The cryptocurrency craze well and truly started in 2017. Bitcoin, the largest cryptocurrency by market cap and the most recognized, rocketed nearly 14-fold in 2017 alone. Some smaller cryptocurrencies even managed to post 2000%-plus gains during the year.
Search engine Google also reported that of the 10 most frequently-asked questions it received in 2017, two were related to Bitcoin. They were “What is a Bitcoin?” and “How to buy Bitcoin?” This just epitomizes the idea that many people are interested in cryptocurrencies, and everyone seems to want a piece of the action.
However, amidst all the hype and the rise of cryptocurrencies, I have noticed two worrying signs that point to the possibility that the sharp surge in prices of cryptocurrencies is unsustainable and is, in fact, mostly due to speculation.
Sign 1: Everyone is a digital currency expert
Just last week, I met a friend who was totally new to the world of investments. He had never bought a stock, or even started investing in any assets outside of his current home.
However, as we were talking, he mentioned that he was looking to purchase Ripple, one of the numerous cryptocurrencies currently available in the market. He said that he had been reading up about cryptocurrencies and was confident that Ripple had the potential to increase in value.
It did not surprise me that someone with little experience with investing suddenly wanted to get in on the action with cryptocurrencies. It seems that everyone I’ve talked to, even those with little financial know-how, or knowledge on how digital currencies work, is keen to invest.
The fact that so many retail investors have bought into cryptocurrencies points to one thing: Speculation is rife among those who invested. There is no fundamental basis for all the money that is piling into cryptocurrencies – cryptocurrencies don’t generate cash flows, unlike businesses – and most of them have bought into it with the hope that the price will rise so that they can earn a quick buck.
Sign 2: Stocks appreciate just because of the mere mention of cryptocurrencies
The cryptocurrency mania has even hit the stock market. For example, Bloomberg reported that a micro-cap company selling non-alcoholic beverages saw its stock price rise by as much as 289% overnight after it changed its name to include the word “Blockchain,” and announced its plans to invest in blockchain technology (blockchain is the underlying technology powering cryptocurrencies.)
The incredible increase in the company’s stock price came despite the fact that it had not signed any agreement with blockchain partners at that time; so, the price surge was just a reaction to an announcement.
To me, this is reminiscent of the dotcom-bubble days when companies that were not related to the internet would see their share prices soar simply by adding “.com” to their name.
It seems like history is repeating itself today. Investors are so enamoured by cryptocurrencies and blockchain technology that they are throwing money at anything that has the word “blockchain” in it. If history has taught us anything, it’s that this type of ‘investing’ is what leads to bubbles.
The Foolish bottom line
Don’t get me wrong. I do believe that blockchain technology is an exciting development and it may be a really useful solution for information storage for banks, auditors, and even healthcare records. However, the speed at which the prices of cryptocurrencies have taken off, and the reason for it, has got me worried. The speculative nature of the trades, and the fact that retail investors appear to be the main drivers of the price increase is reminiscent of the dotcom bubble.
As investors, the world of cryptocurrencies may seem like an exciting prospect. However, we need to know the risks involved and learn exactly what we are investing in. We should not fall into the trap of developing FOMO (fear of missing out), because investing based on emotions may cause to lose part or all of our capital.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.