Bitcoin, IPOs, and Tulips

Recently bitcoin made the news because of its meteoric rise in value. Naturally that followed with a less dramatic fall. One bitcoin is currently valued at around $11,000. So what is bitcoin and should you be investing in it? Bitcoin is a cryptocurrency that is similar to a form of money that you would use in another country. The big difference is that there is no central bank controlling the exchange rate. That means bitcoin is worth exactly what people are willing to pay for it. If everybody wants to buy bitcoins, the price goes up. If everyone wants to sell, the price goes down.

Bitcoin reminds me of investing in dot-com IPOs in 1999 and early 2000. You could put a few thousand dollars in the stock market on Monday, sell off the stock on Friday, and pay cash for a brand-new Mercedes on Saturday. The rise can only last so long before people lose interest and stocks come crashing back to reality. There were some dot-coms that did absolutely nothing yet had higher valuations than Boeing which actually makes airplanes, a tangible product. At the end of 2000, prices corrected and people realized a lot of the stock out there wasn't worth much. The downside is that a quarter of a million jobs in Silicon Valley disappeared seemingly overnight.

Dot-com IPOs are not the first speculative bubble. That honor goes to the Tulip mania that happened in Holland during the 1600's. I remember hearing about it in one of my history classes where certain designer Tulip bulbs became worth more than a home. Naturally that all came crashing down in February of 1637.

So do I think you should invest in bitcoin? There are a number of companies that accept bitcoin as a form of payment and so for the moment it is not worthless. There are also some financial institutions looking at using bitcoin to reduce auditing costs. There are a network of bitcoin miners that verify transactions for less money than current financial auditing costs. That could lead to some longevity with the cryptocurrency. Then of course, everyone could decide it has no value at all and the value of bitcoin could fall a lot. As I have no need to trade in bitcoin, I am going to avoid it for the time being. If you feel differently, feel free to invest away.