Bitcoin. Investment or Gamble?

Bitcoin. Investment or Gamble?

Bitcoin

Bitcoin. Investment or Gamble?

I recently toe-dipped into the Bitcoin topic in a blog posted on 12/7; and since then it has surged by greater than 60% in a matter of hours (yes, hours…). Bitcoin has cruised along and pierced 12,000, 15,000, 18,000 and now 19,000.

Ok, what is going on here? In short, it’s certainly time to talk about Bitcoin.

For us at Signals Matter, moves like this are not on our trading screens nor our Signals Watch, because moves like this aren’t trades, they’re gambles.

I mean, let’s not kid ourselves folks, Bitcoin is beyond rational price discovery, it’s a speculator’s rocket ship.

If you bought $10.00 worth of it 7 years ago, you’d by a millionaire 7 times over today. Holly S@3&! That’s a rocket…

And so we need to give this rocket ship some attention. I know a few 30-somethings who are now paper millionaires on this single trade. And even the derivatives exchanges are stepping up this weekend to create a futures exchange (and thus a liquidity market) for this headline-making asset.

That’s serious respect from an otherwise (and hitherto) condescending “Street” attitude about the crypto currency world.

Should you respect Bitcoin?

The answer depends on how you spend money.

Bitcoin as an Alternative Currency? Nope.

Anyone who reads, watches or listens to my posts will know that I am (and have been) concerned about Fed monetary policy and what $15+ Trillion in global central bank money printing can do to global currencies—i.e. dilute them akin to adding a swimming pool of water to a glass of scotch.

Stated otherwise, since 2008, the major central banks have put global currencies—including the USD—at risk, and the world is slowly catching on and looking for “alternative” currencies that can’t be manipulated, diluted, or aka “fudged with” by a bunch of PhD’s who think they can steer an economy like a golf cart.

In short, and as someone openly concerned about the massive amounts of global currency and economic risk created by our destructive central banks, I’m all in favor of cheering on the little guys seeking to buck a teetering, if not yet broken, system.

After all, Bitcoin—like some other crypto’s—will have a fixed/set amount of “coins” (21M) and that’s it. Many love this. (As of this writing, Bitcoin has “minted” 16,728,000 of them). No further tinkering, no rate policies, no dilution moves (i.e. “printing more bitcoins out of thin air”)—just a simple fixed amount and then the market can take it from there. Seems ok, right?

Not so fast you eager little $$$ in the headlight types….

In the past, if you were worried about currencies or otherwise losing faith in central banks (as we did, have, and still do), investors—from Switzerland to San Jose—would turn to the historically most proven alternative currency of all: gold.

Yet now the speculators have a found a new shiny thing, and it’s Bitcoin.

But currencies are about stability, while stock plays are about appreciation. If you keep this in mind, there’s nothing at all stable about Bitcoin and thus no way in Hades one should consider this an “alternative currency.” Full stop.

A Trend Followers Dream “Car”? Yep.

As a stock “play” however, one can’t deny that appreciation like this is an off-the-charts dream come true. But then ask yourself this, what kind of investor are you? A pure momentum/growth type, a value investor? A realist? A dreamer? A speculator?

We’re all different, but here at Signals Matter, we simply can’t invest (or recommend investing) in something we can’t even value, let alone see an org chart of its management or reality test its technology.

If Bitcoin were a car, investors are buying it without looking under the hood, verifying its mileage or even kicking its tires. They’re just buying it because, well, the hype and movement is huge. HUGE.

And don’t get me wrong, I wish I’d bought tons of this at $10 bucks, but I wouldn’t and didn’t because that’s not investing, it’s speculating. No judgement here—it’s just not how we roll. But boy, in moves like these, I wish I had rolled differently J (Hindsight is a cruel thing.)

But more on Bitcoin’s instability and scary-scant little knowledge or transparency as to the OZ behind its curtain below. Let’s just start with the basics:

First: What is Bitcoin?

