On Dec. 5, I was on Fox Business Network with Gerri Willis talking about Bitcoin. You see, people are enamored with the digital currency right now, but it's the exact time that they shouldn't be.
You can always count on the masses to get all worked up about any asset when it's near its peak. How many people were in love with tech stocks and Internet stocks in 1999 and 2000? And more recently, how many people were infatuated with real estate in 2007? Oh, it was "the rage!" It seemed everyone was just about stumbling over themselves to get into these assets. Yet it was the worst possible time to be entering into those assets.
Well, we're in the same spot now with Bitcoin.
There wasn't near as much talk about it was valued at $200. But when it was at $1,000 to $1,200 per Bitcoin, people's eyes were glazing over and they were getting starry eyed about it.
It's at these times when they'd do well to heed Warren Buffett's investing advice. "Be fearful when others are greedy and be greedy when others are fearful."
What does Buffett really mean by this statement? Be highly disinterested in assets that everyone have run up to the moon in price, and become very interested in assets that people have pummeled and show little to no interest in, as long as the asset is fundamentally sound.
Well, so many have run to snatch up Bitcoins over the last six weeks or so that Bitcoin has become the latest bubble that's going to pop, since its move has become so parabolic.
When I was on with Gerri Willis, I told her that it's going to pop and leave a lot of people with huge losses. In my notes to the network, I said that Bitcoin (which was trading in the $1,100s to $1,200s at the time) could fall quite quickly to the $500 level faster than most anyone could imagine and that it wouldn't surprise me at all to see it back at $250 shortly thereafter.
Well, just ONE day later, Bitcoin was down to $730. So that was a one-day drop of at least $400 per Bitcoin, or a drop of 35 percent — again, in just one single day!
This shows how volatile and unstable this "currency" is too.
Another reason you'd want to avoid Bitcoin at this point is because it's not very useful as a currency. Oh yeah, there was that guy who bought a Tesla with Bitcoins and a few other various uses. But try going into the grocery store and paying for your groceries with Bitcoin or filling up your gas tank and paying with Bitcoin. You're not going to have much luck.
In fact, more institutions and governments are even starting to back away from Bitcoin, which is another reason to avoid Bitcoin for now.
For instance, China barred its banks from dealing in Bitcoin. Chinese search engine Baidu is now not allowing Bitcoin to be used for payment for music, etc. So there are some "heavy hitters" that are now backing away from the digital currency.
Which leads to the next problem. Why are they backing away from it? Governments don't generally like Bitcoin because 1) it could be a competitor to its own currency, which it controls and 2) money launderers love the currency because it's hard to trace/track. Governments hate it for this reason because they are obviously losing out on a ton of taxes that they could prove was due to them if it were in a traditional currency.
And of course, there's the final reason that comes to mind.
When an asset is in a bubble and nearing its "pop" there is usually some crazy stories that start to pop up. For instance, there's a police chief in Kentucky who has requested to have his paychecks paid out to him in bitcoins. Of course, his thoughts are that the pay could end up being more because of what he believes to be the continued growth of Bitcoin. But when policemen essentially become currency traders, it's usually a bad sign.
And that's no disrespect to policemen — they're phenomenal at what they do, but they're typically not currency experts. Just as I'm great at following markets and making calls on asset prices, but I'm horrible outside of my skillset, such as handyman work, etc. I assure you, you don't want me trying to fix stuff at your house. Why? It's far outside of my skillset.
But back to the policeman for a moment . . . this reminds me of when the supermodel Giselle decided she wanted to get paid in euros. And rappers from America were flashing rolls of euros in their videos. Well, that's about when the euro topped out — when models and rappers thought they were currency experts too.
So when you hear people in professions that are far outside of their field all of the sudden thinking they are experts in another field, you've usually got a mania/euphoria going on that has caused a bubble that is getting ready to pop.
Additionally, when a bubble does pop, financial history shows us that the asset is usually "dead in the water" for quite some time thereafter (sometimes years into the future). So don't get sucked into the vortex of Bitcoin. Instead, focus on some other asset that's not overvalued and investors aren't in a frenzy over.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
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