The Duck Test is a popular form of Abductive reasoning. It is based on logical inference, which starts with an observation, and then seeks to find the simplest and the most likely explanation. It goes something like this…
If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
The test implies that a person can identify an unknown subject by observing the subject’s habitual characteristics. A more generic, heuristic based problem solving approach is found in Occam’s razor, which is attributed to William of Ockham. In all its simplicity the Occam’s razor says…
The simplest explanation is usually the right one
Using these principles on Bitcoin price action: if it looks like a bubble, behaves like a bubble and feels like a bubble, it probably is a bubble.
I stuck my neck out and called the farce on cryptocurrency here. I am more convinced than ever that this is a bubble.
Each asset bubble goes through 4 Phases. Now look at the price action of Bitcoin.
This, to me, looks like a classic bubble which is in the Blow off Phase. In fact, it has followed all phases of the bubble life cycle to the T. Now, let’s look at some of the other classic bubbles in history.
Do they look familiar? Bitcoin enthusiasts say that this time it is different from the Dutch Tulip Mania or the British South Sea Company bubble. Isn’t it always?
The bubble is always fed by people who are out to make a quick buck and understand nothing about the underlying asset they are investing in.
See the WSJ video on bubbles and read the article below which was published on the 29th of November 2017.
Source: WSJ
Bitcoin Mania: Even Grandma Wants In on the Action
The digital currency has gone from tech curiosity to mainstream topic, leading its value to jump more than 10-fold in 2017
Rita Scott’s grandson convinced her in mid-November to get in on the latest investing sensation and buy bitcoin. “I thought it was a big coin,” the 70-year-old said. “I didn’t even know what it was, a piece of coin? Why would I invest in a piece of coin?”
With a few hundred dollars of her money invested in it, Ms. Scott quickly caught on and started checking the price several times a day, even while playing poker at a casino in her hometown of Las Vegas.
Late Monday, as the price approached $10,000 for the first time, her grandson, Anthony Santa, sold the bitcoin that he and his grandmother held, netting what he said was a gain of around 45% over just a few weeks.
That was prescient. While bitcoin later topped the $11,000 mark—reaching its highest level in its nine-year history—the virtual currency tumbled more than $2,000 later Wednesday as several exchanges struggled to handle surging volume. It rallied again later to trade at $10,214.
“Believe me, I didn’t have this much fun with T. Rowe Price,” said Ms. Scott, a retired secretary and taxi driver, referring to her mutual-fund investments.
Bitcoin, a stateless digital currency that shares some investment characteristics with gold, has captured the imagination of investors.
As its value has doubled since mid-October and risen more than ten-fold in 2017, the currency has transformed from a curiosity among techies to a hot topic for mainstream investors.
But the speed of its ascent has some warning that it will end in tears. And, as Wednesday’s quick reversal shows, bitcoin is extremely volatile—the currency has declined more than 50% on eight separate occasions since 2011.
Another source of concern: The latest move higher in bitcoin’s price is drawing in more individual investors.
“They see the price break $10,000, obviously they see the news, they hop on their app and go ahead and buy bitcoin,” said Bobby Cho, head of over-the-counter trading at Cumberland, the cryptocurrency unit of a high-speed trading firm in Chicago.
Paul Joseph Spelce, a 22-year-old graduate student in New York, was one of the newcomers who bought in. Over Thanksgiving dinner with friends last week, the conversation was dominated by talk of bitcoin. “Even this woman who didn’t have a computer at home couldn’t stop talking about how bitcoin was going to reach $10,000 soon,” Mr. Spelce said.
After stewing about it over the weekend, he pulled an all-nighter poring over articles about bitcoin’s rise. He repeatedly searched the price of bitcoin on Google.
At about 6 a.m. Wednesday, he placed an order to buy $50 worth of bitcoin on Coinbase. Hours later his position was up about 11%. Then it was down 9%. “When I clicked, it was just one of those feelings. I’d finally read enough, finally felt confident enough to do it,” Mr. Spelce said. “My friends all think I’m crazy.”
Friends of Tony Horsely in Atlanta have been more understanding. The 78-year-old investor began investing in bitcoin over the summer just to add some spice to his portfolio. Soon, he moved about 5% of his portfolio into the coin and an exchange-traded fund based on the currency. He started writing a periodic, informal note to about 30 friends, in which he talks about bitcoin’s price dynamics and the logistics of buying it.
“I’m late to the game,” he said, “but I’m enjoying it.”
While some of his friends have expressed doubts, Mr. Horsely says about half a dozen joined him in buying. Meanwhile, he has accelerated his purchases, picking up more bitcoin on Nov. 24, and then Wednesday morning.
The fervor for bitcoin has been global. Tom Reaney, owner of the Burger Bear restaurant in London, started accepting bitcoin about five years ago after a customer asked to pay for some bacon jam with the virtual currency.
Recently, nearly as many people ask Mr. Reaney about investing in bitcoin as using it to pay for a meal. “It’s quite lucrative,” says Mr. Reaney, who owns seven bitcoin. Even though he views a drop in price as inevitable, he says “I don’t want to pull my money out because it keeps going up.”
But bitcoin’s volatility is making many conservative investors hesitant, some of whom work in finance.
At the Asia Securities Industry & Financial Markets Association’s annual conference in Hong Kong on Wednesday, only two of about 150 professional investors raised their hands when asked if they had invested during a session on cryptocurrencies.
“It’s incredible that we’re [seeing this] at a finance event, but it’s actually very common,” said the panelist Henri Arslanian, PwC’s China and Hong Kong leader for fintech.
Mr. Arslanian, who also teaches a fintech course at the University of Hong Kong, said when he asks his students that same question, usually about 30% of them say they own virtual currencies.
He said in the past few weeks he has received so many requests on how to trade cryptocurrencies that he has put together “a template response.”
While individual investors might be piling into bitcoin, some are cashing out quickly, potentially adding to the currency’s volatility.
Nathan Hoyle, a 27-year-old Londoner training to be a Navy pilot, bought £1,000 worth of bitcoin in September as a “curiosity,” he said.
When he saw the rally picking up steam, he decided he would take his profit and run if it got close to $10,000 from the $3,500 level where he bought it.
When the price rose above $9,800 Wednesday, that was close enough. He said he sold his position, booking a £1,780 profit. “Now, I’ll wait for another price crash and buy again,” Mr. Hoyle said.
—Paul Vigna, Christopher Whittall and Georgi Kantchev,Steven Russolillo and Alexander Osipovich contributed to this article.
When grandmothers who know nothing about what they are investing in, but are blindly investing because it is fun and because they are making a quick buck, that is the time one needs to be very afraid about the bubble bursting very soon. In retrospect, since November, 2017, when the article was published, Bitcoin went close to $20,000 and is now back at around the $10,000 mark. I wouldn’t be surprised one bit if Bitcoin goes higher from here before the bubble starts to deflate decisively and it reaches a value which is a mere fraction of where it is today. When that happens, don’t blame me for not warning you! Till next time safe investing.
Read the disclaimer here.
The Thoughtful Investing Blog 