Are We Approaching Crypto Mania??

It’s time we had a serious talk about crypto.

The way the crypto market is running at the moment seems like utter madness. In this article I’m going to take a look at whether this is just the new normal, or whether we’re now approaching the craziest mania since certain Dutch people sold all their worldly possessions in exchange for Tulips.

Crypto Madness

As we all know, the price of Bitcoin has been all over the place recently. I’ve previously set out why I don’t think it’s actually a viable currency. The events of this last week have just strengthened my belief in that.

I’ve been worried for a while about how inflated the crypto market is. I know it’s easy to say that after we just had a mini crash.

The particular incident that precipitated my worries was when I saw one of my mother’s friends give this advice to somebody on Facebook:

“You’ve missed the boat on bitcoin now, it’s far too expensive to buy a bitcoin. If you want a chance of making some good gains have a look at dogecoin”

As I think you can probably gather, this is a woman with no particular noteworthy record in the investment industry. The fact that she thinks you have to buy a whole bitcoin at around $40,000 is just one red flag. I probably don’t have to tell you that they trade in smaller units, ‘satoshi’, which are 0.00000001 of a bitcoin each.

Despite not even really understanding bitcoin, she seemed quite confident to tell someone else to pile into Dodgecoin. I too heard the hype on Dodge. So looked for it in Coinbase (where you aren’t allowed to trade it) – and read:

I don’t know about you, but that makes me wary of making any serious investment…. It’s a currency that seems to rise and fall wildly based on whatever Elon Musk says about it.

The market is flooded with absolute lunatics

It’s safe to say when you see one of your mother’s friends – who never before has had interest in financial products – piling into crypto and advising others to do the same, that should be a sign.

Every man, woman and their dog seems to have taken a punt on crypto. It really worries me where this is all heading.

Last week the BBC covered the many, many people who have been falling for crypto scams recently. Sad as it is, it beggars belief that people are falling for stuff like this:

Although I think greed is often to blame, I truly feel sorry for people reeled in by the above. If you’re conned into thinking Joe Biden is sitting around waiting to double your bitcoin, and he needs you to send yours to him first, then you’re fairly fair from being a sophisticated investor.

Ask the vast majority of people why they are buying bitcoin and they have no idea. Most of them have just heard it’s hot and want to make easy profit. Some people don’t even know what it is – but Elon Musk or Tracey on Facebook said something about it. It’s absolutely nuts!

These are the sorts of people who you’d struggle to convince to make a tax efficient investment in a simple equity tracker. Yet they’re happy to put a load of money into made up currencies.

Frankly, I think a lot of people are going to get their fingers burned. And in a lot of cases it will be the people who can least afford it.

We’ve been warned time after time….

The governor of the Bank of England has said that cryptocurrencies have “no intrinsic value” and people who invest in them should be prepared to lose their money.

The energy used to mine bitcoin has outstripped the entire energy consumption of the Netherlands. Not surprisingly, it has been described as unsustainable (BBC).

And most recently Bitcoin fell 30% after China banned banks and payment firms from providing services related to crypto-currency transactions, as well as warning investors against speculative trading (BBC).

Even after China shook the crypto markets, people merrily just bought the dip. The market really is clinging to the assumption that the only way is up! It just makes you wonder what it will take to cause this bubble to really burst!

And of course out came the conspiracy theorists:

People have told us that one of the great virtues of bitcoin is that it is outside of the normal financial system. The same people are now annoyed that a) China don’t want it in their financial system and b) are claiming that the financial system is now manipulating the price!

They’re not wrong though about some of the key exchanges ‘locking out’ people, though. I know first hand that Coinbase ground to a complete and utter halt on 19 May when things were going particularly crazy. It’s yet another reason to be wary of crypto as an investment.

Crypto Mania?

The way crypto has been headed, we could well be witnessing the greatest mania of our generation. I don’t think there’s ever been any asset where people all over the world have been able to pile into owning something so easily.

Maybe I’m placing too much reliance on the anecdotal evidence but I really worry about so many people blindly charging into something they neither are able to use nor understand.

It could be that Bitcoin really is worth $60,000 a coin. Perhaps it’s worth much more than that. I’m certainly not convinced. What is the intrinsic value of a coin? If you don’t have a pretty good idea, you should tread very cautiously.

My guess is this will all come tumbling down. Are we now looking sillier than in the great tulip mania of the 1600s (wiki) when people were literally trading everything they owned for tulip bulbs? We’ve all got our own views.

Right now it’s all great fun to watch, and I’m not going to pretend we’re complete spectators here. We have an investment in bitcoin, and even a small investment in ‘joke’ dodgecoin. For us, it’s almost a social experiment, a ticket to tell the tale for years to come. If we make money then great, but if we lose it all then that’s fine too.

At some point, I think we’re going to look at taking profits and converting some of it back to cash. I think there’s a high chance we might be getting too greedy here. But if my mum’s non-investor friends are still piling in, I think this might have further to run.

One thing is for sure. If (or when) the music does stop, it will be difficult to say we didn’t see it coming.

What about you? How far are you in on crypto and what are your thoughts on where it’s heading in future? I’d love to hear some views… I know others are completely the other end of the spectrum on crypto – I’d be keen to hear those views too.