Bitcoin Isn't Suitable for Everyone
In the ten years since Bitcoin was invented, its price appreciated from less than one cent to over $19,000 per coin. In 2017 alone, the popular cryptocurrency doubled in value more than four times. But after reaching a peak in December 2017, the same month that Bitcoin futures were introduced, Bitcoin and Bitcoin futures tumbled over 70%. They are both currently worth about $6,000 per coin. While violent, the most recent fall in price is not new nor unprecedented—Bitcoin spot prices have actually experienced four drops of over 70% in its short lifespan, including a 93% drop in 2011. To say Bitcoin and Bitcoin futures are volatile is an understatement; they are some of the craziest markets that I have ever seen. Bitcoin markets are not suitable for everyone, and while I assume very few readers of Dr. Dahle’s blog have exposure to them (which is totally fine!), I do think that you may find the concept, and their price action, fascinating. Bitcoin, and its derivatives, have the potential to go down in history as some of the biggest financial asset bubbles ever. My goal is to offer some information about what Bitcoin and Bitcoin futures are, the risks of getting involved in such volatile markets, and how my firm approaches trading the futures market from a risk management perspective.
Virtual Currencies
For some background, Bitcoin is a virtual currency (a.k.a. cryptocurrency) that was created in 2009 and is designed to work worldwide as a medium of exchange and store of value without a central repository or single administrator. The system is incredibly unique in that it is peer-to-peer, and transactions take place between anonymous users directly without an intermediary. All transactions are recorded in a blockchain, which is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. This underlying technology in and of itself, is an extraordinary achievement, and it is the core component of Bitcoin where it serves as the public ledger for all transactions. While over 1,000 cryptocurrencies have been created, Bitcoin was the first, and remains the most popular and widely used. Over 100,000 merchants and vendors accept Bitcoin as payment, and world central banks are currently evaluating cryptocurrencies as potential reserve currencies. Because of its increased popularity and fixed supply, Bitcoin’s price skyrocketed over the past decade (with extreme volatility), as investors and speculators rushed to get involved.
How to Buy Bitcoin
Don Wieczorek
There are two main ways to gain direct access to the Bitcoin market. The first is through buying or selling Bitcoin for dollars or other fiat currency through one of the various specialized (but unregulated) exchanges. As an example, the largest such exchange in the U.S. is Coinbase. After buying Bitcoin, the coins are then stored in your “cold” (offline) or “hot” (online) cryptocurrency wallet to be sold or used at a later point in time. The prices of these Bitcoin are known as spot, or cash, prices. I must emphasize that, because Bitcoin is completely unregulated, the spot market has attracted bad actors who commit fraud, theft, and hacks, with very little recourse for the victims. The second method to gain access to the Bitcoin market is via the Bitcoin futures market, which is a product that was launched in December 2017 by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME), both of which are regulated exchanges under the U.S. Commodity Futures Trading Commission (CFTC). Bitcoin futures derive their price from the underlying spot price of Bitcoin. The futures offer a way to gain exposure to the gains and losses of the market without owning the underlying virtual coin. While more regulated than the unregulated spot market, Bitcoin futures do have added risks that are associated with being a futures market—leverage, volatility, and complexity (see disclosures at the bottom of my article, per my regulators).
Bitcoin futures can experience significant price volatility, and thus margins may be higher and trading halts can be imposed making it difficult to enter or exit markets. Bitcoin futures trading involves a high degree of risk, potentially even more so than other futures markets, because of the risks inherent in the underlying spot market. Again, Bitcoin spot is completely unregulated, not recognized as legal tender in the U.S., extremely volatile, subject to cybersecurity risks, and difficult to value. My firm is registered to trade commodity futures products, so I trade Bitcoin futures, but I do not trade Bitcoin spot. I’d like to emphasize that while I do trade Bitcoin futures, it makes up a very small portion of my trading program’s activity. I also trade over 40 other commodity and currency futures markets. But for the purpose of this post, I am focusing on Bitcoin markets. Below are charts of both Bitcoin spot, and Bitcoin futures, with the Bitcoin futures chart having a much shorter time frame since they were only introduced last winter.
