Would a Bitcoin Crash affect the general markets?

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BlackStrat
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Would a Bitcoin Crash affect the general markets?

Post by BlackStrat » Sun Dec 10, 2017 9:31 am

My limited knowledge of bitcoin see it simply as a hyped-up and speculative currency with no ties to anything of real value.

What (if anything) would a crash do to the general stock market?

Eric76
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Re: Would a Bitcoin Crash affect the general markets?

Post by Eric76 » Sun Dec 10, 2017 9:40 am

Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.

Valuethinker
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Re: Would a Bitcoin Crash affect the general markets?

Post by Valuethinker » Sun Dec 10, 2017 10:04 am

BlackStrat wrote:
Sun Dec 10, 2017 9:31 am
My limited knowledge of bitcoin see it simply as a hyped-up and speculative currency with no ties to anything of real value.

What (if anything) would a crash do to the general stock market?
If Bitcoin is currently capitalized at around $300bn the loss of that money is trivial (less than half the market cap of Apple, last I checked). And that assumes 100% wipeout.

Where these things have broader effects is if there is margin and/or leverage. Thus a collapse in Bitcoin increases the losses of financial intermediaries and that precipitates some kind of panic/ rout. This is more or less what happened with Lehman Brothers (in the context of the collapse of the US housing bubble which took down a number of financial institutions, such as Northern Rock, RBS, FMAC, FNMA etc.

chevca
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Re: Would a Bitcoin Crash affect the general markets?

Post by chevca » Sun Dec 10, 2017 10:19 am

BlackStrat wrote:
Sun Dec 10, 2017 9:31 am
My limited knowledge of bitcoin see it simply as a hyped-up and speculative currency with no ties to anything of real value.

What (if anything) would a crash do to the general stock market?
To answer with a question,... what does it do to the general market when it's not crashing, or even rising rapidly? :happy

Also, hasn't Bitcoin crashed at least a few times already... over 80% one of the times? The market didn't care.

Seasonal
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Re: Would a Bitcoin Crash affect the general markets?

Post by Seasonal » Sun Dec 10, 2017 10:26 am

Valuethinker wrote:
Sun Dec 10, 2017 10:04 am
BlackStrat wrote:
Sun Dec 10, 2017 9:31 am
My limited knowledge of bitcoin see it simply as a hyped-up and speculative currency with no ties to anything of real value.

What (if anything) would a crash do to the general stock market?
If Bitcoin is currently capitalized at around $300bn the loss of that money is trivial (less than half the market cap of Apple, last I checked). And that assumes 100% wipeout.

Where these things have broader effects is if there is margin and/or leverage. Thus a collapse in Bitcoin increases the losses of financial intermediaries and that precipitates some kind of panic/ rout. This is more or less what happened with Lehman Brothers (in the context of the collapse of the US housing bubble which took down a number of financial institutions, such as Northern Rock, RBS, FMAC, FNMA etc.
Put another way, Lehman was a leading symptom, more than a cause. The problem was the housing bubble and associated issues.

Bitcoin does not appear to be a symptom of a wider problem. If you believe there's a wider problem, worry about the underlying issue.

letsgobobby
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Re: Would a Bitcoin Crash affect the general markets?

Post by letsgobobby » Sun Dec 10, 2017 10:26 am

Eric76 wrote:
Sun Dec 10, 2017 9:40 am
Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.
I’m not so sure. With exchanges opening up leverage and derivatives will more and more become part of the game. These will amplify the effects of price movement of the underlying commodity. It wasn’t the decline in housing prices which caused the financial crisis, it was all the derivatives tied to the leveraged credit in the housing sector. Eventually this could be an issue with cryptocurrencies, but not yet.

Bitcoin is the symptom of a larger problem, which is very loose monetary policy.

Valuethinker
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Re: Would a Bitcoin Crash affect the general markets?

