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Bitcoin, the crypto-currency that keeps going higher than a stoner on weed!
Last weekend Bitcoin reached a new high of over $9700 per unit. The only thing going higher than the price of bitcoin is Donald Trump's legal bills! The demand for bitcoin from investors is getting impossible to please. The fear of missing out on the rise in bitcoin's price keeps investors in the crypto-currency.
I have a feeling our love affair with bitcoin is going to end with a bang! Let me explain why.
Bitcoin is a crypto-currency that is a form of money. Money is something which: a) has a store of value, b) is a medium of exchange and c) a unit of account. Most forms of money are printed in unlimited amounts by governments.
Bitcoin is not a government issued currency. Bitcoin is mined like gold by people just like you and I. There is a limit, though, to the total number of bitcoin. The cap is 21 million bitcoin. The limited number of mined bitcoin means that supply will run out.
Increasing demand by investors for a limited supply of bitcoin will cause the price to rise. Also, banks and other financial firms hope to create derivatives from bitcoin. Derivatives are like making side bets on the rise or fall in bitcoin's price. These financial instruments will also drive up the cost of bitcoin.
When investors' say no more to the rise in price for bitcoin, all hell will break loose! That's because investors will have to unwind their positions tied to bitcoin. Who knows how such a scenario will play out?
The rise in bitcoin's price reminds me of the tulip mania that bankrupted the Dutch in the 1600's. One could make the argument that the same story may apply here.
When you hear pundits talk about how the price of bitcoin can't go down, take their advice with a grain of salt. Every currency, even cryptos, have a breaking point. Bitcoin hasn't reached its peak yet, but I wouldn't buy bitcoin now.
At the very least, I would wait for a price drop of 20% or more before even considering an investment in bitcoin. For now, I'm content to watch the fireworks from the sidelines. And I hope you will, too!
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