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Bitcoin Is Just Getting Going - Lots of Upside Left

Updated on December 1, 2017

Bitcoin will continue to climb over time

What financial media gets wrong with Bitcoin

The financial media has recently been wrongly reporting on the up and down movements of the value of Bitcoin. Every time it takes a plunge it immediately brings up the idea it may be in a bubble.

That may attract eyeballs because people like to read about fear, and those that have taken a position in Bitcoin are likely to read it in order to scan the story for clues as to whether or not it has any basis in the fundamentals of the cryptocurrency.

Understanding how a new asset class evolves

For those that have invested for years, or understand the process a new asset class goes through, there is no concern on their part over the wild swings in price of Bitcoin. They see every time the value drops as an opportunity to buy more.

If you're new to Bitcoin investing, understand you don't have to acquire all of one Bitcoin to take a position in the token, you can a percentage of the value of the coin, so you can start off small and build up your exposure over time.

As to the process all new asset classes go through, they start with early adopters, transition to managed money, and last garner interest and investment from the masses. Where Bitcoin is at now is in the early stage of the second phase of the process.

Hedge funds in particular are starting to pour money into Bitcoin, other cryptocurrencies, and elements of the blockchain that are being used to develop the type of infrastructure people are comfortable with using to make investment transactions.

Being at the early stage of the second phase of Bitcoin's growth, when media, traditional financiers, and pundits assert Bitcoin is in a bubble, they simply don't know what they're talking about, or have a huge reason for not wanting Bitcoin to succeed. A lot of that includes the potential loss or reduction of centralized control of money.

Another is the loss of business that has come with cryptocurrency exchanges that in the case of Coinbase, has already surpassed the client base of many traditional asset management companies. It will continue to add many more traders before it slows down.

Where from here?

With the growth process of an asset class in mind, let's look at what the future of Bitcoin will look like.

First, there are some analysts I know of that I trust, that say it could soar anywhere from $400,000 to $1 million in value. At first I thought this was just hyperbole and marketing rhetoric to generate attention and interest in Bitcoin, and those making the projections.

I'm not suggesting Bitcoin will reach those dizzying levels, but I am saying that with it moving so quick and high at this stage of growth, it has a lot more room to grow before settling down to a price that market agrees upon.

What has happened historically with new asset classes is once they start to be trusted and embraced by the masses, that's when the massive upward move begins. This is what most of the "experts" are considering when making the very high estimates about the potential for Bitcoin to soar much higher.

Most of you reading this article will have already been through a couple of bubbles bursting. One was from the new asset class called the Internet at the turn of the century, and the second was the collapse of the housing market that triggered the Great Recession.

In both cases it was when the average person on the street started participating that the prices soared beyond the underlying value of the Internet and houses. In the case of Bitcoin, there are still many people that don't even know what it is when I do some research to gauge how far it has reached into the minds of regular people. That means it has yet to be understood and accepted as valid by the masses, assuming they even know of Bitcoin's existence.

Again, this is why it has so much upward potential before it finally does become a bubble that bursts. Even with the inherent volatility associated with Bitcoin, the drops we see today of 20 percent or more at fairly consistent intervals, is nothing more than contraction after the price soars at a rapid pace.

Investors in those cases take profits, while those that don't understand what's happening, panic and sell for much less than they had to if they understood Bitcoin, and the fact it isn't near to being a bubble. You don't have to be one of them.

What a real bubble is

When reporting on Bitcoin, the media or some traditional analysts or pundits call attention to the Internet and real estate bubble bursting. Although understandable, it's comparing apples to oranges.

What a bubble bursting represents is when a specific asset or sector climb above what their intrinsic value is. When that happens, the pressure from the price rising too high causes it to plummet down to what the real value is. This is different than a temporary contraction or correction.

Every time Bitcoin corrects the media rush to declare if this time the price of Bitcoin will drop to reflect what it is really worth. The problem there is we have no idea of how valuable it is. That's part of the power of free markets and capitalism: they provide a mechanism for the market to discover the price of any product, service or asset that is bought or sold in the market.

What Bitcoin has going for it is its built-in scarcity factor. It is designed to only have 21 million Bitcoin ever. Once that level is reached, there can be no more Bitcoin added to the total. In that sense the scarcity drives up the price.

This is one of the reasons behind the creation of Bitcoin in the first place. People wanted an alternative to fiat, or money created out of thin air by central banks, which continues to erode the buying power of currencies. For example, since the Federal Reserve in the U.S. came into being, the U.S. dollar has lost about 97 percent of its buying power or value.

Conclusion

Next time you hear Bitcoin is in a bubble, keep in mind the volatile nature of the cryptocurrency, and understand dropping 20 percent and more at a time is part of the nature of the asset; it's not a bubble bursting.

Also remember that the life cycle of a new asset starts to with early adopters, moves on to managed money, and finally is embraced by the masses. The time when an asset enters a real bubble phase is when the masses start to invest in it without understanding why or how come.

They keep bidding the price up as they did with Internet companies and housing in this century, in hopes of making a fortune on a quick play. Since they don't fully understand the nature of the asset, they don't know when it's best to sell and take their profits.

Consequently, many will lose a lot of money when that happens. For the reasons mentioned earlier, we're not close to reaching a ceiling on the price of Bitcoin.

What you have to be sure of is you don't sell in a panic when the price drops quickly, otherwise you'll lose a lot of money before there even is a bubble that can burst. Make your mind up before you get in that you're in it for the long haul. That'll keep you safe.

If you enjoy a nice upward move in price and want to take your profits, there's absolutely nothing wrong with that. Just understand that for some, they'll deeply regret it if they do so and Bitcoin soars far beyond what they sold it for.

Your personal comfort level will determine that. If you get out and take profits, don't kick yourself for doing so. There are worse things that can happen than making money, even if it's not as much as you could have.

Bottom line is you want to watch for the stage when it moves beyond investment from hedge funds and other managed money, to the regular person on the street starting to hear about the profits made in Bitcoin, and are looking to do the same.

I wouldn't get out yet when that time arrives, but it won't be long afterwards when Bitcoin will explode upward in price. Those willing to endure the ups and downs of the price of Bitcoin will eventually make a small fortune if they don't wait too long and try to extract every penny from the investment.

Until that time, if there is a major contraction of correction, there is no doubt in my mind Bitcoin will recover and soar to higher heights.

The best way to invest in Bitcoin at this time is to buy on the dips.

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