At the most basic level, bitcoin, launched in 2009, is a digital currency which can be stored offline or online in an electronic “wallet” and used to pay for things electronically. It’s not issued by a central bank nor tied to any specific country. It’s called a “crypto” because transactions are placed directly between buyers and sellers via encryption-protected means rather than through a bank.

Is Bitcoin Safe?

With investment rates this volatile, the simple answer is: no. Is it fun to make gobs of money in less than hour? Yes.

Furthermore, this puppy has zero regulation (is highly vulnerable to cyber-attacks) nor any kind of corporate governance or balance sheet audits to critique, so you are pee-ing into the wind if things go wrong—and if you lose your digital key/password, you are out of luck, period.

If you were looking to “value” Bitcoin, the heart of its valuation lies in its pioneering blockchain technology as to speed and privacy. Unfortunately, other crypto variants like Ethereum and Ripple (the choice of Bill Gates) have even better technology but currently less hype. That will likely change soon enough.

As for verifying corporate governance, the man of mystery behind this rocket ship is Satoshi Nakamoto—assuming that’s his real identity. The truth is, no one even knows for sure. Would you invest in a company that had no verifiable leadership/management?

For some of you, and we truly and fully understand, that answer may still be a resounding “You betchya!”

Also, for Bitcoins to be sustainable at these prices, you need markets to shop em—but as of at least now, the hurdles facing Bitcoin, from China to NYC to Silicon Valley are still considerable. Just saying.

In fact, even the Tulip Mania of 1637 had more transparency than Bitcoin, but just as much lunacy—and this really is lunacy, albeit fun while it lasts, and it might last for a while.

For many of you, such concerns are understandably of little interest. You see an asset (be it a tulip or a tube of toothpaste) appreciating like a rocket and you just want to jump on board for the ride and the view from on high.

We understand. Indeed, we wish we could join you—but that’s not investing. Again: it’s gambling.

By the way rockets go up, but they also come back down… Gravity, like market bubbles and market forces, can be a real bummer. Remember our recent sub-prime waves and market bubbles?

Assets fall just as fast (often more fast) than they rise, and you could wake up one morning on the wrong side of gravity.

Again, just saying…

Is Bitcoin Ethical?

It’s also worth noting that Bitcoin does raise some ethical concerns that might matter to some (hopefully many) of you. Although not entirely “untraceable,” Bitcoin is overly-associated with a great deal of criminal activities, from drug sales to prostitution on the dark web. That, well, kind of sucks.

Yet we know the story… 11,000 to 19,000 in a matter of weeks…It’s hard not to love this thing. Temptation is a tricky vice.

It’s you’re call.

How Did We Get This Mania? It All Comes Back to the Central Banks

The simple answer will come as no surprise to our readers. Our financial system, driven entirely by grotesque levels of debt and speculation-top-heavy, risk-be-damned “investing,” is the direct result of a once normal market dynamic completely distorted by central banks and their addictive “stimulus” policies.

I’ve written elsewhere about the bubbles which QE and ZIRP have created in the equity and bond markets. Toss in high-speed trading technology and these bubbles just grow even more crazy.

Watching Bitcoin and other crypto’s fly to the moon is really no shock; it’s just a mania, plain and simple. We’ve studied, seen and traded around these things before. But this is admittedly even more maniacal…

And manias, from Tulips to today are all about ignoring history, facts, common sense or prudence and embracing a fevered, visceral desire to make big money easy and fast. (i.e. “Greed’). Hence today’s Bitcoin “revolution.”

Bitcoin investors today are willfully ignoring the fact that many other crypto variants are coming into play, and so even if Bitcoin stops at 21 million coins (aka “tulips’) don’t think for one minute that other “tulips” or coins won’t hit (and dilute) this market and become “sexy.”

In short: this is not a fixed supply market—it’s an infinite supply market, a fact which makes even the Tulip Mania a safer bet in 1636 than crypto’s in 2017.

But no one wants to see this, because there’s no fear in these markets due to an artificial calm (and marketplace) the Fed created years ago, falsely declaring that all is fine in a financial world that is anything but fundamentally fine.