Post by Valuethinker » Sun Dec 10, 2017 11:19 am

Seasonal wrote:
Sun Dec 10, 2017 10:26 am
Valuethinker wrote:
Sun Dec 10, 2017 10:04 am
BlackStrat wrote:
Sun Dec 10, 2017 9:31 am
My limited knowledge of bitcoin see it simply as a hyped-up and speculative currency with no ties to anything of real value.

What (if anything) would a crash do to the general stock market?
If Bitcoin is currently capitalized at around $300bn the loss of that money is trivial (less than half the market cap of Apple, last I checked). And that assumes 100% wipeout.

Where these things have broader effects is if there is margin and/or leverage. Thus a collapse in Bitcoin increases the losses of financial intermediaries and that precipitates some kind of panic/ rout. This is more or less what happened with Lehman Brothers (in the context of the collapse of the US housing bubble which took down a number of financial institutions, such as Northern Rock, RBS, FMAC, FNMA etc.
Put another way, Lehman was a leading symptom, more than a cause. The problem was the housing bubble and associated issues.
Let's assume markets are reasonably informationally efficient. Then the reaction of markets to an event is a good signal as to what is likely to happen next in terms of the real economy and in particular corporate profits.

Lehman was a shock to the system, then, and a very bad one. The subsequent drop in markets shows us that. And, in fact, world trade fell faster in the next 6 months than it had done in 1931.

That's the problem with the default of a major financial institution, and why there are historical events such as the 19th C failure of Grant Cutler securities and the Barings Crisis. Because there are knock on effects associated with the collapse in confidence and liquidity around a major default.

Lehman Brothers was a symptom, but it was symptom that in turn fed the most devastating part of the down cycle.
Bitcoin does not appear to be a symptom of a wider problem. If you believe there's a wider problem, worry about the underlying issue.
Agreed. However if there is some unknown (at least to non-insiders) channel from there to cause wider havoc in financial intermediaries, then there's a risk.

https://ftalphaville-cdn.ft.com/wp-cont ... -27-17.pdf

that's the point of that letter.

lack_ey
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Re: Would a Bitcoin Crash affect the general markets?

Post by lack_ey » Sun Dec 10, 2017 11:57 am

chevca wrote:
Sun Dec 10, 2017 10:19 am
To answer with a question,... what does it do to the general market when it's not crashing, or even rising rapidly? :happy

Also, hasn't Bitcoin crashed at least a few times already... over 80% one of the times? The market didn't care.
In 2011 from $32 to under $3 within a few months. In earlier 2013 from $184 to about $80 in a day. From the peak in 2013 to early 2015 was over $1000 to about $175.

There was less interest back then, less value at the time, and fewer transactions and usage then, so I don't think that line of thinking quite works. You should probably make an argument about ownership, current total market value, and make a case for relatively low contagion effects. It's not like Bitcoin crashing would destroy consumer confidence, shake a large part of the economy, take down a bunch of banks, or anything like that.

Eric76
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Re: Would a Bitcoin Crash affect the general markets?

Post by Eric76 » Sun Dec 10, 2017 1:16 pm

letsgobobby wrote:
Sun Dec 10, 2017 10:26 am
Eric76 wrote:
Sun Dec 10, 2017 9:40 am
Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.
I’m not so sure. With exchanges opening up leverage and derivatives will more and more become part of the game. These will amplify the effects of price movement of the underlying commodity. It wasn’t the decline in housing prices which caused the financial crisis, it was all the derivatives tied to the leveraged credit in the housing sector. Eventually this could be an issue with cryptocurrencies, but not yet.

Bitcoin is the symptom of a larger problem, which is very loose monetary policy.
Global banks were in deep with housing derivatives. There is no evidence that global banks are playing in Bitcoin. Have you heard Jamie Dimon on Bitcoin? I couldn't imagine global banks getting involved in the Bitcoin trade.

In regard to "loose monetary policy", are you saying that quantitative easing and low interest rates caused the emergence of cryptos?

chevca
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Re: Would a Bitcoin Crash affect the general markets?

