Bitcoin Bitcoin And Tesla Investors Should Carefully Read The Fed’s Minutes
Bitcoin and Tesla investors should follow the Fed’s minutes closely to get a clue how fast and how far US interest rates will climb. For a good reason: higher interest rates could deflate the price of both assets, as they did back in the early 2000 with dot.com stocks.
Bitcoin and Tesla have turned scores of investors who bought early into these investments into millionaires. But these investors can lose their millions faster than they made them, and then sum, if the market momentum turns in the wrong direction.
That’s what usually happens to many investors who decide with the emotional side rather than the rational side of their brains—including Sir Isaac Newton, who lost a small fortune in South Sea Bubble.
To be fair, it isn’t known whether an asset is in a bubble territory until the bubble bursts and investors lose a great deal of money. What’s known is that bubbles usually burst following four Fed interest rate hikes. At least that’s what set the stage for the burst of the dot.com bubble back in the early 2000s.
The good news for Tesla and Bitcoin investors is that the Fed isn’t there yet. This means that even if there’s a bubble, it’s in the “sweet spot.” That’s usually the time between the first and the fourth interest rate hike. During this time, the impact of a stronger economy on earnings is greater than its impact on interest rates, fueling strong momentum for speculative assets.
Adding to strong momentum during this period is growing euphoria that lures individual investors into the market in droves, fueling a cascade that turns bubbles into manias before they burst.
Simply put, the early stage of Fed’s tightening is when bubbles upturn sharply. And that’s when most of the money is made — provided that investors are in popular assets that fit into the popular investment theme which feeds the bubble.
That’s what happened back in the dot.com era. Most of the money was made from October 1999 to March 2000 when individual investors indiscriminately chased every stock that had the words “dotcom” or “networking” name— popular investment themes of the time.
Still, bubbles are never alike, as the investment “context,” conditions and circumstances change with time and investment themes. And some bubbles burst sooner than later, before the fourth Fed interest rate hike. That’s what makes timing of the sweet spot of the bubble everyone’s guess … and turns investing into gambling.
It’s well known what happens to gamblers in the long-term.