Market Wrap – Cryptocurrencies are just another bubble

Market Wrap 22 August 2017 eNews

If you have taken a taxi or Uber ride lately, you would know that Cryptocurrencies are all the rage and talked up as the hottest investment on the streets. It seems every 20 something would be millionaires are running to invest in this new market. Is this just the next bubble about to burst or is this market here to stay?

Let me be upfront and say that from where I am sitting this is just another bubble and for the most part those investing in it are not old enough to remember the tech boom and bust of the late 90’s, and this bubble has all the same signs. Boom bust bubbles are not new and in fact, we have over 400 years and hundreds of examples.

According to behavioral finance research, bubbles are created by group thinking or herd mentality.  Just like a snowball, they start out slowly and the more people joining the bubble, the more they talk and the faster and bigger the bubble gets until finally the speed of the rise is unsustainable and the bubble bursts leaving the masses in a big financial mess.  

I sat out the tech boom and bust and I will sit this one out too, because there are two things I know with great certainty. The first is that human emotions don’t change and people will get caught in this latest bubble out of pure greed to make quick cash. The second thing is that when the taxi or Uber driver has a great tip on where to invest, then the time has come to get out.  

What do we expect in the market?

The All Ordinaries Index (XAO) continued sideways again this week, trading at approximately 5800 points at the time of writing. History demonstrates that it’s rare to see the market trade sideways like this, in such a tight range, for this duration and to date the market has traded sideways for four months!

This can seem somewhat boring as it is likely your portfolio is tracking sideways with the market. That said, markets eventually change direction and therefore if you are patient your portfolio and shares will grow again. ‘Boring’ can actually be good as the length in time the move remains sideways, the shorter any subsequent decline is likely to be. A further positive is that when the market eventually trades above it, this range provides a stepping stone to higher share prices.  

Of the major markets in the US, UK, Germany and Asia, the XAO is the last of the major indices to commence its next rise. Consequently, some are saying that Australia is beginning to look like a much lower risk market, which represents an opportunity for those who are ready.

Dale Gillham Chief Analyst at Wealth Within

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