Bitcoin - are we still out?

[forgerator]

Invested in it in the late 2017 boom, was left holding bags which were down 80% from all time high. But kept believing in the tech and kept buying small amounts all the way until July of this year when I finally broke even. That's when I took a gamble and put all my IRA into GBTC (risky bet which could have back fired). Ended up tripling my IRA balance due to the recent run-up to 23k. So I can say I'm very much in profit but it involved immense risk taking.

[Radioherd88]

Invested in it in the late 2017 boom, was left holding bags which were down 80% from all time high. But kept believing in the tech and kept buying small amounts all the way until July of this year when I finally broke even. That's when I took a gamble and put all my IRA into GBTC (risky bet which could have back fired). Ended up tripling my IRA balance due to the recent run-up to 23k. So I can say I'm very much in profit but it involved immense risk taking.

Are you sticking with it or cashing in your original investment to hedge against a crash?

[forgerator]

I'm planning to cash out in January on 50% of my initial investment, then remaining 50% perhaps in summer of 2021.

[monfluo]

When there's a money making scheme, I prefer to visit the ground floor first.  With Bitcoin, that was using Bitcoin to buy things - and years ago that was difficult.  Also, although it was supposedly decentralized, all but one core developer was hired by the same company.  A blockchain related company captured all the developers responsible for bitcoin/blockchain software changes ... so to me, that's not decentralized.  I think that was an early attempt at lightning nodes, so it was in their best interest to not allow the blockchain to process too many transactions at at time (which would make their company stock options worthless).  I kinda soured on it around then.

I think I have some posts on this forum where I predicted the 2017 crash.  That year, Bitcoin surged up 2000% (twenty times) and the market cap of all Bitcoin exceeded the market cap of Visa.  Visa runs a worldwide credit card network that processes hundreds of thousands of transactions per second ... the blockchain was many order of magnitudes slower, with orders of magnitudes fewer things you could buy with it.  It make no sense, so I predicted a crash then.  For what it's worth, I don't see that same situation now.

There's a lot of investment company interest in making funds and ETFs out of Bitcoin, which is new.  There's a more worldwide fear of governments printing money and causing inflation, which helps Bitcoin (while the fear lasts).

Years ago, I recall a reporter asking someone from Venezuela why they invested everything they had in Bitcoin, which could go to zero.  They said they had already been through Venezuela's currency becoming worthless - multiple times.  So to them, Bitcoin was less risky than trusting their government not to devalue the currency to zero again.

The best estimate of inflation isn't expert opinion, or even the views of the Federal Reserve.  More accurate than all of those, according to a study?  The current level of inflation.  So that's my prediction: inflation doesn't change much.  Historically, that's the most accurate prediction.  If that proves true, at some point people will realize inflation isn't likely, which removes a big reason to own Bitcoin.

Agree with this comment. This is where I arrive. However, it does remind me that crypto, and more specifically Bitcoin is not more or less important in fiat land where the currency can be trusted, BUT in countries where the fiat cannot be trusted, well perhaps it might have a significant future. If you thought your Government was going to devalue your currency 100x, you'd probably try Bitcoin (as you say), and in many developing nations individuals already use other forms of currency such as mobile money minutes.

Here's my thought, the more use cases that become available for Bitcoin, the more it might be worth, because then it won't simply be an inflation store (like gold) it will be a true cross border currency (already is - but just with insufficient participation versus say USD).

Love to know what others thing, whether they'd want investing exposure to BTC through say borrowing on their investments / property and then gaining exposure to BTC? Too risk? Or should you have a portfolio theory approach where 0.5-1% should be in crypto to take some upside (should it occur)?

[talltexan]

My approach to Crypto...very quick summary is that I've "dollar value averaged" up to where I think I can stand it. It's worked out for me since I've done so during the dramatic run up.

Each pay period--I only buy/sell on my paycheck days--I set a target amount I wanted to own, increasing that target by $100 every cycle. As the currencies I've owned have moved around that target, I might have to buy or sell to bring my stake back to the target amount.

This method has given me a lower-risk path to where I am now, which is basically having about the equivalent of one month's pay in crypto- while having sold enough to make back my original cost. The downside is that my return would have been greater if I'd simply dollar-cost-averaged, as I woul have bought more at lower prices, but that path would have carried greater risk.

[marcus_aurelius]

What I am not saying is that bitcoin isn't without risk or that you should sell everything and buy bitcoin. But what I am saying is that it is risky to NOT hold any bitcoin in your portofolio at all. This forum is all about diversification and talks all about holding index funds and passive investing and yet I find it funny that many don't see the forest from the trees in the greater macro-economic picture that all these assets' valuations are tied to currencies that are being massively inflated.

