Black Swan or New Yuan?

 

“Uh… No! Absolutely not.”

That’s what I said when asked recently: “So are you buying bitcoins?”

The fact that the lady who cuts my hair was asking me for advice on bitcoins was enough for me to cave and finally address the subject. Clearly, bitcoin is “in the building!”

Amidst unthinkable price increases recently – 5,565% year-to-date and 273% in the last month – the media has gone nuts over bitcoin!

Here’s a chart of the Google Trends analytics, plotting the number of web searches for the term “bitcoin”…

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Funny, that chart resembles this next one, the bitcoin/USD exchange rate:

See larger image

History shows illegitimate things can be legitimized… if enough people talk about them. Is this the case for bitcoin? Is the promise of bitcoin galvanizing, just because our social and media networks are shining their collective light on the topic?

Perhaps.

But clearly the sudden, widespread interest in bitcoin has contributed to the astronomical rise in the digital currency’s market value.

And that’s a classic bubble phenomenon: public craze spurring skyrocketing prices.

Yet there could be merit to this novel, potentially game-changing “currency of the future.” Let’s not be old-fashioned or close-minded here… even the U.S. Senate feels ready to acknowledge this currency experiment, a position that must have taken a good bit of warming up to.

China, too, has its geopolitical, strategic wheels spinning, figuring out whether the bitcoin should be its “new yuan.”

Clearly the bitcoin phenomenon is a deep and wide topic, which we can’t cover in one article. So let’s begin with a manageable bite and ask the two big questions…

Would I buy bitcoins today? More importantly, should you?

The answer to both questions is: “No.”

I realize that the lure of plopping $500 down on bitcoin today and cashing out with enough loot to buy a decent Cadillac in a month or two is enticing.

But right now it’s also extremely risky. You could just as easily lose your shirt.

The volatility in bitcoin’s recent price swings is unimaginably extreme – equaling upwards of 18 standard deviations! Price spikes and drops equal to just three standard deviations are considered extreme and in the black swan category – the rarest of rare occurrences.

That means bitcoin’s recent price swings are the blackest of black swans.

The volatility has benefitted bitcoin bulls this go-around. Yet, since volatility is a double-edge sword, it’s just as probable that the next round of extreme price moves will send bitcoin’s value south… possibly back to zero, where it started.

Just like fiat money, the intrinsic value of bitcoin is ZERO. The market price on any given day is determined solely by what buyers and sellers are willing to pay and accept on exchanges. That’s why it was worth about $560 yesterday… $710 the day before… and less than $400 the week prior.

The volatility of bitcoin/USD exchange rates alone should be enough to send anyone considering speculating in bitcoin running for the hills. But there are still more concerns and question marks, like…

Will governments squash the bitcoin, or adopt it?

Can the bitcoin be hacked, stolen and counterfeited?

Does the economics of bitcoin even make sense?

Is the bitcoin the “new gold,” or “fool’s gold?”

These are questions we’ll leave for another day. For now, enjoy the show, but stay on the sidelines. Bitcoin is not an investment I’d recommend you make right now.

Adam

 

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.