For weeks, anyone with a modicum of experience in financial markets has been watching the incredible upward spike in the value of Bitcoin -- the virtual currency beloved of libertarian haters of big government -- and warning that the bubble was sure to pop.
On Wednesday, their predictions seemed to be at least partially coming true. After reaching a high of $266, the value of a single Bitcoin started dropping quickly, provoking a drastic sell-off. At one point, as reported by MtGox, the leading exchange clearinghouse for Bitcoins, the price dropped as low as $126. Trading has been absurdly volatile, however, with huge swings back and forth all afternoon. (When I started writing this post, the price was back up to $180. We'll see where it is when I finish.)
The timing of the turbulence couldn't be better. On Tuesday, Business Insider CEO (and disgraced stock analyst) Henry Blodget published a screed mocking people who were calling it a bubble. He backed up his analysis with some superficially compelling math: If Bitcoin crashed before you got out, you only stood to lose "100 percent" of your initial investment. But your possible gains could be far far higher....
Those who bought Bitcoins in early March, for example, have now made 7X their money — a return of nearly 600 percent.
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.
Blodget's reasoning works as justification for getting in early on any bubble. Of course: If you buy low you aren't risking much and stand to gain tremendously if you sell high. Some people surely are making out like bandits. More power to them. And if you bought your Bitcoins last year or early this January, you are hardly alarmed at today's huge drop. You're still sitting pretty.
On the other hand, if you bought Bitcoins this morning at $266, you may well end up getting severely burned.
I have no idea where Bitcoin is headed. Today could be just a bump in the road. Bitcoin may turn out to be the currency of the future. Future historians may end up mocking the naysayers.
But there's still a good reason why it's worthwhile trying to identify bubbles as they are happening. It's not a bad thing to warn people about the dangers of jumping in too late, when the price is high and the upside could be very low, especially when those people might be relatively unsophisticated investors seduced by a wave of hype.
If, say, a financial reporter who managed to identify the bubble convinced would be investors to steer clear, that reporter could be considered to have performed a useful service.
On the other hand, if you read Henry Blodget on Tuesday and thought, hey, the upside here is unlimited, I gotta get in on this action! -- you're probably feeling pretty screwed right now. Nice work, Business Insider!
(And, as I write these words, MtGox is reporting a current price of $130 for a Bitcoin, with a new daily low of $105.)