Bitcoin and the Market: What’s next?

March 28, 2014 20:03 UTC

Indications coming out of China can be seen as, nothing less than, frankly, negative. Bitcoin has for a long time been functioning, not only as a means of exchange but also as a store of value. The returns from 2013 clearly suggest that mainline investors, buoyed up by stories of spiralling returns, were crowding on-board. The currency peaked in early December at just over $1,000 and is now, March, trading at just over half of that, but is this necessarily a negative? To examine what this means more clearly, I am going to apply some fundamental economic reasoning in an attempt to evaluate the figures. If the reasoning I use, seems somewhat simplistic, it is because I am a fairly simplistic person.

The first question I must seek to address is: Why has the value declined so strongly since December and what does it mean? There are certain ‘truths’ or understandings that investors apply in looking at an investment and one of the most important of these, is an assessment of the level of risk involved. Let me begin by stating that: Investors hate uncertainty. In order to invest they want to have some indication of expected returns, and the best indication is always the long-term past performance. Investments tend to do what they have always done, some go up; some go down, and we learn from the experience. The four most dangerous words in investing are “This time it’s different.”

The recent Bitcoin bullbear weekly report predicts that the value will continue to ease and that it would be positive if it bottomed at circa $400, as this would indicate a triple bottom is in, and that would send out a very bullish signal. The peak in value at the end of last year is an indication that investors were entering the market, wanting the returns, but with neither knowledge or loyalty to the investment.  In the words of Phillip Fisher: “The stock market is filled with individuals who know the price of everything, but the value of nothing.” The problem with masses of investors is that they behave in a fashion not disimilar to sheep. When the returns encourage investment, some come cautiously on board, and this encourages more to test the waters. At the first indication of a fall in price, they rush to sell stocks and move their money into cash and gilts. Remember the old adage: The Bull climbs up the stairs but the Bear jumps out the window. Investors leaving an investment cause the price to further drop and thus the fall becomes a self fulfilling prophesy. What we see now, in Bitcoin, is, therefore not so much a fall, as it is a period of value stabilisation. What we are now seeing is rather a normalisation and to a sensible long-term investor, that is a very positive indication.  Remember what Warren Buffett, was quoted as saying, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

Remember also, this quote from, businessman and writer, Robert G. Allen,: “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”  This may well be the time, not to sell, but rather a time to hold steady and quietly acquire.

Last modified: March 28, 2014 20:15 UTC

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