Like many Australians, I did a fair bit of travelling around the country over December and January, which involved driving thousands of kilometres across NSW, Queensland and Tasmania. The drives offered breath-taking views, particularly in the Apple Isle, but also several hair-raising instances of other drivers speeding well beyond the limit.
From a risk and return perspective, the ‘returns’ of speeding are clear – people can get to where they want to get to faster. The risks are also clear, however, and these include getting caught by a speed camera, getting caught by the police or worse, having an accident.
The real issue with speeding however occurs every time drivers get away with the risks and ‘earn’ the returns. And the more this happens, the more speeding becomes seen as ‘acceptable’. Furthermore, given a natural human tendency to follow the herd, other drivers start sharing the same view on speeding and continue to put themselves and everyone else in danger.
My experience got me thinking about crypto currencies, such as bitcoin.
In the last couple of years, bitcoin has gone from an untraceable currency loved by the dark web to a potential get-rich-quick investment opportunity that seemingly every man and their dog is talking about, given how much its price has risen.
Like any other investment, the risks and returns of bitcoin are quite clear. Much like speeding, every time an investor gets away with the risks and earns the handsome returns, he/she may build confidence and be tempted to put more money into the cryptocurrency, exposing themselves to greater risks in the hope of greater returns.
The herd behaviour then kicks in, whereby people are jumping on the bandwagon and investing in bitcoin not because it is the currency of the future, but because it’s what ‘everyone else’ is doing. The real reason people are now interested in bitcoin may be a simple case of FOMO (fear of missing out).
It certainly looks like bitcoin is headed towards the dreaded ‘b’ word. Think about the dot-com bubble that burst in the early 2000s or the Dutch tulip mania of the 1600s.
These bubbles can often be fuelled by a compelling but rather shallow or superficial narrative, which is exacerbated by the way humans are hard-wired. We tend to be strongly influenced by other people and trying to understand what other people are doing and might do in the future.
In the case of bubbles, people buy in because others have already bought in, and because they believe others who are not already in will eventually do so, pushing prices up.
Unfortunately, one of the problems with bubbles is that we do not know it is a bubble until it bursts. And if it does burst, the herd mentality shifts from a frenzy of buying to a frenzy of selling, pushing prices down.
I for one certainly hope the bitcoin bubble does not burst, as I have friends who have, wisely or unwisely, invested substantial sums in bitcoin and I do not wish them any ill. Maybe bitcoin will turn out to be a sustainable long-term investment.
In the meantime, perhaps it is time to think back to the boring basics – budgeting, paying down debt, saving money and investing in more ‘conventional’ investments such as shares and property. These asset classes may not be as exciting as the bitcoin sprint, but slow and steady wins the race, doesn’t it?