Post by chevca » Sun Dec 10, 2017 2:10 pm

lack_ey wrote:
Sun Dec 10, 2017 11:57 am
chevca wrote:
Sun Dec 10, 2017 10:19 am
To answer with a question,... what does it do to the general market when it's not crashing, or even rising rapidly? :happy

Also, hasn't Bitcoin crashed at least a few times already... over 80% one of the times? The market didn't care.
In 2011 from $32 to under $3 within a few months. In earlier 2013 from $184 to about $80 in a day. From the peak in 2013 to early 2015 was over $1000 to about $175.

There was less interest back then, less value at the time, and fewer transactions and usage then, so I don't think that line of thinking quite works. You should probably make an argument about ownership, current total market value, and make a case for relatively low contagion effects. It's not like Bitcoin crashing would destroy consumer confidence, shake a large part of the economy, take down a bunch of banks, or anything like that.
I wasn't looking to get that deep into it... for about the same final statement about it. :happy

letsgobobby
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Re: Would a Bitcoin Crash affect the general markets?

Post by letsgobobby » Sun Dec 10, 2017 2:13 pm

That's what Jamie dimon said sixty days ago. This week he said, "I'm open-minded to cryptocurrencies." Et tu, Dimon?

Things change fast. An asset that has risen 2000% in a year will inevitably attract attention. Exchanges are opening up, derivatives are inevitable. It was a pyramid of derivatives which brought down housing, not a nationwide 20% decline in housing prices. I'm not predicting anything will happen, but I wouldn't be entirely sanguine that something couldn't.

Does excess liquidity sloshing around the financial system create cryptocurrencies? No. But it contributed to a 2000% increase in one year. Likewise to near record high US stock valuations based on CAPE and stocks as a percent of US GDP, a Chinese housing and credit bubble, as well as a flat yield curve and overall low interest rates despite the rate of US economic growth and rising US indebtedness (record high credit card and student loan debt).

Valuethinker
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Re: Would a Bitcoin Crash affect the general markets?

Post by Valuethinker » Sun Dec 10, 2017 2:27 pm

Eric76 wrote:
Sun Dec 10, 2017 1:16 pm
letsgobobby wrote:
Sun Dec 10, 2017 10:26 am
Eric76 wrote:
Sun Dec 10, 2017 9:40 am
Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.
I’m not so sure. With exchanges opening up leverage and derivatives will more and more become part of the game. These will amplify the effects of price movement of the underlying commodity. It wasn’t the decline in housing prices which caused the financial crisis, it was all the derivatives tied to the leveraged credit in the housing sector. Eventually this could be an issue with cryptocurrencies, but not yet.

Bitcoin is the symptom of a larger problem, which is very loose monetary policy.
Global banks were in deep with housing derivatives. There is no evidence that global banks are playing in Bitcoin. Have you heard Jamie Dimon on Bitcoin? I couldn't imagine global banks getting involved in the Bitcoin trade.
The risk is more in the clearing houses.

All derivatives trades are now cleared through clearing houses (pretty much). If one of them went wrong, world financial markets would freeze. Given the political climate, a bailout is less likely.
In regard to "loose monetary policy", are you saying that quantitative easing and low interest rates caused the emergence of cryptos?
There's always a new new thing, though. Australian diamond mining shares in the 1970s for example.

The point is a negative cost of carry. If you can borrow at a zero or near negative real rate, that tends to inflate other asset markets. And particularly assets that produce no cash flow return-- hence cryptocurrencies.

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Watty
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Re: Would a Bitcoin Crash affect the general markets?

Post by Watty » Sun Dec 10, 2017 2:31 pm

BlackStrat wrote:
Sun Dec 10, 2017 9:31 am
My limited knowledge of bitcoin see it simply as a hyped-up and speculative currency with no ties to anything of real value.