Why I Trade
While some people understandably elect to watch the price of Bitcoin and its derivatives from the sidelines, I’m cut from a different cloth. My temperament and interests attract me to hot volatile markets (commodity futures in particular), where I try to manage the risks and attempt to make trading gains from large moves. Managers who trade futures products, including Bitcoin futures, are known as Commodity Trading Advisors (CTAs) or Commodity Pool Operators (CPOs). My firm, Purple Valley Capital, Inc., has been registered as both since I founded it over ten years ago. I’ve traded my share of volatile futures markets over the years, but they pale in comparison to the Bitcoin futures market. I enjoy trading Bitcoin futures because I feel they are the perfect speculative market—demand is driven by human emotion (and faith, or lack thereof, in fiat currencies), supply is finite, and trying to find a fundamental value on the underlying asset is virtually impossible. Thus, the market is prone to having huge booms and busts, more so than most other markets.
My Trading Plan
While CTAs can trade a whole portfolio of various commodity and currency futures markets searching for large trends, Bitcoin futures are often the most volatile market in the commodity futures space. It is essential to allocate accordingly and have a bullet proof trading plan. Some essential aspects of a plan may include:
- Only allocate capital that you can afford to lose
- Properly size the position such that the volatility is normalized
- Have a clear plan for when (and at what price) you will exit with a win or loss
- Cut losses extremely quickly; ride winners
- Never turn a trade into an “investment” because it’s losing and you want to give it more time to “work”
- Don’t deviate from your plan
- Enjoy the ride
I feel that even the most volatile market in the world shouldn’t keep you awake at night if you’re properly allocated, understand the risks, and have a plan for when to exit with a loss or a win. Still, some people may choose to stay away from Bitcoin spot and/or futures, and that’s totally ok! As Warren Buffet says, “You don’t have to swing at every pitch.” But then again there are others, like George Soros, Paul Tudor Jones, and other global macro trend traders who feel bubbles and crashes offer the greatest opportunities to make the most money (but obviously have correspondingly elevated risk of loss too). The best risk managers figure out ways to manage the downside risk while retaining the upside on both their long and short trades. Volatility does not scare traders. We know that we need volatility to help spring us higher; our job is simply to try and limit the downside volatility while preserving the upside. As any successful trader will tell you, there’s no better way to do this than by cutting losers quickly and riding winners. Because of this paradigm, the majority of futures traders with any length of tenure are trend following in nature.
While my firm’s risk management strategy is reactive, systematic, and does not predict price direction, I can’t help but be fascinated by the Bitcoin and Bitcoin futures markets and wonder what will happen to them moving forward. I have an avid interest in financial market history and bubbles. The word bubble gets thrown around frequently, and everyone has their own definition. I think my view will be different than most, because in my opinion, the Bitcoin markets are not a massive bubble, but could still be one. I do think they undoubtedly have some ingredients of a bubble including a breakthrough idea, incredible price appreciations and collapses, enthusiasm, as well as rampant speculation. Cab drivers, co-workers and neighbors are talking about Bitcoin markets, and articles about them continue to pop up everywhere. But it’s still only in the very beginning stages of leverage, liquidity and mass adoption.
Most of my neighbors and friends don’t own Bitcoin or its derivatives, and I doubt many of you do either. The biggest bubbles affect almost everyone. Wall Street is still in the beginning phases of expressing interest. The futures market (which was only introduced last year) and ETFs (not yet approved) may help with this next stage of mass adoption. I do think Bitcoin could be on the path to becoming a bubble, and in the end when it eventually bursts, unfortunately lots of people and entities will get hurt financially due to over extension and improper risk management and position sizing. This was the case with the Tulip, South Sea, Technology, and Housing bubbles too. But to be mentioned alongside these historic bubbles, I think Bitcoin will have to be much more widely owned and affect many more people and institutions, both on the way up, and way down. It may sound crazy, but the main bubble part of the move could still be ahead of us. The recent 70% drop in Bitcoin spot and futures markets could actually be interpreted as a “normal” correction in a wildly volatile market. When it’s all said and done, I think the Bitcoin markets have a chance to go down in history as the largest financial market bubble ever simply based on the fact that, unlike all other prior bubbles, this is truly a global phenomenon and the supply is inelastic.
