Defining the Bubble and Deciding If Bitcoin Is Headed for One
There have been many examples in the past where investors have followed their hearts before their heads and suffered as a result of it. Many skeptics feel that it’s that type of impulsive investing that is fueling the incredible rise in the value of bitcoin and other types of cryptocurrency like it. While bitcoin can be used as a way to make financial transactions over the internet without the need for a third party, they can also be utilized by investors as they would a stock, buying low and selling high to take advantage of its changing value just like anything else on the market.
It’s likely that you’ve seen articles warning that bitcoin and others of its ilk could be headed for a dreaded “bubble.” If you’re not an investing expert, you might not understand what the term means, other than it’s a bad thing. It even might dissuade you from letting bitcoin anywhere near your investment portfolio. But fearing something without first understanding it is a bad idea, no matter the situation.
Before deciding whether or not bitcoin is right for you as an investment opportunity, you should try to find out as much information about what it is, and isn’t, as possible. Then you can make informed decisions about whether the bubble is coming.
The Characteristics of a Bubble
A bubble, at least as it relates to investing, is something that occurs when investments drive up the price of one asset or a group of assets to surprisingly high levels. The bubble analogy is used because of the expectation that the whole thing will pop, leaving investors with nothing. In the case of bitcoin, that would mean that those holding it as an investment would have little or nothing to show for it once the price corrected itself to more realistic levels.
What Causes the Bubble
The reason that a bubble occurs is due to investors are either buying an asset going on nothing more than news about it or blindly following what others are doing. If the asset in question isn’t backed up with fundamental financial information that supports the prices investors are paying for it, a bubble is in place. Imagine a stock that’s priced at a high level while the company which issues it is in financial doldrums and you can start to get a feel for the bubble.
Does Bitcoin Qualify?
At first glance, bitcoin might seem like a bubble because of the incredibly rapid upsurge in its value over such a short period of recent time. But the other way to look at it is that investors understand that the technology is creating a sea change in the world’s monetary system. If that prediction comes true, the value of bitcoin still has far to go in the upward direction before it ever gets near the formation of a bubble.
Obviously, the investment world is a volatile one and things can change in a moment. By keeping a close eye on news about bitcoin and if that news actually supports its value, you should be able to avoid the bubble, if and when it appears.
