What to do if you’ve missed out on the bitcoin super-bubble

Bitocin accepted here sign © Getty Images
There is a virtually unlimited supply of bitcoin-buyers in China

Bitcoin relies on greater fool theory, say the naysayers. People are only buying it because they think they’ll be able to sell it to somebody else at a higher price.

And so they sit on the sidelines and watch while the price rises ever higher.

Who is the greater fool? The guy who participates in the greatest investment mania any of us will ever see in our lifetimes, or the guy who misses out?

That shoe-shine boy? He may be a bitcoin billionaire

Bitcoin has had five 80% corrections in its evolution. It would not surprise me if it had another. In fact, I think it’s likely. The question is when.

When Joe Kennedy sold stocks just before the 1929 crash, he did so because he was given advice by his shoe-shine boy. When an outsider as far removed as that is giving you stock tips, you know the bubble has gone too far. The shoe-shine boy strategy worked well for Joe Kennedy.

But if you applied it to bitcoin, you’d have missed much of this year’s astonishing 1,000% move. That’s not a typo: 1,000%. In one year.

But you’d have missed it.

Shoeshine boys have been talking up bitcoin since 2010. It’s designed for shoe-shine boys, in that it’s designed for every man. It’s a practical system of cash for the internet.

In the case of bitcoin you don’t want to be worried about the shoe-shine boys. It’s the institutional blokes in suits you want to be concerned about.

I’m 48. When I go to a gold or a mining conference, I’m about the youngest guy there. When I go to a bitcoin conference, I’m the oldest guy there. They’re full of shoe-shine boys and greater fools.

But now, everywhere I look people are talking bitcoin. Every ad that pops up on my computer screen is for some bitcoin-related company. Every new venture seems to be bitcoin related.

I’m getting texts from people who have never speculated in anything in their lives about bitcoin. The shoe-shine boy alarm warning has gone so red the screen has exploded.

Yet bitcoin’s market cap is still under $200bn. Institutional money is not positioned. It is desperate to get in. Career-risk depends on it. I bet every financial adviser in the land has his clients on the phone going “Get me some bitcoins!” – and they barely know how. Which pension funds are invested in bitcoin? I bet you could count them on the fingers of one hand.

There aren’t enough bitcoins to go round

Then there’s the finite supply issue. There will only ever be 21 million bitcoins. That is the maximum. There are currently 16 million. But inventor Satoshi Nakamoto’s 1.2 million coins are locked up. There’s an issue with the keys, apparently. And how many have been lost?

There are wallets sitting dormant with tens of thousands of bitcoins on them. It looks like the keys have been lost. This isn’t something where you can phone up customer services and get them to sort it out. This is cryptography. If you’ve lost the means to access those coins, they’re gone.

And think of all the hard drives that have been lost or corrupted. My buddy used to mine them on his computer at work. When he came to leave the company, they took the computer back and deleted the hard drive!

How many similar stories are there? Bitcoins on old phones that have been thrown away. Ditsy people (like yours truly) who experimented a bit and bought a few, but can’t now remember where that USB stick is. Coins lost when the Silk Road was shut down, with criminals perhaps throwing away their computers to hide the evidence.

I bet at least another 10%–20% of current supply is either lost or can’t be got at.

If you search Google trends you’ll find that “buy bitcoin” is now more popular than “buy gold” (though not yet in the US). Where “buy bitcoin” obliterates “buy gold” is in Russia, in Korea, in China. There may be a finite supply of bitcoins, but there is no finite supply of Chinese buyers.

The sheer volume of greater fools in relation to limited supply is creating the mother of all squeezes.

If Marvel comics were to designing a template for the ultimate super-bubble, bitcoin would be it. A finite supply of a new global money system, brought to market just at the time when the world’s populace was sick with central banking and money manipulation.

Its potential has greater implications than the South Sea Company, than railways, than Mississippi swamp, than dotcom. It’s an entire system of money!

So, yes, it’s a bubble. Yes, it’s gone bananas. But, yes, it could go a lot higher.

So what do you do? You can either ignore it, like Warren Buffett did with dotcom, and keep your powder dry, while dealing with the psychological issues arising from watching a load of wretched kids who know far less than you are getting rich, while you’re not.

Or you dive in, all guns blazing and speculate with huge percentiles of your net worth, risk losing it all but also possibly make a mint.

Or you could perhaps speculate with a small amount of capital, and take the philosophical view if it all goes belly up.

My advice for the newbie is to familiarise yourself with the tech. Buy twenty quid’s worth. Get a friend to do the same. Practise sending each other small amounts of money. Register with an exchange. Flip some bitcoins for some dash or some monero. Read. Watch tutorial videos.  Learn. (Here’s a quick run-down on how to buy bitcoin in the UK.)

