Financial Markets: Understanding The (Short) History Of Bitcoin

Bitcoin markets have had a tumultuous year so far in 2018, and many digital investors have wondered about the possibility that this is truly the end for cryptocurrencies.  The financial markets have a long history, and many different types of asset classes are represented within that history.  Bitcoin traders will need to remember this in the event that we start to see extreme price volatility in cryptos.

But it is also important to have a longer-term perspective when trading these assets.  Cryptocurrency is still in its infancy, but most of the people trading in these markets have little experience with the dynamics of economics.  This is a problem, and it essentially assumes that crypto investors can “sidestep” the normal research that would be required in any other market (i.e. stocks, bonds, real estate, precious metals, etc).  This is especially true for anyone trading on margin, and it is critical to spend time reading a margin trading guide on cryptocurrencies before placing active positions in the market.  Conservative position sizes are always preferable for anyone looking to make steady, consistent gains in any financial markets asset.

For these reasons, it is important to adopt the historical perspective whenever we are looking to make investments in cryptocurrencies.  When investors fail to adopt this type of approach, it is essentially a recipe for disaster — and it is something that can quickly lead to financial losses.  In the chart above, we can see the typical stages of an asset bubble, which tend to be fairly predictable in nature.  This is why it is important to look at the history of the financial markets whenever we are dealing with a new asset like Bitcoin (and the other cryptocurrencies).  There is never a substitute for good, old-fashioned market research as it generally pays dividends through patience and conservative investment practices.

The problem with cryptocurrency investing is that many of its participants expected significant short-term gains in a market that had not yet proven itself in terms of financial viability.  In this chart, we can see that many different asset classes have experienced similar price activity when compared to the recent trends in Bitcoin.  If anything, these trend actually validate Bitcoin as a viable market asset because it is following a path that is similar to what has been seen previously in gold, stocks, and many other market assets.

Anyone that has bought or sold a cryptocurrency is essentially a crypto trader, and crypto traders must remember that the history is still unfolding.  The main questions will be answered once consumers understand how these digital assets will actually be used in everyday markets. This is what drives the real economy, and without this type of use cryptos will only be viewed as speculative in nature.  Market speculation is what creates “asset bubbles” and the people that tend to lose the most money in those types of situations are the retail traders buying into the hype after people have already started to lose interest.  

In this chart, we can see a more linear history of Bitcoin, from its earliest days of inception right through to its acceptance by the market (by major tech organizations like Microsoft, and many other important market entities).  This history continues to unfold, and we are likely to see many interesting developments in the future in terms of the ways cryptocurrencies are traded and used for investment.  There is never any market approach or technique which can replace traditional market research, but there are rules of investment discipline which should be obeyed whenever we are looking to profit from the underlying trends in valuation.

Going forward, traders and investors will need to continue asking critical questions:  What are the underlying trends for the main cryptocurrencies? How many e-commerce store are accepting their use?  Have brick-and-mortar stores started to accept Bitcoin for their transactions? These are all questions which need to be asked whenever we are making an assessment of where these digital currencies are likely to head in the future.

It will also be important to remember that the cryptocurrency space goes beyond the use of Bitcoin.  There are many different cryptos which are now commonly traded, and those cryptos can even be traded in relation to one another.  This has opened up entirely new markets for those looking to make investments in the financial markets. These forecasts should be useful to a totally new set of traders, and this could continue for many years to come.