I hope this discussion was interesting and helpful for you. If you do decide to get involved in Bitcoin spot and/or futures, please understand the risks, because there are many. I would strongly urge you to either have a plan and allocate properly yourself, or utilize the help of a professional. The Bitcoin markets are a speculative beast that moves with ferocious velocity, and no one knows where they will move next.
From the Editor:
I don't buy Bitcoin. I don't view Bitcoin as a viable currency. I don't buy futures. I don't speculate. I don't trade in the sense discussed in this article. I don't use technical analysis. Like other humans, I am not particularly talented at predicting the future. Yet somehow, I am a multi-millionaire in my early 40s and am freed from the need to work for money ever again.
So, is trading Bitcoin smart or stupid? Wrong question. The question you should be asking is, “Is trading Bitcoin relevant to your life?” Almost surely not. This is one of many corners of the investing universe that you can safely ignore. There are no called strikes in investing. You can stand there at the plate all day waiting for a pitch you like to come by. Trading, speculating, and buying bitcoin are all pitches that I would let go right by.
Two points about Bitcoin that are worth understanding.
# 1 Bitcoin absolutely was in a classic bubble and that bubble has burst. Bubbles are sometimes difficult to identify while you're in them, but they're very obvious in hindsight, and Bitcoin had a bubble. It was the most impressive speculative frenzy of my investing career, and a pleasure to watch. Bernstein identified the following characteristics of a financial market bubble and warned that when you see at least 3 of the 4, steer clear:
- The asset becomes the subject of conversation at social gatherings
- People are quitting jobs to speculate in it
- Skeptics are met with anger
- Extreme price projections
By December of 2017, all four of those were in place as evidenced by the links. So it should be no surprise that the Bitcoin chart for the last year looked like the classic chart of a bubble.
Wow! You'd think that second chart was drawn AFTER the first one happened, but no, that second one has been around for years. At any rate, anyone who couldn't see that there was a Bitcoin bubble, especially in retrospect, has no business managing their own money, much less anyone else's. Now I have no idea where Bitcoin goes from here. Maybe it goes up. Maybe it goes down. Maybe it goes to zero. Maybe it goes to the cost to produce it. Maybe it never against equals its previous height. I truly don't know. But it certainly was in a bubble and what happened is what always happens with bubbles. On December 17th, it peaked at $19,783. By June 28th, it was at $5,822, a loss of 71%. That's a return that makes the first year of a whole life insurance policy look good.
# 2 Bitcoin is not, never has been, and given the current trade, is highly unlikely to ever function as a viable currency. Much of the hype driving this mania was that we were all going to start using Bitcoin as a currency. It was supposedly confidential, reliable, and out of the control of governments. Subsequent developments showed that none of that was the case. Besides, Bitcoin failed in the most elementary way – it simply didn't function as a currency. Nobody was using it in any significant way to buy anything. Try it! Check your local area to see which businesses you can use Bitcoin at. I found about a dozen in the Salt Lake Valley, the largest of which repairs lawnmowers. Even those early adopters who tried to use it seem to be backing away from their decision. Try it yourself. Try to buy your next 30 purchases with Bitcoin and report back on how many of them you could use it for.
So if it isn't the currency it pretends to be, what is it? It's an instrument of speculation. Before costs, speculation is a zero–sum game. After costs, like roulette, it is a negative sum game. Don't play negative-sum games.
