Bitcoin has enjoyed a spectacular run over the last year. The cryptocurrency has surged from $730 this time a year ago, to $10,000 today. That's an incredible gain of 1,270%. No doubt plenty of investors are sitting on huge profits right now. Am I tempted to get on board? Absolutely not. Here's why.
Bitcoin is in a bubble
I've been investing long enough now to know a bubble when I see one. I've experienced several, in both asset classes and individual stocks, over my investing career.
The first bubble I remember was the dotcom boom of the late 90s. Tech stocks were soaring higher at an incredible rate, before they came crashing down in early 2000. While I personally didn't lose money in ridiculously overpriced, unprofitable internet stocks, many friends lost thousands.
The next bubble I experienced, and one that pains me more, was the commodities boom of 2007-08. This bubble well and truly sucked me in. I was 'invested' up to my eyeballs in speculative small-cap mining shares. For a time, I was making a great deal of money. Thousands per day at one point. We were told that demand from China would keep pushing commodity prices higher, and despite the fact many companies were not making significant profits, "this time it was different." It wasn't different. It never is. I lost tens of thousands. I learnt the hard way.
In Bitcoin, I see many similarities to the dotcom and commodities bubbles. Here are five reasons I believe it's in a bubble.
Let's start with the price rise. It's been exponential over the last year. Two months ago it was trading at $4,000. Take a look at a chart. That in itself is a warning sign. What goes up at that kind of rate, usually comes crashing down at some stage.
Second, Bitcoin is hard to value. It has no earnings. Nor does it produce any income. So how can we place an intrinsic value on it? If you buy Bitcoin, you're simply hoping another investor will one day pay more for it than you did. In economics, this is referred to as the 'greater fool' theory.
Third, I'm hearing a lot of outrageous price predictions. John McAfee, founder of the anti-virus company that bears his name believes Bitcoin can hit $500,000 within three years. I remember hearing similar claims about specific commodity stocks, a decade ago.
Fourth, many people who normally have no interest in investing, are excited about it. Taxi drivers, hairdressers, friends that have never bought a stock in their life. They're all talking about Bitcoin. That's a classic sign of a bubble.
Lastly, most seasoned investment professionals tend to agree that it's in bubble territory. Warren Buffett has said "it's a mirage basically." JP Morgan CEO Jamie Dimon has said it's a "fraud" that will eventually "blow up." US billionaire Mark Cuban has advised only to invest if you're prepared to lose your money.
Sticking with stocks
As a result, I won't be investing in Bitcoin. It may continue to surge higher, but I'd rather not take the risk of getting my fingers burnt. I'll be sticking to my time-tested strategy of investing in high-quality, attractively-valued dividend stocks, and building wealth slowly over the long term. While the FTSE 100 may currently be trading at relatively high levels, there's still plenty of value to be found.