I liked your post a lot and agree 100%. I find plenty to agree with both views that Bitcoin is a great idea or a bad one, but don't understand why people don't invest in it. You don't need to understand something to invest in it, just like you don't need to understand Bernoulli's principle to travel on an airplane.

Someone here was asking where the long-term holders are. Count me as one. My ~$6K speculation is worth ~$55K today and could all be gone tomorrow. My advice to people is to determine the amount of money you are 100% comfortable with losing, and buy some Bitcoin just to get some exposure to it. Even a small $100 exposure means potential high upside with the downside limited to $100.

[GuitarStv]

FOMO still appears to be the main driver for Bitcoin 'investors' then?

[Maschinist]

I'm FI and mostly a passive investor nowadays but also still doing active trend following trading with a smaller percentage of our net worth.

I bought Bitcoin end of November 2020 at $18.500 per coin with about 8% of net worth when it was about to brake out to new all time highs ( I missed the complete 2017 run up caused by laziness of not following up on my own analysis).
 
In December 2020 I bought Ethereum (ETH) with the same approach (about to break out to new ATH in a super log trend with about 5% of net worth.
I wrote this article about it at that time: https://freiheitsmaschine.com/bitcoin-2020-oder-die-blase-die-keine-war/  (in German)

Both trades are now 200-300% plus and I'm planning to hold both positions during most of 2021.

That said from a fundamental perspective I think MMM is wrong with his Bitcoin article.
What he (in my opinion) forgets to consider is the strength of the network effect.

Things have value because people are using them.

You could clone Facebook 1.000 times but they would not get any value without users (network) of the original Facebook. This existing network effect is a super strong moat. More users are still joining Facebook not because they like Mark Zuckerberg, but because everybody else is using it.

Bitcoin also has a huge network effect with more than hundred million users. This user base is constantly growing and no other blockchain project comes even close and will take that away.

Ethereum is another animal because its the leading platform for "world computer" applications (DeFi and NFT) and it has the by far biggest network effect in this area of technology.

I have no crystal ball but I speculate that Bitcoin could reach $150.000 per coin as "Gold 2.0" till end of 2021 before another bear market starts. This would represent a market capitalization of about 3 Trillion or just below 30% of the market cap of Gold.
Ethereum could reach about $9.000 per coin till end of 2021 which would be a 1 Trillion market cap or 50% of Apple stock.

Could this be wrong? Of course.
But there is a significant chance that both speculations are playing out because the majority of people still don't understand them or the reason why they have value.

Initially I risked about 12% of net worth and if both speculations would have instantly dropped to zero, it would have been painful, but we would still have been FI.
I both speculations play out like I estimate they would double our family net worth after tax. (crypto gains are tax free in Germany after 12 month holding period)

That's a pretty good bet in my opinion and a maybe once in a decade opportunity.

Have a nice day

[talltexan]

@Maschinist , what do you believe to be an appropriate share of your net worth to be in crypto currency?

When considering your stock investments, what international % do you use?

[Maschinist]

Hi.

At this time of the cycle I would only allocate a single digit percentage of net worth into the crypto area.

In December 2020, when Bitcoin & Ethereum where breaking out to new all time highs, risk/reward was very favorable. Now its still a good possibility to participate in this massive trend (and also to avoid FOMO when everybody gets into a buying panic in the second half of 2021) but I would clearly set a limit of how much to invest percentage wise.

Majority of net worth should in general be in cash flow producing assets like stocks / ETF.

Have a nice day

[Telecaster]

Bitcoin also has a huge network effect with more than hundred million users. This user base is constantly growing and no other blockchain project comes even close and will take that away.

How many users does Bitcoin really have though?   I mean, there are lots of owners, but what percentage of those owners use Bitcoin to buy and sell things?  For that reason, I view Bitcoin as a collectable, like say, Picasso paintings or Beanie babies.  You don't need a network effect for Picasso paintings to be valuable, there just has to be a public perception that it is in fact valuable. 

[Maschinist]

How many users does Bitcoin really have though?   I mean, there are lots of owners, but what percentage of those owners use Bitcoin to buy and sell things?  For that reason, I view Bitcoin as a collectable, like say, Picasso paintings or Beanie babies.  You don't need a network effect for Picasso paintings to be valuable, there just has to be a public perception that it is in fact valuable.