As a high-income professional, you have an income in the top 1-3% of Americans. If you simply put 20% of your gross income away during your career and invest it in boring old stocks, bonds, and real estate, with a very high degree of reliability will have more money than you will ever need. You don't need to speculate or buy stuff like Bitcoin in order to be financially successful, no matter how many seemingly smart people are doing so. Do yourself a favor and let this pitch go right by.
What do you think? Does trading or Bitcoin have a place in the portfolio of a serious investor? Why or why not? Comment below!
Mandatory Disclosure Material:
FUTURES TRADING IS SPECULATIVE & INVOLVES A HIGH DEGREE OF RISK. IT IS NOT SUITABLE FOR EVERYONE. THERE CAN BE NO ASSURANCE THAT THE STRATEGY WILL ACHIEVE ITS OBJECTIVES, RISK MANAGEMENT TECHNIQUES WILL BE SUCCESSFUL OR THAT LOSSES WILL BE AVOIDED. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
VIRTUAL CURRENCY DERIVATIVES DISCLOSURE: Purple Valley Capital, Inc. may trade Bitcoin futures. The underlying cash markets and exchanges for Bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority. This could lead to increased volatility and increased risk of loss. The initial margin for virtual currency derivatives may be set as a percentage of the value of a particular contract, which means that margin requirements for long positions can increase if the price of the contract rises. Exchanges may set higher margins for virtual currency derivatives than other market derivatives. Additionally, FCMs may require a margin level beyond the exchange minimums. FCMs may pose restrictions on customer trading activity in virtual currency derivatives, such as requiring additional margin, imposing position limits, prohibiting naked shorting or prohibiting give-in transactions. The rules of certain designated contract markets impose trading halts that may restrict a market participant's ability to exit a position during a period of high volatility.
I had something to say, but then you said it all at the end of the post!
The way I phrase it when talking to my residents is this: “Why play in that game, if you don’t need to?” As you said, if you take a simple “set it and forget it” route to passively investing in stocks and bonds; and diversify with a bit of real estate (whether in REIT’s, syndicated deals, crowdfunding, or property ownership) – you will set yourself up on a path that is much less stressful and that has a much higher probability for success.
All of these speculative deals play on our Limbic system and the rush it gives us. Being an adrenaline junky in investing is rarely a good, and often leads to terrible outcomes. I agree that it’s not about whether you can “win or lose” while speculating. The question is “why play the game at all” if you have a relatively sure way to get there playing an entirely safer game.
Can’t wait to see the rest of the comment section on this one. I’ll go run and grab the popcorn. Who wants some?
TPP
I had a funny feeling that writing a post combining Bitcoin + futures + active trading (each being sacrilegious terms in their own right around here) would raise the blood pressure of a few! But I think it’s nice to have a diversity of discussions once in a while. Thanks for reading the post.
I agree that many are drawn to markets (especially speculating) as a means to excite their limbic system, since there’s no faster way to make or lose lots of money. Those folks don’t last very long, especially in futures trading where the leverage is high. But I will say that for professionals who have a history of doing it for a while, we would mostly agree that it’s not exciting at all–it’s strictly a business, and quite boring actually. My wife’s stories from the emergency room are far more exciting!
Never invest in something you don’t fully understand. Bitcoin fits that’s criteria for me perfectly.
By the time everyone is talking about the stratospheric rise of something it is usually too late and it is these late investors that jump in and experience the greatest losses.
Unfortunately these late investors are the ones that can’t afford to take a massive loss that happens when the bubble bursts. It’s your everyday Joes that here everyone talking about it and have FOMO and then dump all available money that they can’t afford to lose into it to take part in it.
Speculative investing is not for the weak of heart and as you mentioned completely unnecessary with proven ways to build wealth with more conservative risk.
I certainly would not gravitate to advisors that relish this kind of volatility. Don’t want them near my money.
