You come home from work one day and see your next door neighbour off-loading an expensive flat-screen T.V. He tells you he has become wealthy from his Bitcoin holdings. You gotta buy some he tells you the price is going crazy.
Rational thought is gone – you rush inside and Google Bitcoin. When you discover that Bitcoin is the most Googled word in the world, surpassing even the Kardashians, you are convinced you are on the road to riches.
Since November 2016 the value of a Bitcoin has risen from $800 to over $15,000 at time of writing. Bitcoin now trades on the Chicago Board Options Exchange and the Chicago Mercantile Exchange. These are futures markets and have contributed to the fast rising price of Bitcoin. As Bitcoin has come to get more market acceptance, so interest in this cryptocurrency has rapidly grown.One of the reasons why the value has grown so quickly is there can only be twenty one million Bitcoins in existence. As the price goes up, the investors hold onto them, anticipating further price rises. This supply shortage further drives up the price.
At some stage a herd mentality takes over, fuelled by greed and the price goes through the roof. In this stampede no one stops to think – they have to jump in before the price rises even further.
With all bubbles, at some point the price defies belief. Once this happens the losses mount as fast as the price once rose until the asset becomes worthless.