Nobody in his right mind is "selling" a currency / asset / product that compounds with an annual rate of more than 200% per year since its introduction in 2009 (and on top is producing a lot of capital gains taxation events with those currency like sales.)

Bitcoin went from:
0.1 to 1
1 to 10
10 to 100
100 to 1,000
1,000 to 10,000
10,000 to currently 50.000+
in 12 years

Its already the best performing asset/product, call it whatever you want, in our lifetime.

Current market cap: 1 trillion US dollar!

You can call it also beany babies.

But maybe, just maybe, you are overlooking something.

Maybe its a new inflation resistant 100+ mil. user (and growing) asset class.
Tesla & MicroStrategy have it already on their balance sheets.
A "Gold 2.0" with currently only 10% of Golds market cap.

You can copy its code but not its network.
 
Like you can pay a great painter to do perfect Picasso copies but all the interested people in the world (the Picasso network) only want the original (Network effect).

[effigy98]

Probably safer to park in bonds. The government has your back and will not cause inflation.

[Telecaster]

Nobody in his right mind is "selling" a currency / asset / product that compounds with an annual rate of more than 200% per year since its introduction in 2009 (and on top is producing a lot of capital gains taxation events with those currency like sales.)

<snip>
 
Like you can pay a great painter to do perfect Picasso copies but all the interested people in the world (the Picasso network) only want the original (Network effect).

First, that's not the network effect and second, you are arguing against yourself.  The network effect is when something gains utility as its use becomes more widespread. 

As you point out, the vast majority of Bitcoin owners do not use Bitcoin to buy things.  They just own it in hopes of future appreciation.  Bitcoin use is not becoming more widespread by any appreciable measure.  Therefore the utility of using Bitcoin is not growing because the network of users is not growing.   

Note: "owning" and "using" are different words with different definitions.  I'm not interested in arguing the accepted definitions of commonly used words. 

[ChpBstrd]

Thought 1:

What if the network effect only has value if the network produces something of value?

E.g.
English language is valuable for international trade because so many people speak it.
US dollar is valuable for international trade because so many people accept it.
Facebook is valuable because so many people are already there.
AirBnB is valuable because so many properties are listed on it.

The top 2-3 cryptos have brand awareness, but is it also necessary that they produce an economic benefit for that to matter? Try to complete the sentence "Bitcoin is useful because..." with something coherent about how many other people have bought it. I suppose a crypto with higher liquidity is theoretically more useful to trade with than a crypto with lower liquidity, with lower bid-ask spreads as a percentage of price than an unknown penny crypto. Thus as a zero-sum trading game it would be more fun.

Thought 2:

In a still-theoretical future where people trade Bitcoin for labor, goods, and services, a larger user base will likely result in more stuff made available to buy. Yet, for some reason, I still cannot go to the gas station to buy a Red Bull and a candy bar with 0.00001 Bitcoins, despite the currency being around for a dozen years and having many millions of holders.

Perhaps the network effect is actually crypto's enemy. The gas station only sells in dollars because everyone already has dollars and there are few people trying to use Bitcoin. Dollars have already seized the network, even if it is an inferior system like the QWERTY keyboard or (ugh) Facebook. The reason it is unlikely I'll learn to speak Hindi or take the time to open and monitor a MySpace account is because there isn't much of a network effect to use those things, and so they aren't useful. If we had no pre-established alternative language or social media company, then yes we might learn Hindi as our first language and waste time on MySpace instead of Facebook. However, because there is a pre-established language and social media service we'd have to go out of our way to find other speakers of a relatively rare language in our area or convince our friends to switch social networks and lose touch with all their friends, etc. Why do that when the status quo is easy? Why pay the switching costs?

Finally, in the theoretical world where Bitcoin is starting to gain acceptance as a way to spend money and vendors will accept either USD or BTC, which money are you going to spend: your Bitcoin or your dollars? Dollars are losing purchasing power at about 2-3% per year, while Bitcoin's deflationary properties mean it is appreciating - let's say - 2-3% per year in this hypothetical future. The choice is easy. Buy your Red Bull and candy bar with dollars so that you don't lose 2-3% purchasing power, and don't miss out on the opportunity for 2-3% gains in Bitcoin. That's a 4-6% arbitrage opportunity! Of course, if everyone makes the logical choice, there is no one to trade Bitcoin with the gas station, and so the gas station shuts down their Bitcoin terminal as a cost savings move. If every business makes this decision, Bitcoin stops functioning as an accepted currency.

Perhaps this dynamic explains why cryptos are still collectibles and not currencies. The USD is just good enough that there's no justification to pay the switching costs.