The phrase “never invest in something you don’t understand” gets thrown around a lot, and I agree with it re Bitcoin. But something about that phrase has always bothered me: I don’t understand the stock market, ie I don’t understand the specific things that cause it to go up or down in most cases, and I certainly don’t understand the worst-case risks of the individual stocks in it because I am not routinely invited to dinner with all the CEOs. Yet I still invest in the stock market because I want its high returns and its past performance has been good.
Do you understand the stock market? Does anyone? Am I misunderstanding this phrase?
Great point. For me I understand the basic principals of the stock market and real estate market. Unless you are concentrated in a particular individual stock you would not need to know the actual inner workings of the company being invested in the market as a whole.
For bitcoin I have no concept what block chain is or how it actually is kept track of and sold in fractions, etc. Would have to blindly trust someone to tell me its safe. Whereas I have much more faith in the tangible stuff driving our economy which is reflected in market performance
JustSayin….everyone acts like the past is the future – keep shoveling money into the market as if they know what will happen …but all of this is predicated on past performance
Nobody knows where market will be decades from now- yes looking in rear-view mirror gives you information, but can also get you in a freakin’ car wreck!
Not advocating crypto play here, but the blanket recommendation of – put your money in the market – its safe- is fraught with issues
The naivete and overt comfort with the stock market has always been surprising to me
JustSayin’
Yeah, that was my major point. History repeats itself until it doesn’t and I’m afraid that most of us think we understand more than we actually do. Again I’d love to be proven wrong about this.
Now, TIPS are about the only investment that I do understand at a level that makes me comfortable. They have a usually low but fixed rate of return. The main risks specific to TIPS are (1) hyperinflation and (2) unsustainably low rate of return, but doctors can get around (2) just by saving more principal and living within their means. So AFAICT, the only real variable with TIPS if you’re a high-income investor is how likely you think it is that we will have hyperinflation. (Yes, I suppose the government could be cooking the books with the CPI, but as long as it’s within a couple percent I don’t care that much since my buying habits are pretty flexible.)
I have nowhere near this level of understanding about the stock market, real estate, or any other investment currently. Eg, John T Reed writes that in the Great Depression, many stock investors lost their shirts not in 1929, but rather in the early 30s because they jumped back in figuring they would get bargains and then hit false bottoms. It just kept going down and down in the 30s and didn’t recover for decades. How many rebalancers and Bogleheads will walk this exact same path the next time the stock market crashes? Reed writes that the same has been true for real estate over multiple periods of several decades as well.
The problem with investing only in safe investments is you have to save a massive proportion of your income to get to the same place. The last time I ran the numbers, it looked like that instead of saving 20% of gross for retirement, you needed to save 50%. That’s a big deal for most of us.
So we take risk because we MUST. We MUST invest in stocks and real estate because we’re not willing to spend less (now and later) or save more.
This is true. I’ll have to save ~60% of my gross over 10y to make this plan work. Not every doctor can do that. My income is on the high end for EM and no loans but OTOH got my first kid coming soon and so future living expenses are a bit uncertain. May need to keep some stocks ultimately.
A related risk is that I fail to save enough because EM compensation decreases. I have no idea how to hedge that one other than to maximize my savings now.
Whats the alternative and how is its robustness compared to the market?
You dont really have to understand anything other than its highly unlikely markets, populations, etc…will be much smaller and hence a smaller base of consumers using products, etc…in the future than today. Are less people going to be buying from Amazon, Starbucks, or any name in the future (obviously companies come/go, but are replaced)?
The market and its value grows with the growth of the world from a 10,000 mile view. Many of the biggest companies today didnt even exist in 2000, the same will be true in the future. Its just a lumpy ride.
This doesnt mean you’re guaranteed double digit returns or the market owes you a historical rate of anything. Just that there isnt really anything else more robust or obviously a better bet.
