Bitcoin seems unstoppable. Since I last wrote about it in June, the price has doubled again. And with every new high, the bitcoin community gets more emboldened in their view that bitcoin is changing the world.

I however, remain unconvinced. The blockchain certainly will change the world, but cryptocurrencies not so much. Nothing has changed, bitcoin is still a speculative bubble. The price, in my view, will eventually go to zero. But of course, on its way there, it might first go to more ridiculous highs. A higher price does not mean that it is not a bubble. It just means that the bubble is getting bigger.

It is very amusing to watch this, as it is a textbook example in investing psychology. Having been critical about bitcoin for a while now, I get often asked whether I regret not buying any. The answer is, no I don’t. I don’t regret it in the same way I don’t regret buying that winning lottery ticket last week. Sure, now I know which numbers won the jackpot, but last week I did not. In hindsight, everything looks easy.

It was, and it still is, unpredictable where the price of bitcoin is going to top out. Is it $5000, $10 000, or $100 000, who knows. For all I know, there is an equal chance that tomorrow I might loose half, or even more, of my money. That is not a good bet to take. The first rule of investing is, to protect your downside risk. You always want to invest in things, which have high upside, and predictable low downside. An asset, in which you might double, triple, x-tuple your money, but in which you have an equal risk of loosing everything, is an asset to stay away from, if you are not a gambler. It is not worth the risk.

Most crypto investors, however, don’t seem to realize that there is a risk in bitcoin at all. They are making the classic mistake of confusing a bull market with brains. I know, I know, it feels good being invested in a bull market. This is particularly true for bubbles. You wake up in the morning, only to discover how much money you made in your sleep. What a great way to start your day. The longer the bull market progresses, the more you become convinced that you are indeed an investment genius, and you are already starting to plan for your early retirement.

All of this is classic investment psychology. People are chasing assets that have gone up in the past. Humans cannot help it. Inductive reasoning is deeply rooted in our thinking. We see a trend in the immediate past and project it into the future. That way, investors consistently invest in things that have already gone up by a lot. The fact that something has gone up in the recent past, makes us feel secure that there is little risk in investing in it. After all, the trend looks solid.

But, thinking about it rationally, the dumbest reason to invest into anything is, because it has gone up in the past. I think everyone will agree that the goal of investing is to buy low and sell high. So why buy high? The reason, of course, is that people expect to buy high, and sell even higher. What they overlook is that this is every suckers strategy in a bull market. But eventually, all potential buyers are invested in the asset. Once there are no buyers left, prices have to inevitable come done. This is the start of a bear market.

By its very nature, this turning point comes right at the top of the euphoria, when hardly anyone expects the bullish trend to reverse. This has to be the case, since the trend reverses when there are no buyers left, in other words when everyone is invested. But everyone is only invested, if they are positive about the market. At that point, prices have to come down to attract further buyers. These buyers will most likely be people who are already invested in the asset, and think they have a nice opportunity, to buy a bargain, before the bull market continues. After all, every time prices retreated in the past, the bull market eventually continued to new highs.

Unfortunately for them, that time, the bull market will have topped out and won’t continue. The longer there is a lack of new highs, the more people start to think that now is probably a good time to cash in their profits. But they are trying to sell into a market that has already run out of buyers. This makes prices fall even further. The more prices fall, the more people start to get nervous and will try to cash in. The downtrend in motion is going to feed on itself. Eventually, people are going to panic, and prices crash. At that point there will be virtually no buyers left.

Well, that is not quite true. Usually, investments have some intrinsic value. A company, for example, has real assets with real values. Once prices go below the intrinsic value of the underlying assets, smart investors, who are not driven by primitive investment psychology, come in as new buyers. They know they are buying a bargain. This is the reason, why every assets class goes through cycles of bull and bear markets. The trick is, to buy at the bottom of the bear market, and not at the top of the bull. That, however, is very difficult, for it is at the bottom of a bear market that everyone will warn you to invest, and it is at the top of the bull market that everyone thinks nothing can go wrong.

There is, however, a big problem with bitcoin. It does not have an intrinsic value. There are no real assets behind it. The reason why most people invest in it is, because they think the price only knows one direction, which is up. But because it lacks an intrinsic value, there will be no one stopping it from going to zero in a real bear market. And bear markets always follow bull markets, with almost absolute certainty, because there is never an unlimited amount of buyers. That means that there will be no smart money buying into bitcoin once it crashes. That is the nature of Ponzi schemes.

With mathematical certainty, in crypto currencies, for every investor making a profit, there will have to be others who loose that exact same amount of money. It is a zero sum game. So if you hear about someone having made a lot of money in bitcoin, you know there is some poor sucker who has lost that same amount. That poor sucker might not yet know it though, because he things he can cash in his coins at any time for the price advertised on the internet. Eventually, however, there will be a lot of suckers, who will not only have to cancel their plans of an early retirement, but will instead have to start saving again at a lower level then they started. In numbers, those will be more people than the numbers of winners, as most people come to the party at the late stage of a bull market.

None of what I write here, will likely affect a lot of the readers, who are currently invested in crypto currencies.. They will say, Nico, your investment psychology theory is all good and well, but you don’t understand bitcoin. Bitcoin is different. Bitcoin is not just a Ponzi scheme. It is going to replace the global monetary system. That is the reason why prices are going up. You just don’t understand what is going on.

Again, this is classic investment psychology. People always convince themselves that the bull market they are invested in is different from previous ones. Confirmation bias is one of the strongest psychological biases we have. We always like to confirm our theories about the world. This is particularly true if we have a lot of money invested in these theories. So, I am fully aware that most people reading this, will shrug it off as another idiot not understanding the revolution.

I know how strong this psychology is from my own experience. I have been invested in bull markets in the past, in which I too dismissed anyone criticizing the idea that the upwards trend is unsustainable. So, I have been there, done that, and no, bitcoin is not different. It is not going to replace the global monetary system. Right now, I don’t know of any honest business that does its accounting in bitcoin, or any other crypto currency. In addition to that, all the articles I read about bitcoin, and there are many, even in major newspapers, are all about, how much higher will the price go, how much money can you make in crypto. And that is why people are invested in it, not because of some idealistic reason to fight the government.

So, for what it is worth, be warned. If you have investments in crypto currencies, you are invested in a Ponzi scheme. At the end of this, for every winner, there will have to be the same amount of losers. The only way to not end up on the loosing side is, to sell before everyone else does. I am not saying you should not gamble in this game. That is up to you. Just be aware that it is a risky game, at the end of which there will be a lot of suckers. And you might be one of them, if you play for too long.

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This article was first published on Liberating Thoughts – @liberatingideas