Bitcoin is the latest buzz in the financial market. Over the past year, the price of a Bitcoin increased from about $900 to as high as $20,000. Although blockchain technology can potentially benefit the financial market by creating a more secured medium of exchange, Bitcoin’s user demographic, system security, and media publicity has made Bitcoin a speculative financial instrument.
According to Wall Street Journal and Financial Times, most Bitcoin owners are young male between the ages of 25 to 35. They are most likely unsophisticated investors who have never experienced a financial crisis. More importantly, they are most likely aggressive investors who have the “get-rich-quick” and “nothing to lose” mentality. As the price of Bitcoin continued to rise, these inexperienced investors are prompted to follow the hype, which can lead to a speculative bubble. Last week, I had a conversation with a friend in the financial advisory industry. He was convincing me to invest in Bitcoin. He claimed that cryptocurrency has another 1-2 years of bull-run. When I asked him for his justification, he answered “I guessed.” This is a prime example of the type of cognitive dissonance that leads to financial bubbles; people are tricked into believing they have special insights on finding the next gold mine, only to find out their insights are built on nothing but speculations.
The main purpose of cryptocurrency is to replace traditional currency by providing an easy, secure universal payment to store and transfer money. However, Bitcoin has not been serving its purpose. For instance, once the users forget their password, it is virtually impossible to retrieve their Bitcoin. The security feature also casts doubts. A week ago, one of the Korean cryptocurrency exchange filed bankruptcy because hacker stole more than 17% of the cryptocurrency from the exchange. Most importantly, despite Bitcoin’s popularity, only a few places accept Bitcoin as a form of payment and they usually charge a hefty processing fee.
Media coverage has also escalated this mania. On social media, you can find videos of many “Bitcoin millionaires” and amateur investors sharing their success story. Suddenly, someone with no previous investment trackrecord sounds like an investment expert. The cryptocurrency mania went as far as driving the share price of a public company up by five folds within a day because the company changed its name from Long Island Ice Tea to Long Blockchain Ice Tea.
Similar to the dot com bubble, a lottery-like mania is clearly brewing. Only this time, investors are gambling on cryptocurrencies instead of tech companies. The outcome is likely going to be similar – investor will continue to bid up the price of the asset with no regards to price and risk. Eventually, the bubble will burst and everyone will suffer. Warren Buffett once said that “the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs,” perhaps this is the time for investors to invest with extra prudence.
The Voice of Kathmandu 