Possible alternative investments depend on your goals. If you want to FIRE and live semi-frugally as I do, one alternative would seem to be mostly bonds (mainly TIPS +/- 10-year to hedge deflation) combined with some cash and “buying everything I will ever need now” in order to hedge hyperinflation. I also want to learn more about rural real estate and timber investing, but mostly just as an excuse to spend as much time in the woods as possible s/p FIRE 🙂
Of course, we know the biggest risk to this strategy would be failing to achieve a high enough rate of return to stay FI. One way to mitigate this risk is to just save higher principal; my goal is enough for 1% real SWR so I can draw down principal into my 90s if absolutely needed. Another way is to already own all the stuff you will ever need.
I agree w/ you about stocks and the economy; I’m basically an optimist that we’ll continue to improve economically as a society. But it’s the <1% chance we won't that gives me pause since the consequences of that would be so huge for stock investors.
My point being that all those other vehicles have terrible long term return compared to equities, outside shorter duration dislocations, and will likewise be doing poorly in a situation that hurts equities in a retirement effecting material way.
Easier to have a reasonable allocation, then you dont have to save as much as growth does it for you. Its very dangerous to place a large bet on a very low likely outcome, especially when it will have large real world consequences. If the chances are 1% or so, the weightings and hedges against that chance should reflect that likelihood. Aka, more an insurance issue and paying attention rather than an actionable portfolio change.
Make your AA, make it reasonable for your personality and maybe riskier than you otherwise would (if your inclination is anything less than say 50-60% equities) and just watch it closely, let time do the work.
Remember the most important part, you cant get rid of these risks, you can only change the risks you’re accepting which Jim mentions above.
Again – all of this is based on historical performance – looking backwards.
And as a retail investor you are a sailor not in charge of which way the wind blows and beholden to the waves that much bigger boats create!
I favor cash flowing real estate – currently moving heavy into this space – not high end – not section 8 – just good ‘ol working class homes – affordable rents that pay me >10% coc
I have a thesis and its working – some will say I dont control real estate market – but rents in the area I’m in can only drop so far since I’m in the mid-range. Multi units highly unlikely to be 100% vacant. Plenty of margin for me to work with. Also hedging risk in that ave cost of each property is low so each unit is of little risk and if I need cash can liquidate a property. But also working on buying alot in one area so that 1 property manager can handle it and so that I can have some control on rental market.
Stocks – well everyone loves them but a rising tide floats all boats – lets see how well everyone is doing in a bear market , recession or depression. People will always need a place to live – and I’m happy to provide affordable housing for them
Will have 100+ units in next decade giving me more passive income (loaded term) than I make as a doc. FIRE by 50 = achievable!
JustSayin’
I remember trying to liquidate a property in 2010….it liquidated in 2015.
Real estate has downturns too. That said, 10% CoC in year one is pretty protective. Harder and harder to get though.
Interesting dynamic around where I did my residency – seasonal sales every year allowing me to pick up instant 7-10% equity due to discounts/price cuts
Portfolio is cash flowing well enough that I wont need to sell – always have HELOC option though doubt I’ll need it
Take advantage while you can, probably won’t last forever.
I hope nobody is getting the impression that I think one should put all their market into the stock market or that the stock market is safe. Obviously, neither is true.
Thanks WCI – I think in the fog of long posts clarity and brevity can be much appreciated!
I think the author gave it away. He’s not investing in Bitcoin, he’s playing with it because he enjoys it. In that context, if you have $6,000 (or whatever) that you were going to use on a vacation, and really want to try playing with Bitcoin, then trade your experience budget for an experience. Skip that vacation and buy Bitcoin. Just don’t kid yourself that it’s investing, even your “alternatives” in your portfolio. It’s play money/Gambling for the thrill of rises and falls.
A lot of money has been made and lost off of Bitcoin. A couple comments:
1. Some of you may remember my friend “Jim” the day trader. Last year he made a ton of money trading….much if it on Bitcoin. He pulled out in January (by luck or skill, I’m still not sure), but he decided that he had such a good year last year that he wasn’t going to work this year. A nice windfall from the trading that he did.
