What You Aren’t Being Told About Bitcoin and GameStop
If you see other people making a lot of easy money in a short space of time, they are likely to be criminals, very lucky, or super smart. Sometimes they can be all three!
Recently, a minority of people have made a lot of money from a surge in the price of the nascent Bitcoin cryptocurrency, shares in loss-making video games retailer GameStop, and the spot price of silver bullion.
The Greater Fool
What all these things have in common is they don't produce anything of value or positive cashflow. They derive their value from the demand of existing and new investors.
Greater fool theory is the term that describes an investor who believes an 'investment' has no intrinsic long-term value or is significantly overvalued. Still, they invest anyway, in the hope that they can make money in the short-term by selling to new investors.
Blowing Bubbles
Whenever the price of something departs from reality, and that price growth has happened over a short period of time, there is a good chance it is entering bubble territory. The investment price eventually collapses when, in true “The Emperor's New Clothes” style, people finally come to their senses, or no new investors are forthcoming. At the time of writing GameStop’s share price has lost almost 80% of its value from its peak in early January.
The chart below shows the typical path of a bubble. Investors who get in early can do very well, as long as they get out while the price is still rising. Investors who get in near to the top, usually lose most, if not all, of their money on the way down.
Win/Lose Or Win/Win?
There is nothing wrong with speculating with money that you are willing and able to lose. Speculating is a win/lose because someone has to lose for you to win. On the other hand, investing is win/win, in that no one needs to lose for you to win. Owning a spread of shares in the great companies of the world or direct real estate means you get to share in actual profits, rents and future economic growth.
"Speculating is a win/lose because someone has to lose for you to win. On the other hand, investing is win/win, in that no one needs to lose for you to win."
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I explain the difference between saving, investing and speculating in this short 5 min video below.
If you've made money from Bitcoin, GameStop, Silver or anything else, then well done. You were lucky. If you haven't, then you have been warned. Asset bubbles don't care about your circumstances, and they charge a high price when they burst.
Warm regards,
Jason
P.S. A couple of sensible articles about Bitcoin that caught my eye include this one from US money expert Chris Hogan and this one from legendary investment manager Ray Dalio. And this blog about GameStop is well worth a read.