Bitcoin is in the news again.
Facebook’s plans to issue a cryptocurrency called Libra and march into the electronic payment arena have generated a lot of hype for cryptocurrencies again.
But I think the real reason behind the resurgent media interest in bitcoin is that the virtual money bounced above US$10,000 in late June.
Bitcoin hit a high of US$13,851 last week, which means it has spiked 2.6 times in just six months, making it the best-performing asset during the period.
However, given the wild fluctuations, bitcoin investors could fall from heaven to hell in just a couple of hours. They might regret not having bought bitcoin one moment and then feel relief for not having done so the next.
For example, the price of bitcoin soared 40 percent last week, surpassing US$10,000, and then tumbled back to around US$10,000 again, down 20 percent within a couple of days.
It was a popular idea during the virtual currency’s boom in late 2017 that investors should at least buy some or they might miss out on the whole story. Even if there was a fallout, the loss would be limited.
Is that really a good idea? Perhaps not.
The problem is that an asset bubble is already forming if most people have such a perception. We never heard such an idea in late 2016, when bitcoin’s price was only around US$1,000.
Weighting is another issue. Obviously, it depends on the total size of one’s portfolio.
To simplify the case, let’s assume one bitcoin costs around HK$100,000. So if you have a HK$1 million portfolio, the money you invests in one bitcoin already accounts for 10 percent of the entire portfolio, which is not small at all.
Ordinary investors have limited knowledge about cryptocurrencies. How can we convince ourselves to stay calm amid wild price swings.
And even if bitcoin only accounts for 1 percent of the portfolio, even if it quadruples, it won’t have a big impact on the overall return.
This article appeared in the Hong Kong Economic Journal on June 28
Translation by Julie Zhu
[Chinese version 中文版]
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