2. I learned a lot about cryptocurrencies last year. Initially I was a complete skeptic. I never traded them or invested in them as I believed them to be overvalued by the time I had enough knowledge to consider them. Since the price has fallen I have more strongly considered putting some money into Bitcoin. My main hesitation lies in the fact that I am not convinced Bitcoin will win the crypto space. I do believe there will be cryptocurrency in our future (think decades not years). Which crypto wins I don’t know….(think Myspace vs Facebook).
3. I strongly dislike the graph you provided of “bubbles”. Using such a graph is exactly opposite of what is preached throughout this site. I can pick time frames over the past 5 years and show you an exact graph of Amazon or Google stock price that matches that graph. Yet their prices have continued to skyrocket. They were not in bubbles (or they are in a bubble right now)….Impossible to say. These were price fluctuations. Bitcoin has price fluctuations…just more volatile than the average stock.
If you preach constant investing into index funds, then you cannot use graphs like that to make the opposite argument. If you want to use that graph, then I would argue you should stop investing in the stock market right now and hold cash until the bubble we are currently in with the overall market will soon pop. (I am not making that argument as I don’t know).
Now everyone can crush my comments….Incidentally 95% of my investing is in index funds.
Agree, particularly about the graph!
I agree about the graph too. Zoom in or out of any market chart and you’ll see “booms” and “busts.” Only difference is the time frame, people involved/volume, and dollars won/lost. Markets are eerily fractal in nature. Impossible to say what is or is not a bubble until well after the fact. We need more time and price data with Bitcoin in my opinion.
I do think it’d be interesting to poll the readers here at WCI (or the U.S. in general) and compare who actually owns Bitcoin, and who owns passive equity index funds. Then we could have a really fun discussion about which market (and management style) is frothier!
And likewise, 80%+ of my investing is in index funds too. And then I try to diversify with alternatives that have a history of performing well during the infrequent times that equities falter.
“cutting losers quickly and riding winners”…that sounds like a perfect approach, a crystal ball definitely helps.
Jim, I agree that bitcoin was probably a bubble, but we will need more time to know for sure. I personally would feel more confident calling it once it drops back to a small premium over mining cost.
It might already be there. According to this, the mining cost varies from $531 to $26K, depending on country:
https://www.marketwatch.com/story/heres-how-much-it-costs-to-mine-a-single-bitcoin-in-your-country-2018-03-06
Exactly!
Helo Team!
While I agree with everything Jim has said, I do think that doing some research, investigation and playing has no harm.
To follow up with what a prior investor said – a 6k gamble, or better 20 hours of your time to understand the nuances of block chain and its potential is harmless – and could potentially pay off.
My investment club and myself set up an ether rig in my basement for sub 10k prior to the boom, sold twice and more than tripled our money on our play/gamble.
I think we as physicians who are adept at learning and digesting information owe it to ourselves to understand as much as possible in both long-term-investing (e.g. this website and many more), and learning/knowing about new potential opportunities and investments.
It’s like knowing the details behind Dalvance (or any other new drug). We may never use it, it may never pan out – but we owe it to ourselves to understand how it works.
Keep up the great work!
-Neil
I’m not sure that “no harm” is completely accurate. $6K might not be much money to you, but it is for a lot of people. I’m not really too into investing as a hobby, it’s a bit more of a serious business for me. I’d much rather spend my hobby time doing something else. If an investment doesn’t promise a reasonable return, I’d just as soon let it go by and wait for the next pitch.
Maybe it’s harmless to eat dinner in the casino, but some small percentage of those who walk through the casino to get to the restaurant will sit down in front of the slot machine and some small percentage of those who do that will end up losing far more than they intended.
A true currency has an expected return of zero, before expenses, and that’s in nominal terms. By definition that isn’t investing, it’s speculating. Why not tilt the odds in your favor and invest your money in something with a positive expected return?
I agree with you! The sub 10k is place holder for anything that’s gamble-able.
My point is that as physicians we should educate ourselves (even if it means not investing) on novel investments and opportunities.
