As if the 800-fold increase in the value of one bitcoin from February 2011 to the beginning of 2017 were not enough, the 2,200% surge this year has everyone talking about the cryptocurrency.
Bitcoin could be one of the biggest bubbles in history. But should that stop you from booking outsized returns as the price skyrockets? Cryptocurrencies could very well be the future of digital payments and the blockchain technology has the potential to touch nearly every industry.
Trying to time the Bitcoin market, buying in and selling before the inevitable crash, will leave a lot of investors penniless.
But there are ways to profit from the bitcoin revolution, a way to ride the wave all the way to the top without having to worry about the crash when it comes.
It's the long-term way to play one of the fastest bubbles in history.
Is Bitcoin A Bubble?
Opinions on a fair price for bitcoin and whether the market for cryptocurrencies is in a bubble are split, with most CEOs from traditional financial institutions writing the price increase off as the biggest bubble in history. Of course, that hasn't stopped bitcoin bulls and advocates from dismissing the objections all the way to the bank.
I'll admit it gets more difficult to argue why investors shouldn't add bitcoin to their portfolio with every story of someone buying a house from their crypto-fortune.
The problem is that bitcoin has no fundamental value. It's not a true currency, accepted as legal tender, or even widely accepted as a form of payment. There are no earnings that flow to bitcoin owners and it's hard to argue the appeal as a store of value (i.e. gold) when the price often rises or falls by 20% or more in a matter of hours.
The lack of an intrinsic value hasn't stopped the price of bitcoin from surging and many investors have cashed out for millions. Before you rationalize that you can be one of those lucky few to time the market, remember Isaac Newton's experience with the South Sea Company bubble in the 18th century.
One of the smartest physicists of all time sold his South Sea Company shares for a 100% profit but then bought back in at a higher price months later as the boom continued. When the bubble burst, he lost over three times his original profit, more than $3 million in current dollars, and forbade anyone to say the words 'South Sea' in his presence for the rest of his life.
How To Invest In Bitcoin...Without Investing In Bitcoin
Whether Bitcoin is an investment or not, whether the current price is a bubble or just the beginning of a digital revolution, there is no doubt that blockchain technology and cryptocurrencies are here to stay.
Blockchain is a distributed database shared across a community of computers. The data cannot be changed except by the coordinated action across many users in the community. This has tremendous applications in security and process transactions that could touch every industry in the future.
We're not likely to see Bitcoin at $1,000 again, but that doesn't mean the price isn't susceptible to deflate 30% or 40% if investors stampede for the exit.
There are ways to benefit from the future of blockchain technology and the rise of cryptocurrencies without this risk of massive short-term losses.
Computer hardware manufacturers, specifically those making the graphic cards and chips used by cryptocurrency miners, are seeing demand skyrocket for their products. Miners use graphics cards to solve the calculations in blockchain (bitcoin "mining") and get rewarded in bitcoin. Demand has been so strong that retailers have reported selling out of AMD RX570 and RX580 graphic cards.
Companies like Advanced Micro Devices (Nasdaq: AMD) and Nvidia (Nasdaq: NVDA) are rumored to be developing mining-oriented video cards that will be even better suited for running the intense calculations around the clock.
Payment processors and banks that are allowing bitcoin exchange are also benefiting as first-movers in digital transactions. It's likely that most payment processors will integrate some cryptocurrency capability eventually but the first-mover advantage for companies like Square (NYSE: SQ) should help it boost user growth over the next year.
Market Exchanges like the CME Group (Nasdaq: CME) have just started allowing trading in bitcoin futures and could attract an entirely new type of retail user as well as allowing institutional clients access to the bitcoin theme. Exchanges make their money on transactional volume, so a bursting of the bitcoin bubble wouldn't necessarily mean weakness for shares.
In fact, the extreme volatility in bitcoin prices only draws more people to hedge their exposure with futures and could be a boon for futures exchanges.
These companies will likely benefit as bitcoin rises but are partially protected from a crash in the price of the cryptocurrency by the breadth of their business. Even if short-term sentiment for bitcoin turns, best-of-breed companies in each industry should continue to do well and will benefit from the longer-term adoption of blockchain technology.
Risks To Consider: A dramatic drop in the value of bitcoin may drive a smaller drop in shares of these companies as sentiment wanes. Diversified revenue and a solid business model should protect the best-of-breed company in each strategy and support long-term returns.
Action To Take: Invest in ancillary industries serving and complementing the rise of blockchain technology for solid long-term returns with less risk of getting caught in a bubble.
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