The Crypto Bubble: How A Generation Of Investors Got Burned

by: Giesbers Investment Strategy

2018 has proven to be a disastrous year for cryptocurrency investors, and 2019 is showing no signs of improvement.

In this article, I will describe my own experience investing in Bitcoin, and why and when I decided to pull the plug on my investment.

The bubble which occurred at the end of 2017 led to many people investing their hard-earned money in crypto, and they got terribly burned.

I hope my experience can serve as an example on how to identify market bubbles.

People who have read some of my past articles will know that I was an owner of a very modest amount of Bitcoin (BTC-USD) until about a year ago. I first read about Bitcoin and cryptocurrency around 2012. A year later, after a lot of research, I decided to try my luck and buy a small amount of Bitcoin. Luckily, I did this with money which I could afford to lose.

The first years, things went terrible. It seemed that I bought at a peak of both media coverage and price, and at one particular moment, my investment was worth less than 20% of what I originally paid for it. Since it was only a modest sum, I decided to just forget it, and maybe in the future, I would be able to sell it again for the amount I invested in it. I still believed in the future of cryptocurrency, even though price developments had been devastating.

Fast forward to 2017: the cryptocurrency market was quickly gaining traction, the media was all over it, and many other new cryptos were popping up like mushrooms. I remembered my old Bitcoin investment and started paying attention to the market again: would this be the breakthrough?

In the meantime, price level had surpassed the amount I paid for it, and I started to wonder: I never expected that I would get back a dime from my original investment, but now I could get back the full amount, should I do it?

I decided to wait.

During the rest of 2017, the market continued to explode. People who owned cryptocurrency were extremely optimistic, which was hardly strange since prices regularly rose by more than 10% on a single day. Of course, there were also days when the market dropped with double digits, but market performance was truly exceptional.

I started to worry.

When it comes to money management, I'm a conservative person. I like my investments to grow at a slow and steady rate. I love to invest in companies which are boring yet vital to the economy, like utilities and food producers. As I knew by then, Bitcoin was an entirely different animal.

Throughout the whole year of 2017, I picked up an occasional conversation about Bitcoin. Some technologically-savvy colleagues were discussing that they should have bought the thing years ago, and some other people were wondering how it could be that an asset grows so quickly.

At the end of the year, something entirely different happened. During an evening at a party, a friend of mine told me he just invested in cryptocurrency.

Him: "Hey Giesbers, did you hear all the fuzz about cryptocurrency?"

Me: "Yes, I said, I heard some of it."

Him: "It seems to be really promising. I just bought some Bitcoin and Ether (ETHB-USD)."

Me: "Okay, that's courageous, after such a big upturn in the markets, are you sure about this?"

Him: "The media are very positive about it and performance has been magnificent. Maybe you should consider it as well."

At that point, I was thinking about telling him that I owned Bitcoin as well, but I decided against it. Though this friend is an intelligent person, as far as I knew, he wasn't an experienced investor at all, let alone with regard to risky investments like cryptocurrency. I would not be able to convince him anyway and might only make him jealous by telling him that I owned it since 2013.

Me: "Well, I think cryptocurrency could play a major role in the financial system of the future. I'm just very hesitant to buy at today's prices."

After this, he dropped the topic, and we continued having a good evening, but somehow an invisible switch had been pulled in my mind: If these types of people are investing in it, based only on media coverage and market developments, is this not a sign of a bubble?

People who have experienced the internet bubble of the 2000s will probably see many similarities between it and the crypto bubble. I remember my father, who was never very active in investing, opening a broker account for me around that time. I was still quite young, didn't have much money or knowledge, and was advised to invest in a mutual fund specializing in internet stocks. Needless to say, the outcome was disastrous.

After the conversation with my friend, I started paying attention to people talking about cryptocurrency. I overheard people on the street, colleagues during their lunch break, and some more friends who started to become enthusiastic, and even a family member.

Though I still believed in the future of cryptocurrency, I was slightly terrified at this moment. Some completely inexperienced investors were considering pouring their savings in one of the most risky assets available, even though they knew practically nothing about it. I can only hope they only invested money they could afford to lose.

During the last months of 2017, I read a lot about bubbles, even wrote an article about it, and did some research into adoption rates of technology. At some point, institutional investors were even shorting Bitcoin while retail investors were still buying it.

All of my research pointed in the same direction: eventually, the music would stop, and the party would end. The problem was, nobody knew when. And we all know: what goes up quickly can also drop like a rock. Of course, it is possible that eventually price levels will recover in the future, but the rate at which prices were increasing in 2017 was clearly unsustainable.

Between November 2017 and January 2018, I made the decision to sell all my cryptocurrency. Percentage-wise, I made a killing. Measured in dollar amounts, it wasn't close to a life-changing amount of money but enough to make it worth my time.

I didn't look back ever since, which is why I wrote this article. I hope it will help you to identify future bubbles when they are happening instead of afterward.

Thank you for reading!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.