From a proven bitcoin bear: bitcoin has interesting long-term optionality
Despite what it says above regarding when this story was posted, today is September 19th 2018. As proof, please see the screenshot below with chart and time:
It has only been a few days since I posted my latest price views here and they have now been bearish for a good 9 months (see this). I am not trying to tell you that I was right (I was…). I am just showing you that I am not part of the perma-bulls that kept telling you how stupid you are for not investing your entire net worth in bitcoin and worthless altcoins. Still, in the middle of all my Bearishness, when I am expecting bitcoin to fall through its support at $6,000 and down to as low as $1,000 potentially, I am writing this post. I will publish it when the time comes.
A brief recap — what happened?
How we got here matters. If I am publishing this article, it means that we have witnessed a massive capitulation in bitcoin price that ended a deflating bubble that was obvious to those few who actively traded the .com bubble. It might not be the final capitulation yet – no one can be certain of that, but it will have hurt or I would have held back publishing.
It also means that Warren Buffet, Charlie Munger, Jamie Dimon and Bill Gates were all right to warn retail investors from buying bitcoin. When they made the noise (especially Buffet and Gates), prices for bitcoin were north of $10,000. Maybe next time you won’t ridicule them as “nocoiners”, but as people who only had your best interest in mind and have done this investment game a bit longer than any “OG“… Just admit they were right.
So basically as I described in the article linked at the start, bitcoin and the entire crypto space experienced the building and deflating of a bubble that mirrored the .com bubble in almost all aspects, complete with useless ICOs (:= IPOs), blockchain (:= internet) and twitter gurus (:= Jim Cramer; no actual offence intended).
Historically, new technology always gets overestimated in the short run and underestimated in the long run. This is exactly what happened. After early technology enthusiasts got rewarded handsomely for betting on a technology they understood and that they knew had great potential, the masses joined them. First slowly, then to the tune $15bn+ raised over a 12 month-period in between 2017 and 2018 for ICOs that promised to make investors rich over night by selling them hot air. Almost all token had zero rights to any kind of income and fully depended on the “theory of greater fools” to make a profit. Predictably it had to come crashing down. Once every first time investor, starting in the richer parts of the world and ending in the weaker economies (Google trends data shows a fascinating shift from G8 countries to African nations in search for “buy bitcoin” over time) and every less-educated, easily scammed person had invested, crypto could only fall.
And fall it did. If what I expect will happen comes true (speaking from Sep 19th perspective) then all ICOs will have lost 99% or more from their all time highs (they stand at -95% on average today) and bitcoin will have fallen more than 80%. Everyone, including a hefty share of the so-called “OGs” is sitting on losses or at least faces the question of why they did not cash out when the price was $20,000.
Why am I not giving up on bitcoin entirely?
So why am I writing to you now and flipping my position from bearish to neutral for the first time in what could well be a year (remember, at the time of writing this article, I do not know how long it has been since December 2017)? Very simple: everything that attracted me to bitcoin in 2013 and then to Ethereum in late 2016 is not only still valid, but much, much stronger now:
a) The future of (parts of) the internet is decentralized
It makes too much sense that given the choice, people will opt for a decentralized store of value or data storage. This gets rid of the issue of large corporations harvesting your data for their own profits without paying you and also gets rid of the issue of a single point of failure.
Bitcoin can technologically be the database where all the data that you use online is stored and it could protect it. It has other issues to face in the future, one of which is well described here, but it has the potential to be the backbone of decentralized data.
b) Store of value revisited
Of course, a bubbly few lines of internet code is not at first sight a great store of value. Especially considering its volatility. But consider that bitcoin has enormous advantages over gold or cash — it is designed to be deflationary at some point, it does not need to be carried physically and can therefore never be taken off you if you do it right and it can be transferred around the globe within ten minutes. Moreover, despite the possibility of a 51% attack led by Chinese miners, it does provide the decentralized security, government resistance and immutability that you might want for a share of your assets.
c) Blockchain takeover
I have said it many times before — the blockchain as a principle solves a huge issue for banks and stock exchanges alike. It gets rid of the need for clearing houses and provides instant settlement of ownership. That means it saves a huge amount of costs and kills a tail risk to the financial system. Therefore it is highly unlikely that banks and others will not be using a (in my view) semi-centralized blockchain that they run amongst themselves to replace current settlement. The semi-decentralized nature will make it scalable and that chain will NOT be bitcoin.
