The past few months, we’ve witnessed one of the wildest financial markets in recent history. While the economy as a whole thrived over 2017, a new player emerged on the horizon. Anyone not living under a rock the last few years has likely heard of Bitcoin. Just the tip of the cryptocurrency iceberg, Bitcoin set the stage for a wild, speculative financial bubble. Staying sane in a bubble can be difficult, especially when you see everyday people becoming overnight millionaires!
I wanted to glimpse back in time to look at some of the largest bubbles we’ve seen to date in the markets. As someone focused on personal wealth, you need the discipline and the background knowledge to make reasonable choices with your money whenever these fads do arise.
As a disclaimer – I too have put money into cryptocurrency. Just because you play the game doesn’t mean you need to lose the farm. Read on for a bit of history, and to learn how you can keep your net worth rising in any environment.
Famous bubbles of history
As long as financial markets have been around, people have been investing, building, and speculating. Financial bubbles as we understand them date back hundreds of years. Arguably the most popular of all early-stage bubbles was an event known as “Tulip mania”.
Tulip mania was a 17th-century Dutch phenomenon where citizens drove up the price of tulip bulbs to insanely high levels. People eventually began trading contracts for the more expensive/rare bulbs. Needless to say, they were wiped out when the downturn began. Tulip mania continues to be a regularly heard phrase even today, used as a metaphor for anything in the market considered speculative.
Another well-known bubble (this one actually occurring in our lifetimes) is the dot-com boom of the early 2000’s. The internet was all the rage back then, and any company claiming affiliation would see hugely inflated valuations. This led to an epic stock market run-up and numerous lucrative Initial Public Offerings for companies. When many of these companies failed to deliver on their promises in an oversaturated market, the ceiling collapsed. The NASDAQ, which approached $5,000 in 2000, retreated back to $1,500 by 2003.
Housing crisis of ’07-’08
Guess what the financial crisis of 2007-08 can be attributed to? If you guessed a bubble, you’re right again! The 07-08 housing crisis spurred a global economic recession and wiped out 401k’s left and right.
The bubble itself was again a product of wild speculation, this time coupled with exorbitant risk-taking on the part of financial institutions we are supposed to trust. Lehman Brothers, AIG, Goldman Sachs, you name it. These institutions were all selling securities which backed home loans made to people who had no ability to pay them back.
This is an entirely different topic of discussion for Home at 30, but getting trapped by a 5-year ARM (adjustable rate mortgage) was the death knell for thousands of home buyers. When people everywhere started defaulting on their loans (about 5 years after they started becoming popular – odd huh?), the big banks of America were left holding billions of dollars worth of junk. The bubble had burst.
This brings us to our topic of the day, cryptocurrency. I state not an opinion here but a fact: The crypto bubble is the largest bubble we’ve ever seen in recorded history.
Between 2014-2017, Bitcoin saw it’s price increase by a mind-boggling factor of 64x. Internet geeks who caught on early, or anyone that decided to throw some money into bitcoin in the early days, became an overnight millionaire. Bitcoin hit $19,000 a coin in late 2017 – buying one in early 2013 would’ve put you back around $15. Imagine that.
Not only has Bitcoin seen an unprecedented surge in popularity, other cryptos followed in its wake. Ethereum, Cardano, Ripple, Litecoin, you name it. They all saw massive surges at the end of the year.
Signs of a bubble could not be more clear. My 60+ year-old aunts started talking about Bitcoin when they visited for Christmas. Word to the wise: anytime you hear older family members saying they’re considering a popular investment, it’s time to run.
2018 in crypto thus far
All bubbles must eventually pop, right? What we’ve seen thus far in 2018 is a “back to reality” type of market correction, but not a true bubble pop. Bitcoin, which once saw its price up over $19,000, has fallen below the $10,000 level at times. You can check out the wild fluctuations on Yahoo’s crypto tracker.
Popular smaller currencies like Ripple have lost over half of their value as well. As I write this, Ripple trades around $1.25 a coin. Only a few weeks ago it was around $3.30, and I saw numerous people pouring thousands of dollars into it. Leveraging your livelihood over a clear-as-day bubble is obviously a bad move, and now that the market has corrected people are suffering.