Almost invariably those who dismiss bitcoin are unfamiliar with the tech. By all means dismiss it – but it makes sense to know what you’re dismissing.

Dominic Frisby is the author of Bitcoin: the Future of Money?

  • ABlivit

    “I bet every financial adviser in the land has his clients on the phone going “Get me some bitcoins!” – and they barely know how. ” Really? Well, I’m a financial adviser and I have NEVER been asked for bitcoins by a client. Maybe that’s because I supply all my clients with a 40′ bargepole so they can keep themselves well away from this sort of nonsense.

    • Juanfranco Manganelli

      There is also the myth over scarcity in supply.. Every fork and there have been about 4 so far can add 21 million bitcoins. not to mention the other 1300 cryptos there are. It is too late to get in now lucky those who did in the past and have sold and take profits

      • Dave Hawkins

        They’re not actual Bitcoin though, they’re a derviative of it [Bitcoin forks]. BCH is not BTC. The other crypto currencies are completely unrelated.

  • Juanfranco Manganelli

    2010 there was no shoeshine boy whatsoever maybe you get that impresion because you have known about this for a long time. Now they are really coming out of the woodworks.

  • EUROHICCUP

    Hocus-Pocus, easy-money inventions of a broke “capitalist” west….Wonder when the house of cards collapses where would the exits be….

  • Bitcoin isn’t like shares, though. The price doesn’t discount future earnings, because there isn’t any. The price can only discount future demand, and while the number of transactions settled using Bitcoin increases, its value will keep on rising. That’s assuming speculators don’t all start cashing in, of course.

    • Warun Boofit

      If there was any correlation between bitcoins dollar rate and the value of transactions settled the price would be a small fraction of todays price. The price rise is purely speculative, the useage of Bitcoin as a transfer medium is relatively small with most peeps being Hodlers. I believe the inevitable large correction is going to be painful, CFD addicts are going long on 0.5 of a contract against the dollar costing tens of thousands, the downside for them is hundreds of thousands and without guaranteed stop losses some people will be chased for the title deeds to their homes and they are just the small time punters.

      • I agree. If the price rise is mostly speculation then eventually speculation will max out and the price will reverse. It’s a massive game of dare.

        Amazing people speculate on something with no intrinsic value.

  • Nick

    I’ve tried buying a very small amount of BTC (£10s worth) and moving it between two BTC wallets. It seems that the transaction costs are very high for small payments. One transaction is yet to be confirmed after two weeks because, presumably, I “guessed” too low a transaction fee. So where is that BTC now? Can I nullify the transaction and get it back to the original wallet?
    How easy is it to sell, say, £100,000 worth of BTC and get the cash back in one’s normal bank account?
    I can’t find any easy way to do that.
    All too difficult…
    I wonder how many people who have bought BTC and who have ridden the wave of price increases have actually tried to sell it and actually realised their capital gains.

    • philipknight

      Good point. I recently moved some GBP to Coinfloor to buy Bitcoin to convert to Ethereum. Fees: £20 SWIFT payment to my bank, £5 to receive into Coinfloor’s bank client money account, 0.38% fee to exchange GBP for BTC, 0.0005 BTC (approx £2.80 miners fee to move it off exchange to wallet – more by now (£4.14) as BTC price has risen. Same again to go back to sterling.

      To keep fees low, say below 0.5% by now you need to be moving thousands. It has become completely impractical as a medium of exchange.

  • George Lee

    Your list of all the ways to lose one’s bitcoin, whether from forgetting the password, hard drive failure, etc, coming on top of scams, sending money to the wrong account, platform closure or governments closing it down, has finally convincedme that the risk to too great.

  • Chris

    I’ve always read about the money you can make, but where do you exchange the BTC for acceptable currency ? Governments are surely not going to accept bitcoin for taxes or pay there public servants in BTC, so there will always be a paper trail. Can you exchange in cash ? We may have a world wide crypto currency, but a private one will not get legs I feel. If that is the case and one is established, then the government will know all about you and be able to extract taxes.

  • it is dilemma like with every bubble, gold, dotcom…

  • LG

    Yup. Buy those tulip bulbs. You know it makes sense. You’ll never go wrong with tulip bulbs.

  • Ayoola Rasaq

    True experience is the best teacher

  • Jimbo55

    Lots of comments below from mostly skeptical, dismissive and poorly informed people – I suspect most of whom are Baby Boomers. Tells me one thing – this thing goes much higher before the damn bursts; especially given that the majority of the coins currently in existence are owned by ‘Hodlers’ who have been in this market for years. Only been in it myself since late 2014 and won’t be nervous until I see the institutions are in. Yes, there have been hard forks but the forked versions of BTC have lower market caps for a reason – they are not being used anywhere near as heavily (search term = “Network Effect”). Cheers.