A couple of potential investors into the Fund expressed interest to me in Bitcoin, its mechanism as an investment, and my general thoughts on the cryptocurrency space. While I answered those individuals on a one-on-one basis, I wanted to take the time to write out my thoughts on the matter in order to give you insight into the thought processes I have when it comes to this complicated space of Bitcoin and cryptocurrency. I will do my best to separate my thoughts into two categories: Practical Application & Investment Speculation. By keeping these two domains separate, you will gain a more complete understanding on what I think of the topic. Let’s start by diving into Practical Application.
I will do my best not to make this part of the piece a political one, but in order to gain a more complete understanding of my thoughts, a small garnish of political theory must be applied. You see, when it comes to a practical application, I am hugely in favor of the power of Bitcoin and cryptocurrency. As a personal belief, I am always intrigued when society can figure out a way to manage and work with one another without the need of government intervention. Do not mistake that last sentence as a small cry for anarchism, but rather my belief that a smaller government, with less frequent interventions in private markets and transactions, eventually leads to exponential breakthroughs in all aspects of industry and technology.
With that being said, I am not naive to the fact that the US Government will absolutely try its hardest to find a way and shackle on regulations in the cryptocurrency space. Although some (albeit small numbers) regulations are good for business and anti-trust beliefs, the government (‘the government’ = US government) tends to be extremely liberal with such regulation applications. The reason behind this is simple: government revenue. The more the government can regulate, the more power it has to enforce various taxes and stipulations regarding production, consumption, and investment. As of right now though, the government hasn’t found a reliable way to regulate this seemingly ‘un-regulatable’ endeavor.
The practical draw of cryptocurrency is the elimination of a middle man or third party when it comes to private transactions. This has huge implications both domestically and globally. If you are familiar with the Silk Road scandal, then you already know the tremendous implications this no-middle-man structure has on private transactions and business. For those not familiar with the Silk Road endeavors, a brief synopsis will do (if you are interested in learning more about it, a quick Google Search will provide you ample resources): The Silk Road was an online marketplace (think of eBay, but for the dark webs) where individuals could buy and sell anything. When I say anything, I mean it. From drugs to prostitutes, to bootlegged DVDs, even hitmen.
The main source of payment for such transactions? Bitcoin. This is an obvious choice for a service like Silk Road because each transaction in Bitcoin in encrypted, which means it cannot be tracked like cash, credit, or debit cards. The only people that see the transaction taking place are the two engaging in the deal, but even then, the two parties do not know the names, usernames, or anything about the opposing party. That’s the practical use. Now obviously I am not saying that I love the application because of what took place on Silk Road, but my views on personal private property and the right to privacy do influence my positive skewed opinion of such matters. This isn’t without its downsides, but I believe the upside to such currency ideas are revolutionary and no doubt tremendously powerful. I will put it this way: The government would not be trying as hard as they are to regulate the cryptocurrency space if they did not see the inherent power it had, and the incredible ability to rid the importance of needless middle-men.
To conclude, practically, I love the idea of cryptocurrency. I like the idea of putting transaction power back into the hands of the individuals, and keeping it out of unnecessary hands (a la the government).
This is where things get interesting for me as your Fund manager. On the topic of investment speculation in cryptocurrency, Bitcoin specifically, I am of the opinion that my opinion is split. That is something I am not scared or worried about, because I am always happy to admit when I do not have a forthright opinion on any matter. When that occurs, I do the following: I research, read, digest, and interpret various opinions from various sources of news and influence. On the one hand, I have my personal opinion on the practical application of cryptocurrency, which one would assume would influence my opinion on investment speculation. This is not the truth, and it will never be the truth for your Fund manager.
My opinion on the practical use of Snapchat versus the investment speculation idea of Snapchat should lead you to that same conclusion. I want to be consistent in my thinking, which is one of the main purposes of these newsletters. One part of my investigation into Bitcoin as an investment lead me to a brief period in time known as the Tulip Mania (or Tulip Fever) in 1637. Unfortunately for some readers, your Fund manager is a history nerd (amongst other nerdy aspects), so digging into this research proved quite fun. For those not familiar with Tulip Mania of 1637, let us take a brief dive into it.
It started in the late 1590s when the tulip was introduced from Turkey to Holland. This introduction of a new commodity made it a highly demanded object, but price wasn’t outrageous. Note that the tulip bulbs were considered rare, and they were, being a foreign entity they were not locally grown or produced, and quantity was limited. Shortly after being introduced to Holland, the tulips contracted a strange mutation in their genetic code which led to the pedals of the flowers displaying different colors all across the color spectrum. This only further spurred the rise in demand for tulips. The tulips were already starting to trade at a premium to its underlying value, but this further propelled the demand, causing the first strikes of speculation on the tulip market.
The biggest consequence from this speculation due to genetic mutations was that people began to believe that there was no downside to the tulip market. They believed that people would always want these tulips. They extrapolated their demand in the current situation indefinitely. Now in full bloom (pun intended), the Tulip bubble took the entire nation of Holland by storm. Garden shop owners captured most of the supply, which in turn further drove demand and perceived scarcity higher and higher. The bubble came to a head when people began buying tulips through the credit of their homes, their land, their cattle, anything they thought had value they exchanged for a chance to speculate in the tulip market. You can begin to see where I am going with this.
