performance relative to peers. You don’t want to explain to your investors every three months why hot trendy stock ABC is not in your portfolio like everybody else.
While I’m on the topic of strippers, there’s now the world’s first Bitcoin strip club, The Legends Room in Las Vegas. According to the website The Legends Room is a world class Las Vegas gentlemen’s cabaret re-imagined using blockchain technology. The “club” has its own virtual currency and feature Bitcoin ATMs within the club. Instead of pulling out cash, you’re literally buying digital coins. You put money into the “ATM,” hold up your phone, and the machine sends bitcoins directly to your mobile device. Now there’s an army of adult entertainers getting a degree in cryptocurrency.
Here’s another example that brings back memories of the dotcom bubble when any old company could slap .com on the end of their name and see their stock levitate.
Failed biotech Bioptix Inc recently changed its name to Riot Blockchain Inc. (RIOT). Below is the stock chart since the change:
RIOT is not alone. Other companies have shown that a foray into the cryptocurrency space is often rewarded by investors, at least initially, as the astronomical increase in the value of virtual coins has lured everyone from big banks to startups. This trend will also get worse before it gets better.
There are strange stories too such as this one: Rare Pepe Blockchain Cards Have Produced More Value Than Most ICOs. I’m still trying to wrap by head around this. Rare Pepe is based on an internet meme called Pepe The Frog that has been around since 2005 and became popular during the 2016 election. Over the course of 2017, there have been a lot of blockchain projects, and the Initial Coin Offering (ICO) craze has been off the charts. Most ICOs are pump and dump scheme, but this Rare Pepe one is successful for now. Rarepepes are digital trading cards.
These are some of the few examples I came across since researching the crypto space.
Like I previously explained, my guess is that Bitcoins is most likely to go up before it pops. There will be more people like the Australian pole dancer getting involve before they are less. Easy money is addictive and contagious. This will get bigger before it gets smaller. Everybody is talking about Bitcoins but only a minority has managed to dip their toe in the action. It will eventually get main stream. The fear of missing out will drive people to get involved. Eventually the government will have to step in and that’s when the party is over. It will be particularly damaging when it burst because there were no assets underpinning its price.