The smartest thing you can do with a big financial win is to walk away from the table.
The smartest thing you can do with a big financial win is to walk away from the table.

Proof Bitcoin is a waste of money

TODAY marks a monumental threshold in the history of the cryptocurrency Bitcoin. For the first time in ages, Bitcoin is lower than it was a year earlier.

If you bought the digital coin a year ago and held onto it, you've lost money.

 

The Bitcoin slump.
The Bitcoin slump.

 

Bitcoin peaked in December at more than $US20,000 ($28,168). But even as the price fell steadily this year, investors were at least able to say it was far above where it had been a year before. That claim is no longer true. Bitcoin was at $US6249 ($8801) a year ago and at time of writing it sat at $6241 ($8790).

Bitcoin's technological revolutions were supposed to dominate the future. But as the future is relentlessly turned into the present, Bitcoin is looking less and less relevant.

BETTER CHOICES

Bitcoin investors could have done much better. If on this day a year ago they had decided to leave their money in cash under the mattress they would have got a better return (0 per cent interest). They could also have done better by sticking their money in the bank (2 per cent interest on a term deposit) or by buying an index fund of US stocks (the S&P 500 is up 3 per cent, plus dividends).

These were simple results to get. Tech-savvy Bitcoin fans could have done even better investing in a stock such as Netflix (up 40 per cent).

Some Bitcoiners will be able to say, "I bought in 2013 so the recent fall doesn't bother me." However, those people could have increased their commitment to Bitcoin, by cashing out a year ago, investing in something boring for the past year, and buying even more Bitcoin today.

THE GOOD OLD DAYS

Let's cast our minds back to October 2017. Bitcoin's price was at $US6500 ($9152) and rising. Cryptocurrency fans were going crazy. Their experimental "internet money" had doubled in price in a few short months, doubled again in a few weeks, and was about to double yet again.

There was a frenzy of optimism.

Bitcoin would hit $US100,000 this year, claimed one analyst.

Venture capitalist Tim Draper predicted Bitcoin would hit $US250,000 by 2022, and that nobody would be using "fiat" currency (by which he refers to what you and I think of as money).

But even his outrageous confidence in Bitcoin pales next to millionaire entrepreneur John McAfee, the man who invented McAfee antivirus software.

On Twitter, he made a bold prediction that Bitcoin would rise in value to more than $US500,000 within three years, and was willing to back that prediction with a powerful promise.

 

John McAfee’s risky bet.
John McAfee’s risky bet.

 

A few months after the above exchange, Mr McAfee increased his Bitcoin price prediction to $1 million.

Some time remains for his predictions of the price of Bitcoin to come true, but if the last year is any guide, Mr McAfee is set to suffer quite publicly.

DENIAL

After Bitcoin's bubble topped at $US20,000 in December 2017, Bitcoin investors took some time to come to terms with the new reality of falling prices. One of the most cringe-worthy moments was in January and February this year when a large cohort of Bitcoin investors became convinced the tumbling price was simply due to Chinese Bitcoin investors withdrawing money to fund their expenses over Spring Festival, and would soon reverse.

"Around about January time there's always a dip, and then it goes up again," one Australian investor told media. It didn't though.

Bitcoin investors can take some solace in the rest of the cryptocurrency marketplace. At least they didn't invest in one of the other coins that appeared ready to steal Bitcoin's crown.

Litecoin is down 14 per cent over the year.

Bitcoin Cash is down 6 per cent.

Ethereum is down 37 per cent.

The crypto markets are a sea of red.

There are exceptions: a cryptocurrency called Ripple is up 119 per cent over the year. It is part of a system - also called Ripple - that aims to work with the existing monetary infrastructure, rather than replacing it. The basic goal of the Ripple system is to make it easier to transfer money around the world.

And don't forget Dogecoin - the cryptocurrency started as a joke. It is up 250 per cent.

The lessons of Bitcoin can be applied to all asset classes: What goes up can come down.

People who look like genius investors in a rising market can start to look very differently when the worm turns.

People who predict prices by extrapolation will get egg on their face.

When a speculative frenzy starts, and it feels like fear of missing out is peaking, it may be too late. As they say: Sell when people are greedy, and buy when people are fearful.

People are fearful of Bitcoin now. Does that mean it is time to buy? Who knows? But do note - the last time Bitcoin's price was lower than it had been a year before was 2015. In 2015 it sunk to a fraction of its 2014 peaks, falling below $US200. And if you'd bought in then, you would have made a thirty-fold return today.

Jason Murphy is an economist. He writes the blog Thomas the Think Engine.



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