People have made enormous amounts of money trading Bitcoin and other crypto-currencies. In January, 2010, one Bitcoin was worth $16. In December, 2017, one Bitcoin was worth $19,000. That’s nearly 119,000% increase! If you had invested $1,000 in January 2010 you would now be a millionaire. The following, very technical chart, illustrates the consequences of such an investment:
But, what about the downside? If you had invested $1,000 in December, 2013 when Bitcoin was worth $1,000 and sold in January, 2015 when Bitcoin was worth $192, you would have lost 80% of your money. The following, very technical chart, illustrates the consequences of this investment:
This indicates the extreme volatility that has existed in the Bitcoin market. How does this help us determine if Bitcoin is a good investment now?
How does looking at multi-year slices of Bitcoin history help you determine if Bitcoin is a good investment? It doesn’t. Psychologists have found it’s human nature to look at past events and feel like there were indications you could have used to help predict the event. Even when the event was completely random. It’s called ‘Hindsight Bias’. Or, by its more nefarious-sounding name: ‘Creeping Determinism’
Creeping determinism means you will see people making a fortune based entirely upon luck and totally ruin your future by investing in remarkably stupid ideas.
There is plenty of evidence that points to this: 95% of actively managed funds don’t beat indexes, people still play the lottery, and the results of this interesting study from Caltech. You might even be able to make an argument that creeping determinism is institutionalized as evidenced by the enormous salaries CEOs and hedge fund managers make — the people responsible for making highly unknowable strategic decisions about highly random market movements.
Back to Basics
This doesn’t mean you should give up. It does mean you should follow one of our main tenets — diversify. It also means trying to pinpoint exactly when to buy and sell Bitcoin is probably futile. However, we can identify some macro-level observations that lead us to a conclusion about roughly when and how to invest.
Here are several things to consider about Bitcoin (and crypto-currencies in general):
- Bitcoin is a currency, not an asset with underlying fundamentals
- Bitcoin has no physical asset or government backing it’s value — only the faith of its users
- It’s lack of governance and transparency into operational details leaves it open to manipulation and use by criminal forces
- The open-source nature and cryptographic security of its algorithm provides some protection from manipulation
- It’s tech-first nature makes it theoretically easy to perform transactions
- It’s lack of ties to a specific government give it an intrinsic diversification not found in other currencies
- Bitcoin’s growth has created
Based on these observations and, supporting data from articles like the following: Bitcoin regulation, lack of transparency, growth, we can make some macro-level predictions:
- The future will almost certainly contain some form of crypto-currency.
- It’s highly unlikely that it will remain completely unregulated
- Crypto-currencies will stabilize at some point and become similar to traditional currencies
- In the long-term crypto-currencies will become ubiquitous
While it’s still early (other forms of currency have been around for hundreds and thousands of years), we have enough information to determine if it’s Bitcoin or BitCON. Below are our conclusions and recommendations.
- Investing in crypto-currencies now is like playing the lottery – do it for fun, not as part of your retirement plan.
- Don’t invest significantly in crypto-currencies until prices stabilize, more transparency and basic regulation exists.
- Once crypto-currencies stabilize, consider investments in crypto-currency as a hedge or diversification tactic similar to any other currency
- If you want to get in on the crypto-currency craze now, invest in a diversified mix of companies associated with crypto-currencies, not directly in the crypto-currency itself.