What (if anything) would a crash do to the general stock market?
Some companies like Nvidia which sells lots graphics cards to bitcoin miners would likely drop a lot. Having a few Bitcoin supplier tech companies like that drop a lot could cool off at the the tech sector of the stock a lot even for companies that don't have any Bitcoin exposure.

Jack FFR1846
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Re: Would a Bitcoin Crash affect the general markets?

Post by Jack FFR1846 » Sun Dec 10, 2017 2:33 pm

I'd rather invest in Beanie Babies. At least there's some tangible thing that you get for your money. I see Bitcoin as vapor. At any point, it could just disappear. A Beanie Baby would at least be a thing that remains when the value is all gone from the hype.
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aristotelian
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Re: Would a Bitcoin Crash affect the general markets?

Post by aristotelian » Sun Dec 10, 2017 2:34 pm

Eric76 wrote:
Sun Dec 10, 2017 9:40 am
Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.
I heard on NPR that the market cap of Bitcoin is equivalent to a top 20 S&P500 company, so if it went to zero overnight I do think some people would feel pain, and not just Bitcoin holders. Bitcoin has been responsible for major runups in AMD and NVDA stock, to name a couple.

david
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Re: Would a Bitcoin Crash affect the general markets?

Post by david » Sun Dec 10, 2017 2:43 pm

aristotelian wrote:
Sun Dec 10, 2017 2:34 pm
Eric76 wrote:
Sun Dec 10, 2017 9:40 am
Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.
I heard on NPR that the market cap of Bitcoin is equivalent to a top 20 S&P500 company, so if it went to zero overnight I do think some people would feel pain, and not just Bitcoin holders. Bitcoin has been responsible for major runups in AMD and NVDA stock, to name a couple.
This is very true.

Also, the fact that bitcoin futures will be publicly traded on the on the open market means that it will have an ever more integrated roll in lots of institutions. If there is a crash, it could take out a whole lot of people who promised to buy high.

Mordoch
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Re: Would a Bitcoin Crash affect the general markets?

Post by Mordoch » Sun Dec 10, 2017 2:45 pm

One other general point is because the runup in Bitcoins has been so relatively rapid recently, a crash soon would mean in many cases allot of any losses would be effectively "paper" ones than people actually all losing that level of money in term of their actual invested money they put into bitcoins. (They put relatively smaller amounts of money in the bitcoin market in the first place.) I've seen the point made that the Dutch Tulip Bubble did not have as big an impact on the Dutch economy and society as some historical accounts had suggested because it was a fairly comparable mostly paper loss situation for allot of the participants.

This does not mean investors won't be upset about losing their money and feel dumb for not selling it earlier and converting those gains to "real money" but it does tend to limit its impact on the broader market.

Edit: While it might have a minor impact, real bitcoin mining is not done by regular video cards at all today but by businesses using specialized ASIC cards which are not made by companies like AMD or NVIDIA. (Its possible some of the companies involved with making them are traded on the Chinese stock exchange, but I am not sure and this business is not as large revenue wise and you might think on the card production side.)

(To clarify, video cards are used to mine other crypto currencies in various cases today. Some of these might be taken out as collateral damage by a bitcoin crash, but it is not as straightforward as a direct link.)

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Epsilon Delta
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Re: Would a Bitcoin Crash affect the general markets?

Post by Epsilon Delta » Sun Dec 10, 2017 4:15 pm

If you believe the price of Bitcoin is irrational then you believe there are lots of irrational people about, so rational reasons why a Bitcoin crash should not affect the general markets are not comforting.

If you believe the price of Bitcoin is rational then there will probably be a rational reason for a crash and that reason may or may not affect the general market, but at least you will be able to reason about it.

Also if a crash in Bitcoin is followed by a crash, recession or other unfortunate event it will go down as causing the problem. No matter how many times people cry "propter hoc".

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Re: Would a Bitcoin Crash affect the general markets?

