Bitcoin – avoid this pain!

„Bitcoin reaches new all-time high!“ (FAZ 12.12.2017)

„Bitcoin unstoppable“ (Handelsblatt 07.12.2017)

„Bitcoin starts with a boom and a crash“ (N24/Welt 11.12.2017)

„Bitcoin starts miserably into the new financial age“ (N24/Welt 12.12.2017)

„Bitcoin crashes by 18 percent“ (Handelsblatt 29.11.2017)

„More than $60 million worth of bitcoin potentially stolen after hack on cryptocurrency site“ (CNBC 08.12.2017)

Huge success and failure are close together in Bitcoin. Almost daily, the cryptocurrency is worth a message. Mostly because it has again reached a new all-time high, such after the recent launch of Bitcoin futures on the derivatives exchange in Chicago. Although the launch was a bit bumpy, as one can read in the press, it was generally seen as a great success. And – with the start the cryptocurrency received recognition.

Is this justified?

The dumbest reason in the world to buy a stock is because it’s going up! (Warren Buffett)

There’s no such thing as a good idea regardless of price! (Howard Marks)

The broad acceptance of bitcoins and other cryptocurrencies is increasing, especially because of people and companies whose opinions matter. For example, Apple co-founder Steve Wozniak believes Bitcoin is better than gold and dollars, as we could read in an interview in late October. In the same month, the rumor arose that Amazon would officially accept Bitcoin for payment, which immediately drove up the price. Although Amazon still hesitates with the acceptance, the trend is clear. And with that the trust of Bitcoin euphoric people in their currency. The Chinese ban and the warning of JP Morgan chief Jamie Dimon only provide for comparatively small dents in the upward chart of the cryptocurrency. Since the beginning of the year, when a Bitcoin listed at $ 1,000, it has increased 17-fold! 1700% increase – that’s huge and who got in at the beginning of the year, could make a lot of cash. Some experts even see the Bitcoin at $ 40,000 in 2020, more than double the current level.

Is the entry still worthwhile for investors?

Well, doubling your investment within two years is a more than acceptable return. And after all, there is also the chance that Bitcoin is booming in a similar way as it did in 2017. Then one could make huge profits again. Though this would be a bet that something that is already very expensive, will get even more expensive. And the likelihood of this happening without pain is low. Besides, investors do not bet on success but invest their money in the value of something, e.g. of a company, which distinguishes them from speculators. Investors expect an increase in value by generating added value, e.g. through products or services. Don’t get me wrong, value is not synonymous with the price that the market is willing to pay. The value I mean is the intrinsic value to which investors like Warren Buffett attach great importance.

Where do bitcoins get their value from?

Well, as a pure virtual product, Bitcoin has no value of its own. There is nothing behind Bitcoins, which makes it different from gold, silver, and the like. And even if gold will het worthless, the owner of the mine still owns the land. Companies have various assets such as buildings, machinery, fleet etc. Bitcoins, however, have none of this. Their value is in fact the price at which they are traded and this is determined by the daily demand and supply.

The problem is that demand and supply are purely psychologically determined and the psychology of the market is moody and therefore subject to fluctuations; strong fluctuations sometimes, as we see in Bitcoins. This psychology will stumble heavily on Bitcoin and some will lose a lot of money. Mostly the small private investors who now want to jump on the train.

What worries me as an investor and why I’m keeping my fingers off bitcoins as an investment?

One aspect I have already mentioned: behind Bitcoins is no real value that could be liquidated in the end. Investing in bitcoins can result in a total loss, just like derivatives, as we saw in 2008. So Bitcoins are a pure speculative object where participants bet that the price is going up. They are not an investment. This fact has not changed with the trading of futures contracts. Now you can bet not only on an increase, but also on the decrease of the cryptocurrency, which makes it even more speculative.

What scares me about Bitcoin is that I have no idea about the codes that generate them. I cannot tell if there are any bugs in the code or how safe Bitcoins are. In this respect, I also cannot estimate to what extent the mining is manipulatable and how easy and frequent hackers can steal Bitcoins. Bitcoins are absolutely outside of my circle of competence, which is why they are too high a risk for me.

I’m able to understand the business model of a company. I understand how and with which products it earns money or burns it. I learn about the success or failure of a company from the regularly published figures and decide whether the company will be able to generate added value with its products in the future.

Whether the Bitcoin will continue to increase in value is pure speculation and not dependent on products or services, but only on market participants. And these are the ones that worry me the most.

Investors are the biggest threat to Bitcoin

Why?

Bitcoins have risen so much this year, that already this fact should worry anyone. More dramatically, though, this strong climb is causing many to be more worried about missing the train.

Also and especially those who have little idea of investment.

18-year-olds already refer to themselves as top trading coaches and as great bitcoin investors.

All sorts of people on the Internet are trying to get you started on Bitcoin and are bragging about their big successes with their pictures in cheap vacation destinations. And these inexperienced retail investors make fun of those who have not (yet) boarded.

Paris Hilton promotes the cryptocurrency and the Bild (a German boulevard paper) is forced to explain what Bitcoins are and tries to answer the question of whether one should still buy them.

However, what makes me the most skeptical: small private investors who have a few years of experience in investing and have some knowledge on the subject, begin speculating Bitcoins now, even if they have recently rejected this as an investment.

The fear of missing out on something and the greed for the hopefully expected profits in the future will cause all kinds of people to jump on the train. Inexperienced as well as more experienced. Sure, many have not experienced a crash like 2008. That may contribute to a certain carelessness. It’s just another thing to see and endure losses in your portfolio of 30, 40, 50 or more percent, rather than saying that you would endure them. For many people, only few things weigh as much as the loss of money. And talking is easy, enduring is much harder. But not learning from or disregard experiences is extremely negligent.

„The four most expensive words in the English language are, ‚This time it’s different!‘“ (John Templeton)

A smart (and successful) investor has a system on which he invests. He wants to see certain criteria fulfilled before he puts his money into an investment. He sticks to his plan, which he settled in a quiet phase, even in stormy or euphoric times. And if the plan needs to be adjusted, it can always be only minor changes, which are independent of fashionable appearances.

However, one can perceive investment strategies that are adjusted to circumstances and are as variable as daily stock prices which is not very dramatic for them. You only have to find a good reason. And you always find a good reason.

Those who still invest their money in Bitcoins are heading for risky terrain. Not only that a bet on further rising prices for very expensive products is very daring. Bitcoins are being bought and held more and more by shaky hands, to say it with the words of André Kostolany. It is only a matter of time before they can or do not want to hold the coins anymore.