There is an old adage in the share market, when the shoeshine boy is telling you to buy; it’s time to get out. When it comes to Bitcoin, we are well and truly at this point. The price of Bitcoin has increased 30 fold in 4 years. A Bitcoin is now worth about 10 times what it was in January. Everyone is talking about Bitcoin, the shoeshine boy is telling you to buy.

The surge in price is great for people who bought into Bitcoin before the huge increase but has all the hallmarks of a bubble. It has already surpassed every investment bubble in history with the only exception being the Tulip Mania bubble in 1637 where a tulip bulb sold for as much as 10 times a skilled craftsman’s annual salary.

When I think of Bitcoin, I’m reminded of the Warren Buffett philosophy, to only invest in assets you understand and know how they generate their wealth.  Does this apply to those investing in Bitcoin?

The thing to remember with Bitcoin is that it is not backed by an underlying asset, instead it has a fully fluctuating exchange rate. The dramatic price rise is caused by speculation and not an increase in an underlying asset.

The original intent of Bitcoin was to be an online currency that could be used to buy and sell products and services without needing an intermediary. The problem is that this surge in value for Bitcoin makes it a useless currency. In order for a currency to be useful it has to have a stable, consistent value. If you think your currency is going to be worth more next week than it is today, you won’t spend it. It is fair to say that very few people that have bought Bitcoin are buying it to use as a currency. There is very little use of Bitcoin as a currency.

Bitcoin does have the potential to be a “storing of value” asset much like gold. Before speculation drove the price up, many investors were using Bitcoin as somewhere to place wealth without being exposed to the markets. Gold is the traditional commodity used for this purpose and has been for centuries. Bitcoin may also perform this function. It must be noted that, if it is to fill this role long-term, the value will need to become far less volatile. Over the past weekend alone we saw the price at one point drop 10%, after increasing about 20% over the previous 10 days. This is enormous volatility.

Bitcoin looks like a speculative bubble. How much further will the value increase before it bursts? I have no idea. When will it burst? Again I won’t even guess? But what I will say is; be aware, this is a very high-risk investment right now.