Is Crypto in a Bubble? Yes, and This Is How to Play It

Whenever the market moves quickly, there is a natural increase in the number of stories or posts questioning whether we are in a bubble. As people are coming fresh to the market, thinking of investing and reading my blog I think it is important that I address my thoughts on this directly.

There are two particular schools of thought with regards to whether we are in a bubble:

  • Yes, we are in a bubble: usually the opinion of people who missed the opportunity to invest in Crypto, often from other investment backgrounds. Some of these people have been claiming we have been in a bubble since Bitcoin was $8.
  • No, we are not in a bubble: usually, the opinion of those people heavily invested in Crypto, who are scared it will pop. If these people have been invested in Crypto long enough and rode the two-year bear market back to profit from 2013 they are shouting from the rooftops, "see, I was right."

So are we in a bubble?

Yes! Of course are in a bubble.

You only have to look at the definition of a bubble to see we are in one:

NASDAQ definition: A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset. Bubbles are often hard to detect in real time because there is disagreement over the fundamental value of the asset.

We can break this down:

  • "...characterized by surges in asset prices..."
    Just look at the charts, look at the surge in prices this year alone, we are up over 800%.
  • "...above the fundamental value of that asset." 
    While there is an argument for intrinsic value with Bitcoin, many Crypto assets have little to no intrinsic value. They are speculative investments yet trading with a market cap of +$1bn, sometimes without a usable working product.
  • "disagreement over the fundamental value of the asset."
    You can search through Twitter and see the arguments over the fundamental value of Bitcoin, it even led to a fork of because the two main camps disagreed over its inherent value.

We are in a bubble!

Anyone claiming that Bitcoin is a store of wealth and is digital gold is delusional and is speculating it is with a combination of vision and hope. Anyone claiming Bitcoin will replace fiat money needs to try and pay for a coffee with it and wait an hour for the payment to be confirmed, and let's not forget the high transaction fee.

Right now it is neither, but it could be both:

  • Global currency: Bitcoin can lead the way here, but it needs to get its shit together and allow for low-cost instant transactions.
  • Store of wealth: I don't believe it can become a store of wealth unless it is a global currency as then it will have utility and thus value.

Money itself doesn't have intrinsic value; it is just metal and paper, it has value because governments say so and thus people use it as an accepted form of exchanging value. Bitcoin will have value if governments allow it, payments become fast and cheap, and retailers adopt it.

Therefore is a Bitcoin worth $5k? Of course it isn't. Could it be in the future, hell yes, it could be worth way more, hence the speculation; hence we are in a bubble.

The Risk With Speculation

Even if Bitcoin does become a globally accepted currency, it will have a symbiotic relationship with fiat. Similar to how we use foreign currency on holiday, when spending Crypto, we will work out the cost of the things we are buying using a rough exchange calculation.

People are in Crypto to make money right now, and they make a profit when they exchange an asset back into their local currency at a higher price than they paid for it. Yes, there are a whole bunch of people holding Bitcoin and Crypto for the future, but amongst my circle of family and friends, everyone is looking at his or her investment in fiat value.

And this is the key point. As long as we value our Crypto investments in our local fiat currency and as long as the market keeps rallying, then there is always going to be a temptation to cash out back out into fiat. And when too many people do this then the prices will drop, and this can spark the bursting of the bubble.

It is a waiting game of price v utility, and right now the price rally is happening faster than utility.

Are bubbles a bad thing?

They can be. The housing bubble has been terrible for lower to middle-income families. Is it right that someone can buy up 10's or even 100's of houses to make money, pricing families out of owning a home or even renting in his or her home town? Yes, we have a free market, but the rich get richer and fuck the rest? 

Is a stock or crypto asset bubble a bad thing? Yes, if you get caught on the wrong side of it. The thing is people need houses; they need somewhere to live and raise their family. People don't need to invest; it is a free choice with the goal of increasing the value of their investment.

If we are going to have free markets for investors are we saying there is an upper limit? Are we saying if you make too much money then we need a cap? 

No, we either have a free market, or we don't. If you choose to trade an asset and lose money you had a choice. If you invest in Crypto, you have a choice. If you have invested more than you should and lose money then it is your fault, the warnings are there.

A bubble is a natural outcome within a free capitalist society.

But bubbles can also be good:

  • Money is made in a bubble, and if we all accept with markets that there are winners and losers, then we have the freedom to choose what level of risk we want and thus what markets we want to trade in. If you want a low-risk investment, then put money in a savings account and make 1% a year or throw some money at a 30-year government saving bond.
  • Bubbles drive innovation as it is a race to the top. When the bubble bursts then out of the ashes will come genuine valuable players. Just look at the dot com bubble, it burst, lots of stupid companies went to the wall, anyone? But also we have hugely successful companies like Amazon. With Crypto we will have the same, some shitcoins will go to the wall, and some of the best will still be here in 10 years.

