BITCOINS AND TULIP BULBS

With Bitcoin prices surging to all-time highs, surpassing even the price of gold, many who watch the Bitcoin market are becoming nervous yet some are becoming complacent. Where is this all heading?

Is this a warning sign that Bitcoin is in bubble mania or is it a reassuring indication that it's
assuming a more prominent role as a medium of exchange/store of value?

If you hold a substantial amount of Bitcoin is it time to take profits? If you haven't purchased any is it time to get on board or is it better to wait?

Oh what do I do? What do I do?

I think the answers lie in defining, at least as much as it is currently possible to do so, exactly what Bitcoin is.

IS BITCOIN A 'TULIP BULB'?

In 17th century Holland, newly imported tulip bulbs were all the rage. They were a highly coveted luxury item and it seemed the Dutch just couldn't get enough of them and the colorful flowers they produced.

During the cold winter months when tulips would not grow in northern Europe, the Dutch created what were essentially the first futures contracts, allowing people to pre-buy tulip bulbs at the end of the growing season.

In early winter 1636, the price of these futures contracts began to skyrocket. By February 1637, a contract for just a single bulb was worth the equivalent of 10 times the average household’s income! The higher the price rose, the more people clamored to buy it. Why work for a living when you could just invest in tulip bulbs?

But it was a mania--a bubble---and it burst. Thousands of investors lost everything.

Are we amidst such a mania once again with cryptocurrencies?

A true speculative hysteria, like the infamous Dutch Tulip Mania, is one in which rising prices encourages more and more buyers, with no regard for what the asset itself is. FOMO - fear or missing out---drives people to suspend common sense and chase prices higher and higher, even for something as fundamentally worthless as a tulip bulb.

Such environments bring out the scammers. In the Tulip Bulb craze onions were sometimes passed off as tulip bulbs. Today, cryptocurrency startups issue ICOs, selling new digital currencies which there is really no way of knowing the future value of. It's sheer speculation. Not that there's anything wrong with that necessarily. A little speculation can be part of a sound investing strategy, but let's call it what it is and keep our heads.

IS BITCOIN LIKE GOLD OR IS IT ANOTHER TYPE OF FIAT MONEY?

There is a big difference of course, between Bitcoins and tulip bulbs. Tulips are purely ornamental and have no particular use or value beyond that. Bitcoins, on the other hand, can be used to purchase goods and services, like government issued fiat money can. This use is increasing too as more businesses accept it as payment. Like fiat money, Bitcoin, and other cryptocurrencies can be saved and stored. Similar to gold, the supply of Bitcoins is finite

The strange world of negative interest rates, bank holidays, and quantitative easing means of course that government issued fiat money is arguably perhaps the most speculative and unstable store of value in the world today.

Precious metals are a likely safe haven, but what if governments impose confiscatory 'windfall' taxes or similar legislation that robs the prudent of their rightful gains? Could holding some Bitcoin be a wise diversification in that event?

Bitcoin is certainly more volatile than gold but of course it would be since its market cap is far less. As market capitalization increases, price volatility will decline. Until that happens however, a large liquidation of holdings could send the price plummeting suddenly and dramatically. Holders of Bitcoin need to be prepared for a bumpy ride.

SO WHAT'S A SENSIBLE STRATEGY?
A Few Do's and Don'ts ---Disclaimer--these are just my opinions and I am by no means an expert--I just offer what I think is sensible based on my personal research and experience as an investor in hopes that it will be helpful for you.....So here goes;

---DO invest in cryptocurrency. Take perhaps about 1 or 2 percent of your investable net worth---by 'investable' I mean money you have left over after paying all bills and obligations--- and put it into a basket of the strongest cryptocurrencies. Strongest doesn't necessarily mean highest price, but would involve factors like market capitalization, how widely adopted it is, what unique problem it solves or advantage it has over Bitcoin, etc. Such a portfolio might look something like this---Bitcoin-50 percent, Ether-30 percent, Litecoin- 10 percent and Dash- 10 percent. This is only for the sake of example, of course.

--DO take a buy and hold approach. Unless you are a skilled trader, just do your best research, take your positions and be prepared to ride out the inevitable ups and downs. Resist the natural urge to buy high and then panic sell at lows. Remember, you're in this for the long haul with money you are comfortable losing if that's the way it goes.

--Risk vs. Reward Ratio---I look at cryptocurrencies right now as being a little like playing the lottery. You put in a relatively small amount of money, so the risk is very low, yet the potential reward is enormous. Of course, with the lottery, the odds of winning are very slim. With Bitcoin, I actually think the odds are far better, so take the money you'd use to buy lottery tickets over the course of a year and put it into Bitcoin instead. Remember, you don't have to buy an entire Bitcoin at once, so don't let the current high price intimidate you.

I don't know if Bitcoin is a tulip bulb, but any farmer/gardener knows that diversification is essential. So why not 'plant' some Bitcoin see how it 'blossoms'.