Before You Hop on the Bitcoin Train, Consider These Risks (Your Money Will Thank You)
Maybe you haven’t noticed, but everything’s rallying.
Every asset class, every tradable instrument is stampeding higher in its own bull market. There are many reasons for this, but that’s not what I want to talk about today.
Instead, today, I want to talk about cryptocurrencies, specifically Bitcoin, or bitcoin with a small “b.” Bitcoin’s been all over the news lately, and before you hop on its train to buy it, you have to know the facts.
Bitcoin – Popular by Design
Bitcoin is the “mac-daddy” of all cryptos. Not just because it was the first, which it was technically. Not because its origin is mysterious, which it is. Not because it can be “mined’ by anybody, which technically it can be. It’s because of all those reasons and a lot more.
The “more” being the fact that bitcoin’s increasingly being accepted, make that adopted, as a legitimate currency as more merchants are accepting it as a means of payment, just like a real currency.
Then there’s the adoption of bitcoin by futurists like Elon Musk, who just had Tesla Inc. (NasdaqGS:TSLA) buy $1.5 worth of billion to hold on the company’s balance sheet as an “asset.”
And there are payment companies like PayPal Holdings Inc. (NasdaqGS:PYPL) that now let users stockpile bitcoin and other cryptos on their platforms. And institutions adopting bitcoin right and left, lest they fall out of favor when competing companies, and banks, and brokerages welcome bitcoin adopters.
And, of course, hedge funds are buying bitcoin because it’s rallying.
Oh, wait a minute, maybe bitcoin’s rallying because hedge funds are buying it, bidding it up, pumping it up, hoping to attract more buyers, adopters, billionaires, and retail wannabe billionaires so they eventually have someone (make that a lot of someones) to unload their positions to, …. Maybe.
That’s what should give adopters and stockpilers and speculators pause. Hedge funds, with their huge capital hordes and leverage, are bidding up bitcoin. For them it’s an “instrument” to trade, a vehicle to drive their returns higher, to drive their quarterly and annual paydays.
It’s not a long-term hold for most funds, it’s a trade.
Forget that bitcoin, or any crypto for that matter, might be a “store of value” or a fungible means of payment, or a gold-like asset, or any of the things they might be or not be. They are tradable instruments.
And that subjects them to speculation.
Maybe you disagree with the country’s new Treasury Secretary Janet Yellen, the former head of the Federal Reserve, who spoke at the New York Times DealBook conference the other day. She said that bitcoin is “an extremely inefficient way of conducting transactions.” And expressed worries about its wild price fluctuations.
Her warning was clear. “It is a highly speculative asset, and I think people should beware. It can be extremely volatile, and I do worry about potential losses that investors in it could suffer,” she said.
On the opposite side of billionaire Elon Musk stands Bill Gates, who in an interview with Bloomberg said that it was one thing for Musk and Tesla to invest in bitcoin, but average investors should beware.
Gates said, “I do think people get bought into these manias, who may not have as much money to spare, so I’m not bullish on bitcoin.” My favorite line of his was, “My general thought would be that, if you have less money than Elon, you should probably watch out.”
Don’t get me wrong, I love bitcoin. And I’m cheering it on. But I don’t own any.
Being a former hedge fund guy myself, I worry that they’re “pushing the trade” and retail investors and a lot of “adopters” could get hurt if they steer the magic crypto train off its tracks once they’ve made their P&L gains and start to “short” it.
Kristina Hooper, chief global market strategist with Invesco, said in a report recently, “it could still be the digital equivalent of ‘tulip mania,’ which gripped Holland in the 1600s and sent the price of tulip bulbs to astronomical and unsustainable highs before their inevitable crash.”
In the everything rally, some things are bound to stop stampeding.
If you’re in bitcoin, just don’t forget to take your profits.
P.S. My team and I have been on to something big. I’m not always one for pre-IPOs, but what we are seeing right now is something I never expected to come out of angel investing. One of my colleagues has been in close contact with two game-changing founders, one of which is projected to grant a 10x return in only three and a half years. This is big news, so keep a close eye on your inboxes because these deals move fast. Tomorrow, he’s going to release a tell-all about these companies and more in his next private dealroom meeting.