It’s only been a few years since cryptocurrencies like bitcoin first began taking the world by storm, offering what many people see as a more secure financial alternative to fiat currencies like the dollar. But the almost 20 percent bitcoin “flash” crash that recently took place just days ago on June 12 suggests that this may not actually be the case, and that relying on bitcoin as some kind of miracle store of value is more than a bit misguided.
Plummeting from nearly $3,000 per “coin” to about $2,550 in just four short hours, bitcoin revealed to the world its true volatility. It isn’t just going to be up, up, and up for bitcoin as many people falsely believe, including the tens of thousands of amateur investors throughout Asia who are right now stocking up on bitcoin in an attempt to secure what they believe will afford them a solid financial future.
Take a look for yourself at these revealing charts and you’ll see how quickly and dramatically bitcoin’s volatility could bring an uninformed investor to ruin. Unless you know exactly what you’re doing when it comes to bitcoin, you probably shouldn’t be investing in it – especially if you’re risking your life savings to do so.
Prior to the recent flash crash, bitcoin’s value had risen in relation to the dollar by an impressive 210 percent since March, which is why many new investors have been jumping on-board the bitcoin train. But what many of these people don’t realize is that bitcoin has done this type of thing before, and the end result, at least in the shorter term, wasn’t pretty.
It was December 2013 when bitcoin had reached a high of over $900 per coin. It had been on the up and up for many months, with many a savvy investor starting to eye it as a potential new asset in their portfolios. Everything was looking just fine and dandy until suddenly it wasn’t – bitcoin went from $900-plus per coin to below $250 per coin, a more than 70% drop.
Some had anticipated this type of market correction, but few thought it would be this dramatic. It took about three years for the price of bitcoin to once again reach its previous levels. This wasn’t necessarily a problem for those who recognized bitcoin as a potentially risky currency alternative, investing as such. But for those who saw only dollar signs and who jumped headlong into the deep end with speculative intent, it was a financial disaster.
“The explosion [in the price of bitcoin] is mania,” says Raoul Pal, author and publisher of The Global Macro Investor, an elite macroeconomic and investment research service. Pal sees what’s happening today with bitcoin as a potential prelude to the same type of serious correction that took place in 2013.
“It’s people looking for a rate of return. It’s in the bubble phase. [Bitcoin] goes through this periodically … it rises several hundred percent, and then collapses.”
Pal himself admits to having made a lot of money on bitcoin when he purchased some several years back for about $200. But he’s decided that now is the time to cash out, and he’s warning others that they should do the same. He also has concerns about some of the changes that are potentially being made to bitcoin that increase the risks of investing in it pretty dramatically.
“This is the most exponential move we have seen,” he warns. “Bitcoin was supposed to be a store of value, you couldn’t mess with the formula … and now they are talking about a ‘hard fork’ changing it?”
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