3 Lessons I've Learned From the Bitcoin Boom

Markets Motley Fool

Nearly every investor has made bad mistakes with their portfolios, buying losing investments and missing out on explosive growth opportunities. Yet few mistakes can equal my experience with the cryptocurrency bitcoin. My skepticism about bitcoin is well documented, and the cryptocurrency's huge rise has given those who ignored my warnings and bought bitcoin in mid-2013 gains of roughly 4,000%.

Continue Reading Below

You'll never avoid mistakes, but you owe it to yourself to learn from them. I'd like to share three lessons I've learned from my experience with bitcoin, in the hopes that you can apply them to all of your investments -- no matter what you prefer to hold in your portfolio.

1. Prices can climb far further than you'd ever think possible.

On looking at bitcoin in 2013, I thought that the meteoric rise that bitcoin had already enjoyed was almost unbelievable. Going from less than $0.01 to $100 in the span of just a few years was extremely impressive, especially in an environment in which bitcoin use was a lot more limited than it is today. Yet rising adoption of the cryptocurrency and increasing difficulty in mining bitcoin helped shift supply and demand to make prices rise, and we're still seeing the positive momentum continue even with bitcoin having gone well into four-digit prices.

The same is true with a host of other investments. In the stock world, many have marveled at how Tesla (NASDAQ: TSLA) now has a market cap that exceeds those of major automakers with decades of experience and billions of dollars in sales. Yet a combination of investor demand and prospects for future gains have supported the share price, and the hope that Tesla's fundamental business performance will eventually catch up to its stock has given many shareholders the confidence to hold on to their shares and enjoy the big price gains they've seen.

2. Enjoying big gains require suffering through big losses.

Continue Reading Below

Like lifelong stock investors have seen countless times, those who've profited the most from bitcoin have had to endure gut-wrenchingly big corrections. After climbing to $1,000 in 2013, bitcoin steadily lost ground, falling below $200 in 2015. Just this year, the gains and losses have been extremely volatile, with the rise to $3,000 immediately followed by a drop toward $2,000, and the recent push to nearly $5,000 followed by a decline back to just over $3,000.

Many successful long-term stock stories are like that. In late 2011, Netflix (NASDAQ: NFLX) saw its stock plunge as the company boosted prices for its DVD plans and announced that it would break the company in two, with the short-lived Qwikster concept to take the mail-order business while Netflix continued with streaming video. From those lows, Netflix has jumped in value by nearly 20 times, rewarding those who had the patience and commitment to stick with the stock during tough times.

3. Wall Street will inevitably look for ways to profit from winners.

As bitcoin has grown in popularity, players in the financial world have sought to find ways to profit from it. The proliferation of cryptocurrency exchanges reflects the lack of regulation of bitcoin and its peers. Moreover, bitcoin-related funds like the Bitcoin Investment Trust (NASDAQOTH: GBTC) seek to give those who don't want to go to those exchanges an alternative way to get bitcoin exposure.

Inevitably, vehicles for jumping on the bitcoin bandwagon come at a cost. In the case of the Bitcoin Investment Trust, a 2% annual fee saps money from the fund steadily, and a large premium to the underlying value of the bitcoin that the fund holds risks major losses even if the price of bitcoin stays stable. Similar things have happened regularly with other popular investments, and investors simply need to understand that there are professionals trying to separate you from your money in many ways.

I haven't gotten rich from bitcoin, but it has taught me some valuable lessons. By looking at your own investing track record, you can seek to learn from your mistakes and find ways to do better in the future.

10 stocks we like better than Bitcoin Investment Trust
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Bitcoin Investment Trust wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of September 5, 2017

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Tesla. The Motley Fool has a disclosure policy.