My personal take
I am actually bullish about the future of crypto’s and continue to hold a bit of a smaller coin myself. As Baron Rothschild once said, “the time to buy is when there is blood in the streets”. This is totally a matter of opinion, but I believe in the fundamentals of blockchain technology, which is the underlying tech for cryptocurrencies. Right now, we are watching pure panic-driven selling, fear mongering out of Asia, and Bitcoin being a pop culture fad that my 60-year-old aunts know about. In other words, it’s still a bubble. Once the dust settles, however, the underlying technology isn’t going anywhere.
Keys to thriving in a bubble
Whether you are for or against cryptocurrency as a legitimate financial vehicle, you need to understand how to mitigate risk to build your personal wealth. That’s what Home at 30 is all about! Whether it’s Bitcoins or tulips, how do we stay sane through it all?
This has been covered by Josh in a previous post and rings true as ever in 2018. Putting your eggs in one basket (like many have with crypto) means a downturn will wipe out a huge chunk of your worth. Spreading out your money across multiple asset vehicles helps ensure a single event or downturn doesn’t erase your hard-earned cash!
I can’t recommend enough having a look at the various Vanguard ETF options out there. These funds are diversified by default and give you a great market mix based on what sector you choose. One of the most popular options, MGC (Vanguard Mega Cap) is up over 25% in the past 52 months. That’s an incredible rate of return and way less risky than a pure speculative play like crypto.
Invest only what you can afford to lose
Diversification doesn’t mean you can’t have a shot at some crypto action yourself. It’s hard to overstate the above header enough though, “invest only what you can afford to lose”. I don’t mean 75% or 80% of what you put in, I mean 100%.
The people who get crushed by the ebbs and flows of a bubble are the ones who put their life’s worth into a single point of failure situation. In a market that’s still in its infancy like crypto, you never know what’s in store for tomorrow. Exchanges can be hacked, governments can crackdown, small-cap coins can turn out to be fraudulent.
Make sure you are able to lose every dollar you throw into crypto, and not have it negatively impact your way of life. Speculating with a small amount of cash, and reading about the functions of all the small cap coins out there, can even be fun. Just don’t get yourself in a position to be wiped out.
Focus on fundamentals
As I mentioned above, it can be interesting to read up on the cryptocurrencies out there rising in popularity. Each coin has a market niche, a problem that it helps to solve, and hopefully a positive outlook on its future. Many coins have their own dedicated Twitter pages, Reddit.com subsections, and die-hard fanbases. The uptick in crypto awareness the past few months has flooded the market, and sticking to fundamentals can help you stay level-headed through it all.
I won’t disclose the coin I’m invested, but I’ll tell you the same methods of due diligence were made as I’d use for picking a stock. Researching the founder, the coin’s roadmap, it’s efficacy to solve a real-world problem, notable early adopters, etc. are all factors you can look into before pulling the trigger.
Don’t invest blindly if you choose to participate! And even after this due diligence, DO NOT invest more than you can afford to lose entirely.
I hope the above helped you get a better understanding of the crypto craze sweeping the globe these days. The cryptocurrency bubble has surpassed tulip mania as the largest ever, and what happens in 2018 is anyone’s guess. Remember to stay diversified, don’t overextend on risk, and be mentally prepared to lose it all. Staying sane and in the green during a financial bubble really just comes down to common sense.
I would love to hear your comments and feedback! Crypto is a very passionate subject of discussion these days and I really enjoyed writing my $0.02 about it.
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Joe Savoia
Joe is a 2014 graduate of Northeastern University and currently works in a field sales role for technology company Acquia. He has worked internationally as one of Acquia’s earliest Australia-based employees and helped in the early stages to develop that region. Today Joe is based out of Boston and lives in Somerville, MA. Joe’s primary interests vary widely, including everything from robotics/AI to finance, blockchain, and the rapidly evolving world of tech we live in.