Post by RadAudit » Sun Dec 10, 2017 4:22 pm

I think we might start to find an answer around 6:00 PM EST today. Bitcoin futures start trading. May have a clearer answer in about a month.
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Pajamas
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Re: Would a Bitcoin Crash affect the general markets?

Post by Pajamas » Sun Dec 10, 2017 4:25 pm

No one really knows yet. There have been some mini-crashes but nothing extreme.

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Re: Would a Bitcoin Crash affect the general markets?

Post by technovelist » Sun Dec 10, 2017 4:46 pm

Valuethinker wrote:
Sun Dec 10, 2017 2:27 pm
Eric76 wrote:
Sun Dec 10, 2017 1:16 pm
letsgobobby wrote:
Sun Dec 10, 2017 10:26 am
Eric76 wrote:
Sun Dec 10, 2017 9:40 am
Nothing. The total value of all bitcoin is a rounding error compared to the trillions in assets moving around the world daily.
I’m not so sure. With exchanges opening up leverage and derivatives will more and more become part of the game. These will amplify the effects of price movement of the underlying commodity. It wasn’t the decline in housing prices which caused the financial crisis, it was all the derivatives tied to the leveraged credit in the housing sector. Eventually this could be an issue with cryptocurrencies, but not yet.

Bitcoin is the symptom of a larger problem, which is very loose monetary policy.
Global banks were in deep with housing derivatives. There is no evidence that global banks are playing in Bitcoin. Have you heard Jamie Dimon on Bitcoin? I couldn't imagine global banks getting involved in the Bitcoin trade.
The risk is more in the clearing houses.

All derivatives trades are now cleared through clearing houses (pretty much). If one of them went wrong, world financial markets would freeze. Given the political climate, a bailout is less likely.
Yes, that is the big risk. Since the clearing houses are now going to be on the hook for failed Bitcoin futures transactions (e.g., one side goes broke due to margin calls that they can't meet), that is where any contagion would begin.
In theory, theory and practice are identical. In practice, they often differ.

technovelist
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Re: Would a Bitcoin Crash affect the general markets?

Post by technovelist » Sun Dec 10, 2017 4:49 pm

Jack FFR1846 wrote:
Sun Dec 10, 2017 2:33 pm
I'd rather invest in Beanie Babies. At least there's some tangible thing that you get for your money. I see Bitcoin as vapor. At any point, it could just disappear. A Beanie Baby would at least be a thing that remains when the value is all gone from the hype.
Yes, I'm sure Beanie Babies will come roaring back any day now! :moneybag
In theory, theory and practice are identical. In practice, they often differ.

ImUrHuckleberry
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Re: Would a Bitcoin Crash affect the general markets?

Post by ImUrHuckleberry » Sun Dec 10, 2017 8:25 pm

technovelist wrote:
Sun Dec 10, 2017 4:49 pm
Jack FFR1846 wrote:
Sun Dec 10, 2017 2:33 pm
I'd rather invest in Beanie Babies. At least there's some tangible thing that you get for your money. I see Bitcoin as vapor. At any point, it could just disappear. A Beanie Baby would at least be a thing that remains when the value is all gone from the hype.
Yes, I'm sure Beanie Babies will come roaring back any day now! :moneybag
If they do, please let me know. I have 4 or 5 large storage bins full of my Uncle's Beanie Baby "retirement plan" wasting space in the basement.

WanderingDoc
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Re: Would a Bitcoin Crash affect the general markets?

Post by WanderingDoc » Mon Dec 11, 2017 1:35 am

I cashed out all my initial capital yesterday as Bitcoin was falling precipitously. Now just have house money in a small amount of crypto. Bitcoin is now back to almost $17K!! I guess I shouldn't have panic sold.

The reason I sold was because I realized that I bought Bitcoin not because I believed in it, not because it solved an underlying problem. It doesn't produce any income. I bought it out of greed, just like 99%+ of the speculators. After reading the main Bitcoin forum noticing all the grammatical errors, and a Ku Klux Klan-like robotic chanting love and praise for Bitcoin, I knew I was out.

