Chris Brycki, the founder and CEO of robo-advice fund Stockspot, says it’s easy to understand why people watch the rise of cryptocurrency bitcoin and want to be a part of it.
“Anything that can rise in value by 100% in a day creates a sense of excitement,” he says.
His clients have been asking him whether Stockspot will add Bitcoin or other cryptocurrencies as an investment to portfolios or as a Stockspot Theme option.
The price of Bitcoin is trading at more than $US16,000 today. Earlier in the year it was at $US1000. The total value of all bitcoin now exceeds $US300 billion.
“It can be easy to lose sight of what’s smart when you see people making tonnes of money in short periods of time,” says Brycki.
“The same happened in other speculative manias like the tech bubble of 1999-2000 and in the mining boom of 2003-2007. In both periods plenty of shares rose by more than 1000% before falling or vanishing entirely.”
Rapid gains can quickly lead to FOMO (fear of missing out) if others are making easy money.
However, Brycki says the concept of easy money is just a mirage.
“Even if one Bitcoin is worth $US100,000 in 10 years, the odds that you’ll make money are not good,” he says.
“Successful speculation requires you to enter and exit at the right points as well as having nerves of steel to manage your emotions along the way.
“It’s much harder than you think to get your market timing right and have the discipline to not sell on the way up — or during dips along the way. And that’s just assuming you’re eventually right with your bet.”
Bitcoin has already had several speculative cycles.
In 2011 Bitcoin rose to $31 from $1 before falling to $2. It then rose to $250 in 2013 and fell back to $50.
After that it went to $1100 before falling to $180.
Each time Bitcoin has risen rapidly it has fallen 80% to 95% from its peak before continuing on a longer term journey higher.
“If you’re buying Bitcoin at any point in time you should be aware that the value of your investment may fall by more than 80% at some stage (or more),” says Brycki.
“Many of today’s buyers of Bitcoin aren’t thinking about the value of Bitcoin in 20 years. They’re chasing momentum and hoping to sell to someone else at a higher price. These speculative cycles are ultimately what has sent Bitcoin up and down so dramatically.”