And I know I sound like a kill-joy. Frankly, I hate being such a bummer too.

But when I see the Russell 2000 ripping beyond reason, the VIX tanking, junk bond yields compressing, Amazon (and so many other, less headline-making equities) defying balance sheet normalcy and now Bitcoin defying sanity, it all just points to the same obvious thing: markets are crazy, and folks we are in the midst of the mother of all market bubbles.

At Signals Matter, we’re watching these bubbles for our subscribers. We are managing risk. We are not chasing fantasy. In sum: we are investing, not hugging our knees nor weeping in the corner like a chicken-little.

In fact, our signals are making exceptional returns, well out-performing (i.e. “crushing”) the broader market indexes.

But are we beating Bitcoins returns? Not even close.

However, when the Bitcoin bubble pops—along with the other bubbles—we’ll still be in the black when gamblers are seeing red. That in a nutshell, is what separates investing from speculating.

Which type are you?

Also, despite those wise (or lucky) few currently popping out champagne for their Bitcoin fortunes (and I’ll admit it, I’m jealous as all get out), remember this: more money is made buying at the bottoms than at the tops.

Stated otherwise: be patient. There’s plenty of HUGE opportunity ahead for us boring investors too…

2 thoughts on “Bitcoin. Investment or Gamble?”

  1. I hear you on the difference between speculation and investing, and agree that one can’t “invest” in Bitcoin based on balance-sheet value analysis like investing in a stock… But when one looks at sovereign “balance sheets” and diluted currencies– as you do so often and so well– it would seem that cryptos are a good “investment” as an alt currency? It seems ironic that someone who writes as forecefully as you do about central banks destroying price discovery and currencies would not be embracing this with greater enthusiasm?

  2. Thank you for your comments Gunther. You make an excellent set of points. Indeed, I may have been too unclear as to “dismissing” crypto’s like Bitcoin as a “speculative trade” as well as a poor “alt currency.” As a speculative trade, please understand this doesn’t necessarily make crypto’s a “bad” trade, but one for which we can’t comfortably measure risk, and hence we chose to stay away from. For those comfortable with such risk, we fully understand and support their own approach for considering “return upside”–in fact we envy it; again, it just doesn’t jibe with our strict risk metrics. That said, I will chew more on what you noted about crypto’s as perhaps a more legit alternative currency in a global market whose currencies are so distorted by central banks. I certainly agree with you that central banks are experiencing an increasing spotlight and loss of faith by the countries they “serve.” We, and an increasing number of folks, also know that fiat currencies mean very little, and hence we are seeing the upsurge of cryptos in places like Argentina and Venezuela. Given the fixed supply and potentially unlimited demand for specific crypto’s as alternative currencies, one could make a strong “growth” case for Bitcoin et al. I hear you. Furthermore, and on a more philosophical note, there’s no denying the radical shift to “data-ism” in every aspect of our lives, from laptops to cell phones to medicine to law. To see big “data” i.e. blockchain technology enter the currency space is no surprise and a potential harbinger of greater roles for cryptos like Bitcoin, Zcash, Ethereum etc going forward. In short, and as crazy as this current mania is, a strong case can be made for even greater multiples of return in a “portfolio” of crypto’s. Perhaps I’m still too stuck in the past to fully embrace this “alt currency thing”–as I still feel gold is the far better and more time-tested and stable alternative to busted paper money, which I agree, is busted. Again, we are not saying great fortunes can not be made in cryptos, nor are we saying great risks can be avoided. That’s the heart of the matter for us: uncertainty is more of an issue here than measurable risk. Until we can measure the risk, we’ll clearly miss the braver early mover opps, as we have already done so. C’est la vie… (Bit it stings to miss this one!) If Bitcoin starts replacing currencies in broken countries or grabs a market share in being accepted online or mass retail spaces, then we can begin to see a measurable opportunity. Granted, we’ll be late, but we are faithful to risk management more than we are thirsty for an easy return, as incredibly tempting as they are! Thanks again for your comment!

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