This time is different – the four most dangerous words when it comes to investing. We’ve seen it time and time again. From Tulip Bulb Mania to the Dot Com Era, and the U.S. Housing Boom, exuberant market behaviour drives asset prices higher and higher until demand reaches levels that can no longer be sustained, enthusiasm wanes, and the bubble bursts.
It’s what we’re seeing today with the cryptocurrency craze. Bitcoin and other cryptocurrencies surged in value in recent months, spurring on some of the most bizarre behaviour since the Dutch Golden Age when some single tulip bulbs sold for more than 10 times the average income.
For example, I’m sure you’ve heard of Bitcoin, and possibly Ethereum, Ripple, and LiteCoin. But what about SexCoin, PutinCoin, Pot Coin, and Bean Cash? I’ve counted nearly 1,500 cryptocurrencies on the market. Crypto has officially jumped the shark.
Investors got excited when Bitcoin doubled in price between February and May 2017. Then things got a little nutty. Bitcoin doubled again by mid-August, and then doubled again (!) by early November. A dip on November 12th took the price to $5,943 $USD. Then it took off, climbing all the way to $19,196 in just over a month.
That was around the day when a server at Original Joe’s asked me if she should invest in Bitcoin. A few weeks later a co-worker asked me about crypto after talking to a friend who just “made a killing.”
Companies also got in on the action. Shares in Long Island Iced Tea Corp soared from $2.13 to $7.87 in one day after the company changed its name to Long Blockchain Corp, “focused on developing and investing in globally scalable blockchain technology solutions.” Alrighty then.
For those of you who doubted the long-term viability of Eastman Kodak (yes, it is still in business), they’ve just announced Kodakcoin, a cryptocurrency for photographers to use to manage rights and fees for their work. The company’s shares rose 245 percent on the news.
Let me be clear: this will end badly. Sure, maybe not for those who got in before the mania began. But if you bought Bitcoin in December or January you’ve already taken a huge bath on this speculative investment, with the price falling to $11,141 as of Friday. Other cryptos are on a similar path.
Who owns Bitcoin? It’s mostly young men between the ages of 18-34. Sounds like the demographic that was day-trading Internet stocks in the late 90s.
Here’s some sensible advice from Rob Carrick for those who want to get in on the pot stock and crypto frenzy:
“The second-worst stock market environment for the sensible investor is what we’re seeing today – a grab-fest of buying based on the fear of missing out.”
Finally, here’s the always sensible Consumer Reports with a look at why investing in cryptocurrencies like Bitcoin is so dangerous.
This Week’s Recap:
On Monday I explained how buying an annuity can create your own personal pension in retirement.
On Wednesday, Marie looked at the “science” of using patterns to predict stock market movements.
And on Friday I shared two credit card options with no foreign currency conversion fees.
Here’s Jamie Golombek with the five biggest RRSP myths that Canadians can’t stop repeating. The first one drives me nuts.
Another brilliant read from Morgan Housel on the thin line between bold and reckless.
Psychologists increasingly think effortful restraint is not the key to the good life. So what is? Here’s why willpower is overrated.
Robert Shiller on how to invest in the world’s priciest stock market:
“It is impossible to pin down the full cause of the high price of the US stock market. That alone should remind all investors of the importance of diversification, and that the overall US stock market should not be given too much weight in a portfolio.”
A Random Walk Down Wall Street author Burton Malkiel says the secret to investing in an overpriced world is broad diversification and rebalancing.
Rob Carrick says reverse mortgages are a growing temptation for seniors, but proceed cautiously.
Canadian Couch Potato Dan Bortolotti answers a reader question on whether to invest a lump sum at once, or to use dollar-cost-averaging.
Newly retired Michael James is finished with RRSP contributions and contemplating the withdrawal phase.
Mark Seed interviews a pension expert to discuss whether to defer your Canada Pension Plan to age 65 or 70.
Finally, Million Dollar Journey updates readers on his indexed family RESP portfolio. Well done!
Have a great weekend, everyone!