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Here's Why Bitcoin Speculators Are Just Laughing At Anyone Who Calls It A Bubble

Apr 10, 2013, 01:49 IST

As Bitcoin prices charge ever higher, the same people who were dismissing Bitcoin as a "bubble" at $35 six weeks ago are now huffing about it being even more of a "bubble" at $235.

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And maybe they're right.

Maybe, someday, Bitcoin prices will collapse 99.9%, impoverishing everyone who owns them.

But in the meantime ...

Those who are trading Bitcoins — and, more importantly, owning Bitcoins — are making money hand over fist.

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And here's what the latter folks understand that the those who are huffing about "Bitcoin bubbles" don't:

The most you can lose if Bitcoins go to zero is 100% of your money.

The most you can make, meanwhile ...

Well, no one knows exactly how much you can make.

But it's probably a lot more than 100%.

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Those who bought Bitcoins in early March, for example, have now made 7X their money — a return of nearly 600%.

That's a pretty nice return.

And it's a return that more than justifies the risk that these speculators took when they bought their Bitcoins for $35 — namely that the price of Bitcoins could go to zero.

All the speculators would have lost if Bitcoins went to zero was the value of their bet.

And now here they are, six weeks later, sitting on profits of 7X their bets.

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In other words, for anyone who realized that it was possible that Bitcoins might trade at $235 in relatively short order, it was a no-brainer to buy them for $35.

Bubble or no, a wise speculator would take that bet every day.

And how about now?

Are Bitcoins a good bet at $235?

Well, let's run through the possible outcomes.

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Bitcoins could certainly plunge suddenly from $235 to zero.

If they did that, you would lose 100% of your bet.

But ...

Bitcoins could also easily go to $2,350 — or higher.

(Bitcoins are impossible to value, but there are, and theoretically always will be, a finite number of them. Meanwhile, as Bitcoin prices rise, more and more people want them. And there are sound conceptual reasons why an electronic currency like Bitcoin is a good idea — one whose time has come. So it is possible that the "equilibrium" for Bitcoin prices, to the extent that there will ever be an equilibrium, is vastly higher than where Bitcoins are trading today. If you don't believe this, please read this article, which discusses it in more detail.)

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If Bitcoins go to $2,350, then that would be a 10X return.

So that's one possible betting scenario:

If you lose your bet, you lose 100%.

If you win your bet, you make 1000%.

That's a good bet.

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Now, you may think there is no conceivable way that Bitcoin prices could ever hit $2,350.

And you might be right.

But ask yourself this question:

When Bitcoins were trading for $35 six weeks ago, did you think there was a chance that they would ever hit $235?

If you're like most people, you didn't.

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If you're like most people, you either had no idea what Bitcoins even were ... or you cackled smugly about how Bitcoin was obviously a bubble and that all of the idiots stupid enough to buy Bitcoin would lose their shirts.

Well, just so you know, many of those "idiots" were laughing at you, too.

One of them reached out to me the other day.

He explained why he bought a boatload of Bitcoins when they were trading for much less than $35 apiece:

... over the long term the only two possible outcomes are 1000X+ or 0 — I don't know the probability of each possible outcome, but I firmly believe those are the only two possible options ... I actually don't think $400 is a meaningful equilibrium point for it.

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(The $400 he was referring to, by the way was the $400 "target" I put on Bitcoins last week, when they were trading for ~$90. The $400 was an inside joke, which I won't repeat here. You can read about it here if you like.)

Anyway ...

This is the equation that many of the "idiots" hoarding Bitcoins are thinking about when they decide to buy more Bitcoins and keep hoarding them:

All they can lose is all of their money.

All they can make, meanwhile?

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Unlimited.

(Yes, this is classic bubble logic. Yes, someday, many Bitcoin speculators will probably lose their shirts. And, no, there's no way to determine what Bitcoins are "actually worth." That's why I call Bitcoin the "perfect bubble." But what many folks who snicker smugly about "bubbles" don't seem to understand is that before some Bitcoin speculators lose their shirts, some other Bitcoin speculators are going to, well, coin it.)

SEE ALSO: I'm Raising My Bitcoin Price Target To $400

WARNING: Bitcoins have no inherent value, and they could go to zero at any time. If you decide you just can't stand missing out on all the Bitcoin riches and plunge in, and they instantly go to zero, don't come crying to me.

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