(Photo by Dan Kitwood/Getty Images) With central banks tapering or ending their bond buying programs -- and with some raising short-term interest rates -- the era of easy money is over. Already, the 10yr US Treasury yields have edged closer to 2.50 percent, almost a point higher than a year earlier. That’s bad news for investors chasing bubble assets like Bitcoin and overvalued technology stocks, which are very likely to deflate, as was the case with dotcom stocks back in 2001. Bitcoin has turned scores of investors, who bought into the digital currency early, into millionaires. But these investors could lose their millions faster than they made them, and then some, if the market momentum fades and eventually turns in the wrong direction. That’s what usually happens to emotional investors—including Sir Isaac Newton, who lost a small fortune in South Seas Bubble. **As of Thursday October 26, 2017, at 3.30 pm Source: Coinranking.com Higher interest rates could put pressure on Bitcoin prices in a couple of ways. One of them is that higher interest rates raise the “opportunity cost,” of money used to buy Bitcoins. That’s especially the case for investors who buy Bitcoins on “margin,” with borrowed money, and are expected to face “margin calls” should the digital currency drops precipitously. Another reason higher interest rates could put pressure on Bitcoin prices is that they will restore “credibility” to central banks and to national currencies they control. That will make alternative currencies like Bitcoin less appealing to the general public. To be fair, it isn’t known whether an investment 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 several Fed interest rate hikes. Especially when Fed tightening begins from ultra-low levels. 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 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. Adding to strong momentum during this period is growing euphoria that attracts individual investors into speculative assets 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 grow bigger. And that’s when most of the money is made -- provided that investors are in the right assets that fit into the popular investment theme which supports the bubble. That was the case back in the dot.com era. Most of the gains were 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 same, as the investment conditions and circumstances change with time and with 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. And that’s when investors risk losing all the gains they amassed during the bubble and then some.
bitcoin investors should be wary as central banks end their bond-buying stimulus programmes, threatening to deflate bubbles in riskier assets such as the digital currency. Scores of investors bought into Bitcoin, turning many into millionaires, as quantitative easing suppressed the yields on bonds and increased the allure of alternative assets, including tech stocks. But coin holders could lose their money faster than they made it if higher interest rates begin to lure investors back to traditional assets.