February 19, 2021
This quarter I plan to write about cryptocurrencies, and Bitcoin in particular. Investors have a hard time understanding why cryptocurrencies keep on rising in price. Bitcoin just hit $50,000. Given a limited supply of bitcoin, at least there is some rationality to that currency. But, there are others such as Dogecoin, which seem to have no basis in rationality. To wit, Billy Markus, co-founder and creator of Dogecoin, which is up 2,327% in the past 3 months, said “It went from a silly joke to something worth something to people very quickly, and a community was developing fast, with lots of shady people and lots of new people, quickly putting up services and infrastructure around it.” This is a classic case of irrational euphoria or, in behavioral finance parlance, herding mentality. To add gasoline to the fire, Dogecoin’s following has been taken even higher because Elon Musk tweeted about it a number of times. Think about that…the founder of the currency cannot understand why it would go up in value! When witnessing irrational situations like this, it never hurts to check your own investment policy to make sure you are not getting into a place in which you have drifted too far from a rational plan.