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Bitcoin is the Bellbottoms of The Investing World

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Every now and then something comes along and takes America by storm.  We might think this is a new phenomenon brought forth in the digital age, but the apparent truth is that a craze for a trend is nothing new.

Long before viral cat videos and shared posts on social media, there were many trends.  Trends might be too generous a word, they might be better described as fads.  These fads may have taken a little longer to develop and catch on, but when they did, everyone took notice.

The important social aspect of a fad is that in the beginning, it seems kind of silly.  Then, as it grows in popularity it starts to turn into the new normal.  Next you start to see neighbors, family and colleagues getting in on whatever it may be.

Finally, this fad doesn’t quite seem like something silly or passing anymore.  It starts to make sense by social osmosis.  Thoughts start to creep in like “am I the only one who doesn’t own bell bottom jeans or a cabbage patch kid?”

The final phase of a fad is capitulation.  If you hear about something for long enough, from enough people, the initial doubt starts to fade away.

Uncovering investment fads

Just like with clothing and children’s toys, fads occur in the investment world.  The scarier aspect of this investing challenge is that the endorsers of these investment ideas have some pretty heavy credentials behind their name.  Even scarier is that the story behind the fad is usually rooted in a sound foundation of innovation and logic.

The last nudge investors need to jump into an investment fad is the fear they are missing out on the next big gold rush.  But you know who profited the most from the California gold rush of the 1840s?  It wasn’t the miners who panned for shiny nuggets, it was the merchants who supplied the equipment.  In fact, California’s first millionaire was a general store owner, not a lucky prospector.

History is constantly repeating itself.  Back in the late 90s and early 2000s, we saw the dot com boom and bust.  While the internet would go on to fundamentally change nearly every aspect of our lives, the websites were the investment fad.

Why bitcoin is a fad

Bitcoin has followed a similar path to the internet bubble.  Cryptocurrency, Bitcoin included, started with a relatively small audience of people who understand the technology and what it is.  It was mostly those heavily in the tech field, but somewhere along the way it started to gain momentum.  Similar with most eventual fads, as more and more people piled in prices would go higher and higher. 2017 is when everyone outside the tech world started to learn of Bitcoin and the rest of the crypto universe.  This is when Bitcoin turned into an investment fad.

I personally heard of younger professionals who quit their job and started day trading crypto currencies.  Initial Coin Offerings (ICOs) were all the rage.  It is eerily similar to the frenzy of internet stocks where people made a killing (on paper) with Initial Public Offerings (IPOs). Prices shot up so quickly that the investors fear of losing money was quickly replaced with the fear of missing out.  That exact moment is when an investment fad capitulates.

When the most conservative of investors begin asking me about an exotic investment they heard about on the news, to me that is the canary in the coal mine.  My answer is always the same: if you don’t understand it, you shouldn’t buy it.

If you are one of the unfortunate many who buys an investment fad at the top, there is only one payoff.  Use it as an expensive lesson and try your best to not fall victim to it again.  Some people need to experience this lesson a few times before it sinks in, and others might never learn it at all.

When given the benefit of hindsight, it is easy to identify what were fads and what were revolutionary new ideas and businesses.  However, we are not given the gift of hindsight in the moment.  Instead, we must calm the investment hype, take our friends’ newfound get-rich-quick trading strategy with a grain of salt and stay the path.

If investing in a sound strategy with a consistent approach were easy, everyone would do it.  However, it is not that simple and takes a lifelong approach with some mistakes along the way to get right. Always be wary of potential investment fads and do your research before believing the hype.

Joseph Conroy, CFP, is a financial advisor at Synergy Financial Group in Towson and the author of “Decades & Decisions: Financial Planning At Any Age.”  
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through SFG Wealth Management, a registered investment advisor. SFG Wealth Management and Synergy Financial Group are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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