Should you buy into a bubble?
That’s a question I have asked myself all year, as we’ve watched one blown. Yes, this is about bitcoin.
But bear with me, as what may on the surface appear to be one of my more financially irresponsible columns, has a purpose in trying to understand the temptation of a bubble.
Because even now, with bitcoin up 1,600 per cent since the start of the year, I do wonder about buying some. The reason being that I suspect we aren’t at the top of the classic bubble chart yet.
I profess no expertise in bitcoin. I know a bit about it – possibly more than many buyers - but not a lot.
What I can see is that it is in a bubble.
There are varying bubble definitions, but broadly speaking it is when the price of something becomes detached from its value and exuberant market behaviour sends it soaring.
If you do buy into bitcoin
Find out how bitcoin and the blockchain works, so that you have some understanding of the system, the ledger, the major players and the public and private key elements.
Remember bitcoin yields nothing and its main source of value is scarcity. Most bitcoin activity is trading not investing.
Research coin wallets, the digital vaults where cryptocurrency is held, and consider security carefully. Bitcoins have been stolen before, understand how this happened.
Be prepared for extreme volatility. The price can move by 20% in one day and you could easily lose half of your cash in a far quicker time that investing in the stock market.
Consider how you would cash in any gains. There are reports that this has proved hard for some people. A time of market stress could lead to people being locked in and unable to trade.
Read our guide to How to be a successful investor, which looks at the far less high octane world of long-term investing and how to make it a success