Like every single bubble throughout history you had people saying, “the market for (insert good) can only go up”, “this time it’s different”, “this time the valuations make sense given the perceived value”. All of these sayings have happened since 1637. When prices soared into supernova territory, buyers at optimal prices did what any diligent speculator would do, he sold his lot and secured his profits in the market. Of course this is a domino effect. When the first wave of sellers locked in their prices, it increased the supply of the tulips, which in turn decreased the price of the tulips. Others in the market saw this decline, panicked, and sold their lots, still for profits. However, as the selling continued, those who bought in late on the fumes of the bubble run began to panic, but, as many speculators tend to do, said to themselves, “I bought because this thing is going straight up, this market cannot go down.” So they held. Yet as they held they saw the price of tulips collapse as supply increased and the perceived value of these flowers became rational.
This eventually led to a complete collapse in the price of tulips as the chart to the right depicts. What can be garnered from this market speculation that took place nearly 400 years ago? For one, many of the assumptions made about the Bitcoin market are echoed in the sentiment of those speculators in the tulip markets from 1637. I have personally heard people tell me, “Brandon, the price of Bitcoin is only going to go up.” The explanation behind such accusations are simple: There is only a fixed amount. So in theory these people should be correct and Bitcoin should be a no-brainer investment? That is not entirely the case.
Take the gold market. There is only a fixed supply of gold in the world, in other words, there is only so much gold that can be mined from the Earth. Using the logic of many Bitcoin speculators, shouldn’t the price of gold be in the millions of dollars by now? Since gold has long been a tradable commodity, one would assume, using the logic set forth earlier, that the price per ounce of gold would be astronomical at this point due to scarcity of the commodity. This is where the logic falls apart for the Bitcoin speculator as well. You see, scarcity only means something if perceived value is realized into actual value. The reason gold isn’t sitting at $1MM per ounce is because there a large enough group of people that believe gold has no actual value besides a perceived safe haven for inflationary periods.
If prices were purely dictated by supply constraints, all commodities would eventually hit astronomical numbers. We know that there will only be 27 million Bitcoins made, and after that, no more will be created for circulation. On this knowledge I have been told that the price of bitcoin will hit $40 million dollars on a conservative estimate. This is naive to me. There are too many unknowns. What if they decide to change the amount of bitcoins created? We don’t know. What if governments can’t find a way to adopt Bitcoin as a nationwide currency that is accepted as frequently as US Dollars or paper currency? What if people just stop buying Bitcoins? The problem I am getting as is this: Currently the value of bitcoin is dictated on the basis that others think its going to be extremely valuable.
There is no backing behind its valuation or its current price, nothing. Now, this could eventually turn into a self-fulfilling prophecy, much like I discuss when it comes to Classical Charting patterns, where if everyone believes the price will go to $40 million, well by damn it certainly might. But all it takes is enough people to start selling, enough people to start realizing their profits. The Bitcoin bubble reminds me too much of the Tulip bubble, and as your Fund manager, I wish not to be named as a speculator that bought in at the height of a bubble.
I know full well that I could be wrong, and I always accept that notion. I want to direct your attention to the chart on the left. This chart depicts the stages of a bubble. As you can see, the smart money entered on the stealth phase. This is where I as your Fund Manager prefers to enter any position for the Fund. The second phase of buying happens by the institutional investors, who see the smart money moves and are looking to piggyback on them. They also invest here because they want their clients to see that they are doing “what the smart money” is doing. Thirdly, the public gets wind of these investments, and once that happens, it sends prices to the moon.
This is the phase we are in now in Bitcoin. I will not enter when the public enters. This phase is where I as your Fund Manager would be looking to sell once stop losses are hit. As you can see, the main drivers for price advancement in the public phase of a bubble are enthusiasm, media engagement, greed, and most importantly delusion. The next part of the phase is the Blow – off Phase, which is culminated in the feeling of “This time its different!”, Denial, fear, and capitulation. The bubble takes a brief dip into Despair territory before returning to the mean. Above is a daily chart stretched out from close to the beginning of Bitcoin publicity as a tradable currency. You can use this chart to perfectly superimpose the Bubble Mania explanations. You can see the smart money buyers at those prices, you can see the institutional investors gain wind of it propelling it further, and finally you can see the public hitch on to the idea, sending the price to upwards of $5,500.
I am not against investing in Bitcoin.
I am against entering at levels I deem inappropriate and a substantial risk to your capital as a partner. If you choose to personally speculate in the Bitcoin market, do so cautiously. I sent out a video earlier in the week to a friend in which I told him that once price broke the symmetrical triangle it was forming, that it would be a good time to enter, but be cautious. Since that recommendation, price advanced nearly $1,000. Although classical charting principles remain the same, we are at a point where I am late to the party of investment. As your Fund manager, I do not see an applicable reason to invest in Bitcoin at these prices, and at these technical set-ups. If you have any further questions or concerns, feel free to email me, text, or call. Most of you receiving this newsletter do not read the entire thing, which is okay, but I hope you read enough to gain an understanding of how I think, which in turn leads you to increased confidence in my abilities as your potential Fund manager.