NOTE: This post is NOT Buy or Sell advise. Cryptocurrencies are very volatile, are subject to legal / regulatory risk and also carry a risk of permanent capital destruction.
Bitcoin went past $3000 as “segregated witness” or Segwit, the latest version of its open source code is days from locking in to the nodes on its blockchain on August 8th, 2017.
Segwit aims to solve Bitcoin’s long standing scaling problem and serves as a positive fundamental trigger to its price. For stock investors, imagine capacity expansion without the capex. True to fashion, the market bought the rumor before the news and pushed the price above the last all time high of $3019 in June.
This move caught many technical analysts by surprise, as Bitcoin – honey badgerlike – continues to shrug off bad news and humiliate market oracles. I think what is most significant is that the long-term underlying bullish trend has been confirmed this week, which means the odds of a major Bitcoin “crash” have plummeted and a $5000 to $10,000 Bitcoin price is now in sight.
So is it too late to enter? Bitcoin has no intrinsic value. The fair price is unknown. The market price is determined by demand and supply. It has gone up too much too fast. It’s in a bubble. All of this fear, uncertainty and doubt is legitimate but not in the ways one might think.
Bubble valuations (aka the Price has gone up too Fast!)
Every generation has a bubble. Tulips. Dotcom. Unicorns. Cryptocurrencies are the bubble of the coming generation. We are in very early stages of price discovery of a completely new asset class which is still dismissed by a majority of old street finance as a pyramid scheme or vaporware. Banks buy bitcoins only to pay off future ransomeware attacks. Hedge funds are only now beginning to show interest. Equity investors are still to enter. If it is a bubble, it is a bubble that is yet to grow until it floats regal and mountainlike before the thunderous pop.
So has the price gone up too much? Bitcoin was in a bear market from 2014 to 2016 and the anchoring/recency bias makes us fear mean reversion.
Here are Bitcoin’s historical returns since Satoshi Nakamoto wrote the famous white paper:
Notice the trend? The trend is your friend and Bitcoin can be the long trade that changes your life.
What are you buying when you buy Bitcoin?
Don’t buy what you don’t understand. For the non tech savvy, the blockchain is not an easy concept to comprehend. Buying Bitcoins is roughly analogous to buying:
- A share in protocol/infrastructure of the future de-centralized internet. Like buying CISCO shares in early years.
- A scarce asset. Like buying Diamond before De-Beers, because there is no central authority or control on price or inflation schedule.
- The energy and time units that go into mining. Mining Bitcoins gets progressively difficult as Bitcoins grow scarcer (the supply being strictly capped at 21 million). It is expensive to set up a mining rig and involves large amounts of power consumption.
Besides at just 21 million in total supply, with scope for no more to be created, Bitcoin is scarce
Bitcoin is an Experiment. A community without a leader. A cult in thrall to the idea of a world without centralized authority.
An absurdity about this peer-to-peer currency meant to act as store of value is that the developers of the original protocol were idealistic libertarians. Satoshi Nakamoto, the founder of Bitcoin is a myth. No one knows who the real Satoshi Nakamoto is because he chose to shun recognition and remain anonymous (with his stash of Bitcoins worth billions now of-course). In spite of its de-centralized nature, there is an almost cultlike ownership of the protocol by its many participants many of whom are not in it for the money but to achieve their goal of disrupting the financial status quo and making payments truly peer-to-peer without trusted third parties. Their counter is that the trusted third parties like banks could turn untrustworthy and rogue as banks and governments are wont to do. Governments can issue currency as legal tender and declare them illegal overnight. Governments can confiscate your assets and nullify your property rights.
Remember George Orwell’s 1984?
‘It exists!’ he cried.
‘No,’ said O’Brien.
He stepped across the room. There was a memory hole
in the opposite wall. O’Brien lifted the grating. Unseen, the
frail slip of paper was whirling away on the current of warm
air; it was vanishing in a flash of flame. O’Brien turned away
from the wall.
‘Ashes,’ he said. ‘Not even identifiable ashes. Dust. It does
not exist. It never existed.’
‘But it did exist! It does exist! It exists in memory. I remember
it. You remember it.’
‘I do not remember it,’ said O’Brien.
Memory holes were furnaces in which the Government burnt all records of a person’s existence. The distributed ledger of the blockchain is the exact opposite of the dystopian memory hole. Every transaction, every record of your property rights will be recorded on every node on the blockchain. O’Brien and his cronies cannot destroy the memory of you – without destroying every node. Indestructible memories interred in memories like fractals.
This radical de-centralization is an altruistic idea that makes your investment in Bitcoin a part of a militant albeit greater cause.
A dyed-in-the-wool speculator may ask – why do I care for these outlandish ideas or cultish early adopters? Remember these early adopters are like promoters in a listed company. The early developers and miners fanatically hold on to a significant stash of the total Bitcoins in supply. Block and wallet data shows they have been hoarding and not selling – which reduces the potential downside risk on your investment and leads to upward pressure on the price. This is the same affect as gold and silver that for the most part ar no longer in circulation except on exchanges.
Bitcoin is Honey-Badger
Bitcoin is thick skinned, like a honey-badger. A great humiliator of its naysayers. Back in June people predicted a hard fork of the main chain would lead to uncertainty, following it up with platitudes that the market hates uncertainty. But what the market hates most of all is people who are certain they know how the market will behave (I am guilty and have burnt my fingers) and Bitcoin has proved that in spectacular fashion.
The hard fork happened and Bitcoin’s price stayed firm in the 2700+ USD range. It achieved the opposite of what was predicted that the market cap would be reduced by the market capitalization created by the forked currency, i.e Bitcoin Cash. The fork actually made existing Bitcoin holders richer by giving them a free Bitcoin Cash for each Bitcoin in their account creating $7 billion of helicopter money overnight.
I will leave you with the below links and images to stress the survivability of Bitcoin and how the potential of this new asset class is still not properly understood.
The KISS of Altcoins. Keep it Simple Stupid
While investing in Cryptoassets other than Bitcoin – or altcoins – it helps to keep it simple. What I like about Bitcoin is it doesn’t pretend to be anything more than a scarce store of value and does a great job at it (de-centralized control, scarcity, fungibility, increasing difficulty to mine). Monero and Litecoin similarly are good projects that seek to be stores of value.
Personally for me, Ethereum seems like a complicated protocol and investment albeit with great leadership and community.
Ethereum’s main challenges are –
1. Security (It’s turing complete)
2. Scalability issues
3. Untested new design
3. Economics (Confusing inflation schedules, ICOs)
Bitcoin has lower downside risk from hacks and inflation. It can imitate ethereum’s “smart-contracts” functionality using a concept called sidechains.
Apart from Bitcoin, which is king, in my strictly personal opinion I see significant scope of adoption for the following protocols:
Monero – What Bitcoin used to be, only more secure. Use in the dark web/grey market business offers some downside price protection.
Litecoin – The silver to Bitcoin’s gold. Runs on Bitcoin’s chain. Popular with miners and Bitcoin users. Fast. Solid development team.
NEO/Antshares – Technically most sound, on paper. Backed by corporates. KYC compliant, which is a huge deal in China.
Ethereum – Its popular with the South Koreans (the early adopters of all cryptocurrencies) and is being promoted as an alternative to Bitcoin, which I do not believe it is.
Price discovery is a work in progress. Cryptocurrencies are illiquid, unregulated, listed on limited exchanges and this makes them subject to price manipulation.
Here is some great advice from a venture capitalist from Matrix Partners on how to invest in Cryptoassets. Do click and read the full thread. I could not put it better.