Could this be the start of a bubble bursting?

YESTERDAY the price of bitcoin was down more than 25% from an all-time high of nearly US$20,000 reached this past weekend.

Prices fell to as low as US$14,502 on Friday, about 27% from the all-time high of US$19,783 on Dec 17. Bitcoin’s movements have been increasingly erratic over the last few weeks. This month alone, there were several days where bitcoin’s gains topped US$1,000. Then on Dec 19, it dropped more than US$1,700.

Not surprisingly, other cryptocurrencies like bitcoin cash, dash and litecoin have since posted declines, since Friday’s fall.

Analysts have long touted that when the man on the street starts recommending stocks or any other financial products, then the time to sell has come. This was certainly the case with bitcoin. Over the last few months, many unsophisticated investors with little knowledge on financial markets were openly singing praises and punting the cryptocurrency.

This alone is a sign of a bubble, considering that bitcoin was under US$1,000 early this year. It was in February that bitcoin hit a milestone when its price surpassed US$1,000 for the first time ever.

Fast forward today and bitcoin has added an extra zero to the end of its price. Whether or not bitcoin has fundamentals backing it up is not the issue now. It is today up almost 1,600% from a year ago, and quite obviously the risk of a downside has increased tremendously.

“These are ridiculous extremes. It reminds me of the 2000 boom bust. Bubbles happen when they suck in perfectly rational people. I was not around to watch the tech bubble burst. Well now I have the chance to see it with bitcoin,” says Schroders European Equities fund manager James Sym.

Certainly, the media tone now is that more volatility is expected ahead as investors cash out in favour of fiat currencies. Also, what does well this year, typically does not do as well next year.