The Third Bitcoin Bubble

Jan 17, 2018

Credit pitchbook.com

In the past year, Bitcoin – a digital cryptocurrency with no physical backing that can be sent electronically from one user to another – has risen in value more than 1,400 percent. Market researchers are worried that Bitcoin could be similar to the Netherlands tulip mania in the 1600s.

If you were lucky to invest in Bitcoin in 2010 when it was traded at 6 cents, you might be sitting on a gain of more than 200,000 times today.

During a short stretch in the 1630s, speculators in the Netherlands bought all the tulips they could find, driving the price up substantially on the bulbs that produce the flower. According to the Museum of the Netherlands, Dutch citizens were putting their houses up as collateral to get in on the tulip craze, which eventually collapsed, leaving investors with nothing but a nice-looking garden.

“Cryptocurrency revenue was steady for the first three years,” said Jonathan Johnson, who is on the board of directors for the Utah-based online retailer Overstock.com. “Last year it steadily increased throughout the year as the popularity of Bitcoin and other cryptocurrency skyrocketed in 2017. We saw our cryptocurrency revenue on overstock increase significantly.”

Johnson said the cryptocurrencies have become so popular, Overstock.com now accepts close to 50 different online currencies for transactions.

“I think the good reason that people have become interested in it is that Bitcoin will be a better store of value than the U.S. Dollar which gets printed and printed and printed,” Johnson said. “As governments are inflationary, things that have finite value, they can be used as currency, will store value better and that’s what Bitcoin does.”

Bitcoin is also not centralized, meaning it’s a global currency.

Like any financial decision, Johnson said Bitcoin and other cryptocurrencies should be researched and not treated as a get-rich-quick investment.

“A lot of people ask me, should I invest in Bitcoin? My answer is always, 'Yes but not more than you’re willing to lose all of your investment,” Johnson said. “There’s a chance that Bitcoin goes to zero. Invest what you can lose. If you’re patient and watch it as it gyrates up and down over the long term, it’s going to be a great store of value and has the potential to be the best store of value of anything in your portfolio.”

Elliot Prechter is the head of computer analysis for Elliot Wave International, a company that analyzes and forecasts financial markets all over the world. Back in 2010 when Bitcoin was gaining popularity, Prechter recommended the online currency as a good investment.

“Now we’re recommending to get out of it,” Prechter said.

Researchers at Elliot Wave International look at every aspect of global markets. According to Prechter, the most important one is the psychology of people.

“Investments are essentially social trends, more than anything,” Prechter said. “Usually when we see a large amount of people get on board with something and get interested with something that usually comes at the tail end of a major, major trend. You can see this with any kind of investment. Everybody gets excited about it, it’s all over the cover of the news, right when it’s about to change. It’s a normal phenomenon. No one is interested in it when it’s cheap and suddenly everyone gets interested right when it’s very, very expensive and risky to buy.”

Bitcoin enthusiasts have been through rough patches before. The Bitcoin bubble collapsed in 2010 and again in 2013. The value of Bitcoin has even dropped 80 percent at times, but has always bounced back. Prechter says investors should be paying special attention to the bubble happening right now. This third bubble is about three times larger than the ones before.

“It would have been okay to hold it through the other two declines, but this one should be a lot bigger if our analysis is correct,” Prechter said. “What’s going on psychologically with people is not normal. We certainly didn’t see behavior this extreme before.”

Extreme cases like people maxing out credit cards or even selling their home to invest in Bitcoin has Prechter and other researchers worried that history will repeat itself.

“This is just the type of thing you see during manias and bubbles,” Prechter said. “It’s not something you see during what I would call a healthy market environment.”

When cryptocurrency advances in technology and shows compelling evidence of a stable long-term market, Prechter sees future potential.