On November 8th, 2017, Bitcoin broke $7,700. It did so despite criticism from financial incumbents and central bankers. Even September’s crackdown in China couldn’t keep it down for long.
Overall, this year has been great for Bitcoin, with a few bumps along the way. In January this year, it was trading at around $1,000; now, a little over 11 months later, it has surpassed $7,000.
To put things into perspective, if you had invested $500 in Bitcoin on November 8th, 2015, in just two short years, it’s worth would have surpassed $10,000 for a gain of more than 2,000%.
At its peak this week, Bitcoin surpassed a market cap of $119 billion. If it were a stock, Bitcoin would be bigger than Nike, Bayer, Mitsubishi and Goldman Sachs.
All this sound’s exciting, but if history is anything to go by, such unprecedented market growth isn’t always sustainable.
Back in the 90’s, when the internet was taking off, “dotcoms”, or internet companies, saw massive growth. Valuations were sky-high, and investors were falling over themselves trying to buy stocks in literally any company with a ".com" in its name.
In November 1998, theglobe.com went public and closed first-day trading at $63.50. It was delisted in April 2001 at 16 cents. Similarly, Amazon.com had gone public in May 1997 at $18 a share, but between December 1999 and September 2001, it saw a high of $106.69 per share and a low of $5.97 – an overall drop of around 94% in value.
These figures relate to the dotcom bubble bursting, and that was, quite literally, a lesson worth trillions of dollars.
The dotcom bubble was purely a result of speculative investing. People had stopped caring about actual valuations, and more importantly, basic due diligence. We are witnessing a similar phenomenon in the crypto boom now, as investors throw money at cryptocurrencies and “blockchain-powered” solutions without a second thought.
Just as most companies that were big in the dotcom era are now forgotten, many of these cryptocurrencies and digital assets will also fade away. That’s the way financial markets work. New technologies come along; better services are introduced. While the technology it’s built on is growing in popularity, Bitcoin as we know it today is not guaranteed to thrive forever. Granted, the rewards are huge, but so are the risks. These are uncharted waters.
A common strategy is to simply buy and hold popular tokens and digital currencies. While that may work for some, the people who bought Amazon.com shares around $100 during the bubble had to wait about ten years for them to reach $100 again.
Make no mistake, there is money to be made in cryptocurrencies. Back in 1995, there were about 7 million internet users. Ten years later, the number had jumped to 1 billion. Today, there are about 7 million cryptocurrency users; in ten years, we may be looking at billions. This is evidence that the crypto market is in its infancy at present. It is only going to evolve and expand from here on.
You can take some risks today, hold for the next ten years, and if you're lucky, you will have found the Amazon, Yahoo or Google of cryptos.
However, if you're looking for sustainable returns while navigating these uncharted waters, you should invest in a fund that does not depend on any one currency going up with time. When volatility is high, diversification is your ally.