How Much Will You Lose When Bitcoin Falls?

We recently wrote about bitcoin as an alternative to the Venezuelan bolivar in our article How Bad Does a Currency Have to Be for Bitcoin to be a safe haven.

We recently wrote about cryptocurrency traders flocking to bitcoin and experts being confused about the cryptocurrency. The bottom line is while bitcoin is the most reliable of the online currencies it is highly volatile and potentially dangerous. Nevertheless in two nations especially traders are still buying bitcoins. These nations are Venezuela and China and traders are doing this for two different reasons. Venezuela’s currency is in free fall and we wrote recently about what caused Venezuela’s currency to fall so far.

But bitcoin is still on an upward path breaking the $4,000 barrier as the cryptocurrency feeding frenzy continues. Good for you if you bought bitcoin when it was worth about 10 cents in 2010 or when it fell from its $1000 peak and sold for $250 in 2015. And good for you if you bought for less than $2,000 on a correction just a few weeks ago. But how about now that the most popular cryptocurrency is selling for $4,391? What is going on?

Weekend Buying

Bloomberg notes that the bitcoin has jumped on the past two weekends. This would imply that it is not day traders who are driving the price up but people who are free on the weekend from their day jobs and worried about the future who are driving bitcoin to greater heights.

Bitcoin’s surge continues in the wake of the split that had sparked talk of threats to its growing acceptance as an alternative means of exchange. The digital currency jumped more than 5 percent on both Saturday and Sunday, and breached $4,000 for the first time, according to Bitstamp and Coinbase, two of the exchanges that offer trading in the virtual currency. Bitcoin also surged on the prior weekend and has now more than quadrupled since the start of 2017, while the more traditional alternative currency, gold, has climbed 12 percent.

The problem in predicting the future of bitcoin is that there are precious few fundamentals to follow unless you believe doomsday predictions of the world economic system melting down and all paper currencies becoming worthless. Although bitcoin is outpacing gold there are similarities between the two. Neither gold bullion nor bitcoin pays a dividend. Although gold has use in jewelry and industry its price is based on scarcity and the willingness of people to trust it more than the dollar, euro, yen, yuan or British pound. An argument for gold is that there is only so much. The same argument is made for bitcoin in that mining bitcoins is a difficult computational task that gets harder as more bitcoins are produced. But while gold still has a backup price based on jewelry and industrial use bitcoins are at their base just Monopoly money whose value is based on the fear of their buyers. What happens when that fear factor goes away and a few big holders of bitcoins sell out? Look to the gold rally of the 1970s and early 1980s for a guide. How much will you lose when bitcoin falls? Those who have made money on the run up should be considering an exit plan because you can’t buy puts on bitcoin.