Investment bubbles may or may not turn out to describe Bitcoin and Cannabis stocks but the nature of bubbles is well known.
In 1637 the Tulip Mania occurred. The Dutch were traders and a significant maritime power in those days, leading to a relatively high standard of living and idle time to dabble in financial speculation.
Tulips came to Europe from Turkey and gained in popularity in the early 1600s. By 1634 they had become so sought out that it was considered poor taste for any man of fortune to be without a collection of them.
Some of the rare and more colourful varieties commanded astonishingly high prices. As the flower’s popularity spread, trading in tulip bulbs expanded to all Dutch urban centres and prices climbed fast. Tulips were seen as a sure way to make a killing.
The Tulip Mania did turn out to be one of many historic investment bubbles and when it burst it ruined countless households. Expensively purchased tulip bulbs with no buyers in sight were reduced to the lowly status of pretty flowers.
It’s easy to dismiss the Tulip Mania as a quaint historic event because humans have behavioural tendencies that include wanting to be part of a crowd and make some easy money.
There have been at least two investment bubbles in the past two decades. The internet stock bubble culminating in 2000 before destroying massive paper wealth, and the 2008 credit bubble that led to the collapse in U.S. housing and some global equity markets.
Recently, conversations have turned to questions about Bitcoin and Cannabis Stocks. They are associated with a fervent belief that it is easy to make money which in turn encourages people to grossly underestimate risk.
There’s an irrational willingness to borrow money for investment. Why not, if it’s easy to make money and there’s no risk?
Risk seems to be further minimized when Wall Street and Bay Street get involved. If there’s money to be made on a newfangled security, they are always there to “help”.
In addition to Bitcoin, there were some 1,380 cryptocurrencies at the end of 2017 (Wikipedia). There are now exchange traded funds to facilitate purchase, as well as derivatives in the futures markets.
It's true that the Blockchain Technology used by Bitcoin and other cryptocurrencies could benefit the world greatly. It makes it much quicker to verify parties to transactions, reducing what used to take multiple days to a few seconds. However it is not yet fully developed for use by existing financial institutions and the world of commerce.
Purchasing cryptocurrencies themselves is far less certain as a strategic long term investment. The value of these currencies depends on what someone will pay for them because it is impossible to establish their underlying value. Like gold, which has very limited practical uses – jewelry, medicine and electronics which require relatively small amounts of the metal - their value lies in rarity.
While there may be a market for a currency that allows users to hide their identity for fraud and other illegal activities, it is debatable whether such a currency could survive or be widely-adopted.
There are reports that those using Bitcoin for illegal activities have already moved on to other cryptocurrencies as regulators begin to monitor Bitcoin more closely.
A similar phenomenon to other investment bubbles is occurring in Canada with Cannabis Stocks, which are in a bit of a ‘wild west period’ – the issuing of shares before investors can analyze profitability.
Many investors are overlooking common sense and buying up Bitcoin and Marijuana stocks in the hope of cashing in. Beware!
Wealth money managers on the other hand find opportunities that they believe will be good investments for the long-term and monitor those investments daily.
They avoid short-term speculation, including investments that are opaque or have a substantial risk of losing value. Their investment philosophy centers on finding high-quality, dividend-paying companies that grow their dividends year over year, providing a relatively predictable and growing steam of cash flow for their clients.
Investing with these managers may not be as exciting but it protects your capital better.