I totally agree with you regarding keeping investments in sound investments – but from an education standpoint there’s never harm in learning right?
Thanks again!
As long as your learning doesn’t induce you to do something stupid, then all you’re losing is the opportunity cost of your time. For me, that’s a high price. Maybe you have more free time than I do.
Agree with the learning part. I followed Bitcoin closely and with much excitement about what was going to happen. I felt it was a bubble in 2018q1 and it was super educational. It went beyond anything I might have predicted and felt I learned a lot.
Same with cannabis stocks now, that Tilray was something to behold from a madness of the crowds perspective. Things can always exceed rationality to magnitudes of degree from either side. Definitely worthwhile.
What? No way, it was obvious during and was definitely a bubble. It went from a curiosity to full blown mania at thanksgiving. Mainly traded by those with zero market knowledge in general and held on sketchy platforms. Introduction of two way trading helped bring it back down.
Even it eventually regains its price someday, this period was certainly a bubble. My 93 year old grandma was talking about it at Thanksgiving, and you had to mute the term on social media sites.
G– Cutting losers and riding winners is more of a management style based on prior data, not a predictive crystal ball. Think of it this way: NFL coaches use this management style in training camp to whittle the roster down to 53 players, gardeners pull weeds when they pop up, and even the S&P500 drops losers every so often and replaces them with winners. None of this requires a crystal ball, but instead is based on actively monitoring and managing your portfolio of assets based on how they’re performing. By cutting losers as you recognize them and keeping winners, you can end up in a nice spot. It can apply to all facets of life and business. The really cool thing about markets is that they can have massive outliers, known as fat tails or kurtosis in statistics, and catching such a winner is the equivalent of managing a football team with a running back who weighs 2,000lbs and can run 50 yards in one second flat. That’s how outside the “norm” markets can get from a statistical distribution perspective, and the price appreciation (and drops) in Bitcoin is one really nice example.
There is a note at the top that the post was pulled, yet I am still able to view it. Were the issues worked out?
cd :O)
I think you see my lengthy comment AFTER the original post.
I actually got to read the post before it was yanked….Very interesting post. Hope it gets to go back up, whether one agrees with it or not it is interesting.
Hopefully.
Investing in Bitcoin is, at best, like investing in dollars or pesos or rubles. It is not a profit-generating asset. You as the investor are simply hoping that someone else desires it enough to pay you a premium to get it from you. That’s the absolute best case scenario, 100% speculation. Not interested and never will be.
Edit timed out…
Any vehicle of wealth which is subject to wild swings in valuation as the result of speculation is a poor currency. Who in their right mind would take Bitcoin instead of dollars and accept the valuation risk? The only people for whom Bitcoin makes sense are those for whom the anonymity and extra-governmental nature outweighs the valuation risk. These are disproportionately illegal transactions. It’s not coincidence that Silk Road used exclusively Bitcoin for payments, because all those transactions were illegal. It’s not promising when the most obvious application of a technology is “makes it easier for criminals.”
What happened, why was the post pulled? Now I am even more curious. Like forbidden fruit.
Author forgot to get it approved by his regulatory authorities before submitting it. We forgot to doublecheck that it had been before running it. Email subscribers still got to read it! You still get my portion of the post!
Well, I hope to be able to actually read it one day. Would love to see the opinion of a trader.
How people can actually think cryptocurrency is an investment is beyond me. Speculation, sure. Commodity possibly. But investment, never.
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My apologies for not being more clear that the post couldn’t run until final NFA and CFTC approval. I’m glad to see that it’s posted and am happy to answer any questions!
In light of Bitcoin’s recent success, I just reread my post (and Jim’s response). In my opinion, we’re only now entering the phase of financial institution involvement, and wider spread adoption, adding another piece of the “potential bubble” puzzle. In retrospect, we can now clearly say the peak in 2017 and subsequent 70% drop was a “normal” correction in a wildly volatile market as I mentioned in the article. That was not the bubble—it may still be ahead of us.