In an ideal economic word, all investors are rational. They look at a market, look at how the assets are priced in that market, and then make a restrained, intelligent decision to buy an asset based on its projected future performance and a calm, logical analysis of the market. No investing is without risk, but with a mature outlook, risk can be limited.
Then there’s how people tend to actually invest, which is about as far from rational as you can get. An asset starts rising in price, people in on the ground floor early make a lot of money, and the hype builds. Beyond a certain point, the hype takes over. The price rises not because of any intrinsic value or rational investment design, but because everybody insists it’ll rise. It’s the Peter Pan school of investing. Clap your hands and believe! This is great until enough people stop believing, and then the price plunges as investors realize they’ve paid far more than they can ever get back. Sound familiar? If you’re looking at altcoins as an investment, it probably does.
Altcoins can be vulnerable to bubbles because they have no intrinsic value. Gold can be used for circuits, you can grind the coffee from futures for a cup of joe, but altcoins are just bits of code people trade. Bitcoin is a superb example. Literally, the only thing propping up its price is demand. If demand softens, the price goes with it, something we’ve seen multiple times on the bitcoin roller coaster. That doesn’t make every rise in altcoins a bubble, but it does mean before you buy altcoins, you need to ask yourself what affects their value. Don’t get caught in a bubble. Subscribe to the Bitcoin Market Journal newsletter for tips on investing wisely!