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Bitcoin's insane rally shows why all investors can learn from owning some


Bitcoin (BTC-USD) is going bananas.

In late morning trade on Thursday, prices for the digital currency were quoted above $19,000 on Coinbase — one of the most popular exchanges for buying and selling bitcoin — a rise of more than $5,000 in less than 24 hours. Near 12:00 p.m. ET, bitcoin was trading near $16,200; at the start of this week, bitcoin was trading around $12,000.

This melt-up in bitcoin prices comes during a year in which cryptocurrencies have become the major story in markets, befuddling old-school market pros and emboldening the bitcoin evangelists who see cryptocurrencies as the wave of the future.

This week’s wild action in bitcoin prices is also taking place just a few days before major financial exchanges are set to launch futures trading in bitcoin, with the CBOE — or Chicago Board Options Exchange — set to begin futures trading this Sunday, December 10.

The price of bitcoin has been on the rise all year — but has accelerated i the last few weeks. (Source: Yahoo Finance)
The price of bitcoin has been on the rise all year — but has accelerated i the last few weeks. (Source: Yahoo Finance)

Tom Lee, a veteran Wall Street strategist with Fundstrat, has been out front this year trying to put a value on bitcoin, largely using the amount of transactions taking place in bitcoin as a proxy for the value of the network. Last month, Lee almost doubled his price target for the currency by the middle of 2018 — to $11,000 from $6,500.

At Yahoo Finance’s most recent All Markets Summit in October, Lee explained why bitcoin is an important asset for investors to own, saying that, “this year has proven that bitcoin is uncorrelated to equities, gold, interest rates, commodities. It’s an important security, I think, for investors to own.”

Lee added that cryptocurrencies and blockchain — the decentralized ledger technology that bitcoin and other cryptocurrencies like Ethereum are built on — is an important technology. “[Blockchain is] a huge revolution in terms of decentralized control,” Lee said.

“It’s biomimicry, finally, in the technology industry. A proper structure for maintaining encryption and security. But because of the nature of blockchain it’s also an asset class.”

Fundstrat’s Tom Lee, one of the leading Wall Street experts on bitcoin.
Fundstrat’s Tom Lee, one of the leading Wall Street experts on bitcoin.

The usefulness of bitcoin for investors, however, doesn’t end with its place as a diversifying aspect of a portfolio. The price swings we’ve seen in bitcoin since September — and particularly in the last few weeks — have also served as a great lesson for investors in how price can change the story for any asset.

Last year, bitcoin was the fascination of just a few cryptocurrency believers who saw blockchain technology as revolutionary for the banking industry, the payments industry, and as a replacement for the government-backed currencies that dominate global finance today.

Now, bitcoin is the topic of conversations with friends, acquaintances, family members, and people who might not care at all about investing or financial markets. But now these folks love bitcoin. And this shift took place all because bitcoin prices are higher today than they were a year ago. A lot higher.

Since last year, the fundamental reason for owning or not owning bitcoin or any cryptocurrency — which is, at its simplest level, underpinned by the belief that blockchain technology and decentralized modes of tracking or paying for goods will be mainstream in the future — has not changed.

The only thing that has changed is the price. And with this change in price has come an enthusiasm not seen for financial assets since your cousin was flipping houses in the mid-00s or your great-aunt was day-trading stocks in the late ’90s. Right now, the market seems to be saying you can get rich just by buying bitcoin and waiting to sell it at a higher price in the future. And who doesn’t want that.

So the bitcoin craze is not a repeat of the housing bubble or the tech bubble. No one knows where it goes next. It simply rhymes with those prior manias of financial market history.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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