The worst reason to buy Bitcoin

This ad on the London Underground caught my eye recently:

If you're seeing bitcoin on the Underground, it's time to buy.
Ad on the London Underground

But is it really the time to buy? Below, I will outline some reasons why you should not buy Bitcoin and leave your dollars/pounds/złotówki/whatever safely in your bank account.

Bitcoin has been climbing to its highest-ever levels in the past months (over $40,000 at the time of writing). The rise since October dwarfs the previous craze of late 2017. I’m sure a lot of you have had thoughts similar to my friend Bitcoin Bob’s:

Bitcoin Bob saying: Why haven’t I bought it earlier? I hope it’s not too late!
It surely will keep going up!
I must invest, there's no way I can lose money on this!
Bitcoin Bob

First, let’s get some things straight:

  • Yes, Bitcoin is likely to keep going up for a while.
  • Yes, it could reach $1,000,000 eventually.
  • Yes, Bitcoin and blockchain are technological breakthroughs that could revolutionize our monetary system and disrupt multiple industries.
  • Yes, if you had bought in 2008 and held until now, you could have been a millionaire.
  • Yes, if you buy now, you could still make a fortune on it.
  • But chances are, you probably won’t.

Bitcoin is now in another bubble. That means the price is going up because people expect it to go up, not because of any underlying reasons in the real world. In fact, as a purely digital commodity, its value is not backed by anything physical.

Bitcoin saw its first rises in October, perhaps as people diversified away from gold, which hit its own record highs. Then the herd mentality kicked in, and other people started buying simply because they saw others driving up the price, which produced a feedback loop of increasing prices. This is what we call a bubble.

Graph of Bitcoin price history.
Bitcoin price. Source: coindesk.com

All bubbles eventually burst. People at a certain point realize that the price is unreasonable and sell their holdings. Seeing that, more people start selling, and more after that. And soon, there’s a lot of people who bought near the peak and are left with less money than they originally had.

You can make money on a bubble. A lot of people have. To do that, you need to make two choices: when to buy and when to sell. Ideally, you want to enter when the price is as low as possible and exit when it’s as high as possible. Buy low, sell high.

Bitcoin price from September 2017 to April 2018. Source: coindesk.com
Bitcoin price from September 2017 to April 2018. Source: coindesk.com

The problem with Bitcoin now, when everybody on Twitter (and ads on the Tube) is talking about it, is that the price is already very high. And it’s high precisely because people have been talking about it. So it’s not so good on the “buy low” front.

But you may follow in Bob’s footsteps, decide that the price will keep climbing and buy now. To make a profit, you will have to sell at some point. Until you sell, all your profit or loss exists only on paper. How do you decide when to realize your profit?

You can set a ceiling (“when the price reaches X dollars, I will sell“). But, unless you have substantial discipline, that’s easier said than done.

Bitcoin Bob saying: I know I said I’ll sell at $50,000, but I have a feeling it’s going to keep rising!
I can’t miss out on these sweet gainz!
Bitcoin Bob failing to sell high.

But it’s possible that the price doesn’t reach your ceiling and starts falling.

Bitcoin Bob saying: I bought at $40,000, I can’t sell now at $20,000!
It’s bound to go back up, I’ll wait and recoup my losses!
Bitcoin Bob failing to admit his mistake.

My point is not that it’s impossible to make money riding bubbles. People have made fortunes on that. But it is impossible to predict the future. You can make an educated guess that turns out to be right (in other words, get lucky).

But an average person is far more likely to lose money on trading, particularly if they have little knowledge of the asset they’re trading and experience in restraining their emotions.

My advice is: only put your money in something if you know what you’re doing and understand the risks. Don’t buy just because you have Fear Of Missing Out. Don’t be like Bob.

Bitcoin Bob saying: I lost money trading Bitcoin.
Bitcoin Bob is sad.

700cookie-checkThe worst reason to buy Bitcoin

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