So bitcoin has blasted off to more than 15,000 USD. At one point it almost hit 20,000 USD but quickly fell back to around 16,000 USD where it stands today. The ride so far has been really volatile; Major papers were talking about bitcoin as a mania when the prices were around 7,500 USD and then prices took off even more from there.

The question I have is: how many people will actually become permanently more well off due to the rise in bitcoin prices? Given fact that only about 1,000 people own 40% of all bitcoin so far (source here), that seems like a paltry number of the total people who have bought some bitcoin.

So here’s what I think.

Many people bought too few bitcoins

A core group of bitcoin buyers who were early probably bought too little too early. So even if they were in the game as an investor (I’m leaving out the miners for now), they probably saw this as nothing more than a novelty and probably have nothing more than $10,000 invested. Some may even only have a few hundred and the majority probably have a few thousand invested. This is true especially for younger people who don’t have much moolah, to begin with.

So let’s take the middle and saw that most of them have $5,000 in bitcoin and that they got in somewhere at the beginning of the year. To make things easy, let’s say that they bought it at a $1,000 per bitcoin. As it stands, these people have turned their $5,000 into $75,000. That’s a great return and no small sum but in the great scheme of life, that’s not life-changing. Even $10,000 turning into $150,000 is fantastic but once again, that’s not the kind of money one retires on. That kind of money is just a nice bonus for the year which people will probably spend on holidays, a nice meal, or a new toy (e.g. car, yacht etc.)*

How many cashed out along the way?

And the above is assuming no one cashed out along the way. Someone who bought at $1,000 would have been extremely tempted to cash out way before the prices hit $15,000. We see this is stock markets all the time where people buy a stock at 10 and cash out way before the stock even hits 20. So I’m willing to bet that a good majority of people who bought at $1,000 might have even cashed out at $2,000 or $3,000.

They would have then experienced serious sellers’ regret as they price continued to climb and maybe they would have got in again at $5,000. Thing is, they probably got out again at $7,000 or $8,000. Want to guess what price they recently got in again at?

The point is, guessing how much returns someone made by comparing prices now and at the beginning of the year is quite futile as most buyers probably never hung on long enough to enjoy the full run-up. And for all you know, they ploughed ever greater sums at much higher prices based on the early success of their trade.

How many are ready to handle their new found wealth?

Even for those who were in bitcoin from the early days and have held on until know, how many of them are now facing the agonising decision of whether to continue holding the coin or divesting?

You have to remember that the swings in bitcoin prices will make some people very nervous. Imagine having 10,000 bitcoins and seeing your wealth change by $30,000,000 in a matter of hours when the price of bitcoin increased to 19,000 USD and then fell to close at 16,000 USD.

And how many of these newly made multi-millionaires are ready to deal with this amount of money? We have to remember that there have been many others like them in the form of lottery winners, NFL players and NBA stars who suddenly came into wealth and then saw they wealth all evaporate in just a few months or years.

Tough choices to make

Many people in the investing community are looking really dumb right now for saying that bitcoin is a bubble and that it’ll burst or that the price cannot go any higher (I actually think it can) but that’s always the case before the bubble has burst.

But if you’re holding on to bitcoin, you have tough choices to make:

  • Do I cash out now and gain some utility from spending my gains?
  • Do I hold? Just in case bitcoin prices go up further?
  • Should I go back in/ go in now in case I miss the boat?

I wouldn’t want to be in bitcoin given the current environment.

Notes:

*Which is good for businesses.