Taking a profit is never a bad thing.. but I'd be lying if I told you I didn't want to go back in and try my luck. 8-)
Rent where you live, buy where others pay your mortgage for you. | I'm not looking to get rich quick, I'm not looking to get rich slow (indexing}, I'm looking to get rich.. for sure {real estate}.

Valuethinker
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Re: Would a Bitcoin Crash affect the general markets?

Post by Valuethinker » Mon Dec 11, 2017 3:38 am

Mordoch wrote:
Sun Dec 10, 2017 2:45 pm
One other general point is because the runup in Bitcoins has been so relatively rapid recently, a crash soon would mean in many cases allot of any losses would be effectively "paper" ones than people actually all losing that level of money in term of their actual invested money they put into bitcoins. (They put relatively smaller amounts of money in the bitcoin market in the first place.) I've seen the point made that the Dutch Tulip Bubble did not have as big an impact on the Dutch economy and society as some historical accounts had suggested because it was a fairly comparable mostly paper loss situation for allot of the participants.

This does not mean investors won't be upset about losing their money and feel dumb for not selling it earlier and converting those gains to "real money" but it does tend to limit its impact on the broader market.

Edit: While it might have a minor impact, real bitcoin mining is not done by regular video cards at all today but by businesses using specialized ASIC cards which are not made by companies like AMD or NVIDIA. (Its possible some of the companies involved with making them are traded on the Chinese stock exchange, but I am not sure and this business is not as large revenue wise and you might think on the card production side.)

(To clarify, video cards are used to mine other crypto currencies in various cases today. Some of these might be taken out as collateral damage by a bitcoin crash, but it is not as straightforward as a direct link.)
The Mississippi Company (John Law, France 1720) on the other hand ... and the South Sea Bubble precipitated a financial crisis in Georgian England.

The key is leverage. If the speculators borrowed to invest, or if they contrived to achieve leverage via derivatives etc. then in a crash their losses would in turn be inflicted on financial intermediaries.

In the extreme case, you get the post Lehman situation, where liquidity just dried up. The Shadow Banking System ceased to function.

That's unlikely here given the value of bitcoin. A few people who lose their homes (in a buoyant US housing market) is neither here nor there (except to them).

However the Clearing Houses are a danger point, because they bear the counterparty risk for settling bitcoin and cc derivatives (as these are introduced).

You would have had to be a real insider to realize that AIG was threatened by defaults in the US housing market-- but it would have gone bankrupt over the activities of AIG Financial Products, a small subsidiary in London. Which had written Credit Default Swaps on the CDOs held by the banks...

Valuethinker
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Re: Would a Bitcoin Crash affect the general markets?

Post by Valuethinker » Mon Dec 11, 2017 3:45 am

WanderingDoc wrote:
Mon Dec 11, 2017 1:35 am
I cashed out all my initial capital yesterday as Bitcoin was falling precipitously. Now just have house money in a small amount of crypto. Bitcoin is now back to almost $17K!! I guess I shouldn't have panic sold.

The reason I sold was because I realized that I bought Bitcoin not because I believed in it, not because it solved an underlying problem. It doesn't produce any income. I bought it out of greed, just like 99%+ of the speculators. After reading the main Bitcoin forum noticing all the grammatical errors, and a Ku Klux Klan-like robotic chanting love and praise for Bitcoin, I knew I was out.

Taking a profit is never a bad thing.. but I'd be lying if I told you I didn't want to go back in and try my luck. 8-)
Your honesty is appreciated. This was speculation, not investing.

Bitcoin has become pure speculation. And right now, greed is winning over fear.

Rest assured, fear will reassert itself, and Mr. Market Mania will move on to greener pastures ("Plastics!" I heard). Whether this will happen at $18,500 or $118,500 no one has any way of knowing.

You can now enjoy the ride, secure in knowing that (other than taxes to be paid on your sale) you can't lose money on this investment.

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