Reference: Clem Chambers, Forbes "Cryptocurrency Is A Bubble, Revisited"

And I am going to make sure I am holding the majority of my investments in those which will be here in 10 years.

How to Trade in a Bubble

The question isn't whether we are in a bubble it is where in the bubble are we and how do we play it?

As ever we must accept that nobody knows what the fuck is going to happen, the market could crash tomorrow, in a week, in a month, in a year. We could crash at $250bn, $1tn or £10tr. We could crash multiple times up to any value. We could have many small bubbles inside a larger bubble.

Nobody knows what the fuck will happen!

What you want to ensure as an investor is that when it does crash, you can come out of it relatively unscathed, therefore you need investment strategy where you are making good money on the way up and limiting losses on the way down.

And you don't get greedy.

My personal view is Crypto is here to stay, and in 10 years time, there are going to be some extremely valuable assets. The benefit of both Cryptocurrencies and the blockchain are real. It isn't a solution looking for a problem, it is a solution solving real world problems, from business efficiency, banking for the unbanked to low-cost cross border transactions.

I think the road to adoption will be volatile and therefore I believe we will crash multiple times on the way to a huge global market cap. I don't think a $1tn market cap is crazy, it feels quite small, it may happen next year, we may crash next year, and it happens a year after. But for me, long-term, the only way is up, and that is why I am 100% invested in Crypto as my source of income now.

I am though playing the market is with caution, for two reasons:

  1. I need to be able to extract an income from my investments
  2. I want to limit losses during each correction and maximise profits through each rally

My gut feeling is that we have another correction coming and this is down to a number of factors:

  • Prices are moving too quickly and +1,000% year on year growth is not sustainable.
  • There are too many crappy projects and coins coming to the market which either have little value or do not need a token to support them.
  • Some large investors have significant investments in Crypto who can extract fiat money, which has utility to live a great life and will be tempted to cash out.
  • And, well, the charts. History does tend to repeat itself, just look at the two charts below for what happened before the 2013 crash and where we are now. Okay, the timeframes are different and there are plenty of ways the optimistic investor can pull this apart. For me though, bubbles are a lesson in history, and I am happy to be cautious. 
 2013 market rally

2013 market rally

 Current market rally

Current market rally

I offer no detailed technical analysis as to why the two charts above give me concern in the short-term. I am cautious because the movements in prices feel similar. I am cautious because bubbles can crash. I am cautious because history has told us to be greedy when others are fearful and fearful when others are greedy.

My issue is that even though I accept we are in a bubble, I don't know where in a bubble we are, when it will crash and how much it will crash by. All I am doing is strategising around it to limit my exposure when it does yet allow my investments to keep growing while the market rallies.

Keeping it as simple as possible, the two things I am doing are as follows:

  • Taking fiat money cash off the table. I am trying to keep to my 5% for 25% though I am tracking at 18% right now. I will continue to do this and will likely increase the % as the rally continues.
  • Increasing my % holding in the most crash proof coins. I will transfer some of my investments to my more stable coins which survive corrections and crashes the best: Bitcoin, Dash, Monero, etc. During the June/July correction, a move to an entirely Bitcoin portfolio would have been a good thing.

And when a crash does happen I will be ready to invest back into the market with those assets which move quickest, your speculative altcoins.

But what to do if you are new to the market?

If you have only just joined Crypto or you are thinking of coming in now. Well, we are back to our scenarios based on nobody knowing what the fuck will happen:

  • It may continue to rally
  • It may trade sideways
  • It may crash

The best time to invest is when markets trade sideways when things are pretty boring because there is nobody left to sell so the speculation cycle can begin. If the market had traded sideways for a long time it would feel safe, but it hasn't, it is on a mega bull run. Therefore if you are thinking of joining the market now, you are running the risk of investing at the peak.

I can't tell anyone what to do, all I can do is tell you how I would play the market as a new investor right now, and that is with a shit load of caution:

  • Golden rule number 1: I would never invest more than I can afford to lose. If the market crashes then cool, it won't affect my life. Having lost £20k in tech stocks a few years back, I know how shit it feels when the markets turn against you. It is only money; it isn't worth that feeling.
  • I would be investing for the long term; this is for 3-5 years minimum; therefore if the market does crash, I can ride through it.
  • I would iInvest slowly. Just a small amount at a time and follow the market, if it continues to rise, then I would continue to invest, and if it crashes, I would be able to swallow it, ready to invest again when the market finds a bottom.
  • I would take money off the table through every spike until my original investment is out knowing that all the money I am playing with is free money.

I highly recommend caution right now though. I wouldn't be looking to put lots of money into Crypto. If and when the market turns it will be quick and painful. When a market crashes, the speed can be frightening. I suggest that anyone who hasn't seen the Big Short go and watch it. Look how quickly the housing market nearly destroyed the global economy. Governments had to prop up banks, and huge companies went to the wall.

We are in a free market but when there is money to be made it can equally fuck you!

Any questions, then please give me a shout. There is also a short video I made discussing this below.