Bitcoin, Tulips, and Behavioral Finance

I find investor psychology fascinating.  Often, I have witnessed situations where the investor is his/her worst enemy.  Many investors are unaware of the impact of investor psychology on the decision making process.  Unfortunately, many financial decisions are made out of either fear or greed–neither lends itself to prudent and evidenced-based investing decisions.

This is nothing new.  The Dutch Republic was the world’s leading economic and financial power in the 17th Century.  At the height of “Tulipfever or Tulipmania”, a single tulip bulb could be traded for an entire estate of land and a house.  However, when “Tulipfever” crashed, a tulip bulb was worth nothing more than the price of a common onion.  Many investors realized too late that they had traded their home for a flower.

Today, I am hearing about a new type of “Tulipfever’.  Many people are talking about BITCOIN, a crypto currency that allows you to buy and sell things without any paper trail at all.

The only feasible way to purchase bitcoin is to acquire it from an existing owner.  Bitcoin was created in 2009 by Satoshi Nakamoto; however, no one is certain who this person is.

I find myself asking why would anyone want to purchase Bitcoin.  I am reminded that there are often two competing emotions in the financial planning world:  FEAR AND GREED.  Bitcoin seems to hit on both of these destructive emotions.  Many are worried/fearful about the future and an economic collapse and believe that Bitcoin is a good hedge against that.  Secondly, Bitcoin appeals to that other emotion so prevalent in the financial world: greed, or get rich quick!  Bitcoin has experienced a staggering 1,000 % increase in the last year or so.  Bitcoin supporters also are quick to argue that Bitcoin is untraceable offering its owner complete anonymity–no banks and no transaction fees.  Even some people in the profession who I thought should know better, are telling investors to invest in Bitcoin.

Bitcoin is not investing but rather more akin to gambling or speculating. Currently Bitcoin does not serve as a medium of exchange.  If you do purchase something in Bitcoin, it is immediately converted into dollars or Euros.  Bitcoin adherents argue that eventually more and more businesses will accept the crypto currency.  Moreover, Bitcoin really has no “reliable stored value”.  It is a very, very volatile “investment”.

I have to admit that it is impossible to convince someone  who has made money with Bitcoin that Bitcoin is a really bad investment.  I have heard many times over the last few weeks that “this time it is different”.  I think that eventually governments will weigh in on this when they see Bitcoin as a threat to their sovereignty.  Of course, I do not have a crystal ball; however, I know that Bitcoin is indeed a volatile, speculative investment and it impossible to accurately measure its risk to investors.

It may be that holders of Bitcoin may be forced to exchange them for tulip bulbs.

If you would like to further discuss this or other financial issues.  Please do not hesitate to contact me.

 

 

 

 

By | 2017-12-08T17:03:16+00:00 December 8th, 2017|Betzel Wealth Advisors, Blog, Investments, Uncategorized|0 Comments

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