However, once that happens, there will undoubtedly be other service providers that offer new technology or even services as boring as real estate deeds and standard contracts that offer to place these on the blockchain. They can certainly “piggy back” onto a semi-centralized one hosted jointly by banks and others, but it is more than likely a certain share will still prefer a completely decentralized chain. They will flock to the most secure option. That answer would be bitcoin — none of the others.
d) History of financial markets
To me, running an investment fund (only equities, never anything I discuss here) and always having been a personal (!) investor in crypto and never a “power” user of the technology, nor a coder, this is the most important reason (even though the others will likely prove to be superior).
Financial markets work in a way that when everyone is at maximum despair, prices have usually bottomed. It also usually takes a while for them to go on the next bull run; despair is often followed just by boredom for a while. I have no idea how long this “boredom phase” will take this time, but after I said countless times that the community is still to bullish and that “OGs” will need to feel the pain for prices to bottom, I think that we are beginning to come full circle now.
I always like to look for asymmetry in a good trade. When bitcoin was at $10,000 it could of course double to a new all time high, but it would only double. For an asset that can always lose you 100% and that many would claim is actually worth zero that’s a pretty meagre pay off. As I type this, the price is at $6,200. Sure, it can triple to the ATH, but again that’s just 3 up, 1 down.
Now that I am publishing this, bitcoin will offer at least a 4 to 1 chance, but I am guessing the price is somewhere in the $4ks or lower, so the chance is there to 5x your money if we ever make it back to ATHs. That, to me, is an attractive risk-reward in general (not investment advice). Everyone will need to take that decision for themselves though and I would not be rushing into it personally. As I said, capitulation is followed by boredom most frequently.
e) Last but not least: insurance
This is kind of the same reason that one would be holding gold: system insurance. If our current system fails and does not frictionlessly morph into one where the top 0.1% of the population own less than today, then what will we use during crisis?
Gold is the obvious answer, except it is hard to carry, hard to divide and hard to be sure its real. It is also easily confiscated. Bitcoin solves all of these issues. So while I am not hoping for a systemic collapse, I cannot rule it out.
So that’s it
I am back to being neutral on bitcoin for the first time since December 2017. I think in all likelihood the price will go down to sideways for potentially quite some time here to build out this bottom and ensure people just lose interest (that’s what markets tend to do), but eventually I like the diversification that a very small share in bitcoin can provide.
I should note that if I were someone getting “back” onto the crypto train, I would give some thought to doing it right this time. An investment in anything, but particularly bitcoin can go to zero. One should never ever risk one’s entire net worth on any trade, nor any conviction. So if I were getting back onto that train, I would do so with a portion of my money that I do not care about. Something that you are happy to see triple in value, but that you do not need to check the price of and that in all likelihood you would not really feel if it disappeared completely. Bitcoin is still a technology and a bet — it can turn out to be utterly useless. Also, I would personally stretch my entry over months. It is completely feasible for the price of bitcoin to fall down to below $1,000 before it finally turns around and don’t forget – there is every reason to fear this is just South Sea Company, part 2. It can still end up effectively worthless. Also, I would probably keep an eye on tether. There is good reason to believe that the bottom comes after tether is ruled illegal and bitfinex collapses or that it is ruled legal (which I personally find less likely). So bear that in mind.
Noting again here that all of this is my personal opinion — I can be wrong and all I am really saying is I no longer see bitcoin as a clear short here.
Just to be absolutely clear again: any investment that I would make into a technology with a lot of promise but very little surety would be tiny. It needs to be an option-size investment. It should be nothing that I start having religious thoughts about like it was (and with many still is) the case in 2017 for a lot of people. Also it would be spread over months.
Thank you for reading. If you enjoyed this, please clap and have a look if you’d like to follow me on twitter. My other works can be found here:
Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. Most of all this is not investment advice in any way. Crypto assets can fluctuate widely in value and all of your capital can be lost. I have a 50/50 chance of being right. Any negative views expressed are solely aimed at the token in question, never at the development teams behind them for which I have utmost respect (if they are sincere).
