Reflections on Bitcoin(i.e. it may be time to sell)

 Below are points I made back in January to try and convince those who may have the buy and hold bitcoin forever mindset to possibly consider selling some of their bitcoin. The numbers are from January, but I don’t think I need to update the numbers to make the point come across.  My reading below isn’t that much of an investment of your time, but for those who have serious bitcoin holdings, I highly recommend reading this short article that paints much of the dollars going into bitcoin as potentially illegitimate. Basically, it says much of the price movement could be fraudulent. I’ve provided a article that tries to counter that bitcoin short article as well. My thoughts on the short case are represented at the end.

January article

1. Since March Bitcoin has gone up nearly 600%. There is a lot of People with a lot of house money, wealth that was earned very easily. This could be ammunition for a big sell off.

1. Considering around 18.1 Mil coins in circulation. in March with a price of $5,800 you had a market cap of $104 Bil. At the $35k price as of recent you are talking a $636 Bil Market cap . That is $532 Bil in paper wealth created in less than a year.

2. Lets say 30 Mil people own bit coin. That $536 Bil gain translates to an average gain per person of around $17k. If bitcoin goes down there are many people who could cut their losses really quick, since that money came so easy.  Obviously this is an over simplification, but I think it illustrates a point, there is a lot of wealth out there created not by any labor, conviction, or analysis and if things start to look more gloomy you could have a lot of people looking to get out. That’s not to say that there are not people who will buy bitcoin after a lot of consideration and analysis and who themselves have a lot of conviction. But, who knows how much of the bull run has been driven by those people who bought bitcoin after much consideration and how much of it has been driven by people buying into the hype and euphoria.

3. Consider a Market Downturn where assets across the board take a 20% hit, Bonds, stocks, gold, real estate, and bit coin. Are people most likely to liquidate Bonds which I believe have stayed relatively flat, stocks which have gone up around 50%, gold which has gone up some, or bitcoin that has gone up nearly 600%?

2. Much of the argument around the value of Bitcoin is that it is a good protection against inflation as it has a finite supply and is not subject to manipulation by the federal reserve that can create money supply. Gold has a pretty stable supply as you can only mine so much of it every year and it never tarnishes, gets consumed, or goes away in meaningful numbers. Hence you can say that gold is a  good store of wealth as it acts like a liquid currency like cash that is outside government oversight and the financial system. Plus it has the long history of being the world’s currency. I think some history of gold prices since Nixon took us off the gold standard is relevant to give some perspective that a buy and hold forever strategy might not be always wise.

1. In 1971 Nixon took America off the gold standard at around $35/oz and in about ten years gold sky rocketed to a peak of $676 per ounce in September of 1980 over 1,800% gain over 10 years. It took Gold nearly 26 years to reach that level again In April 2007. Now gold is at $1,938 a nearly 200% gain from April 2007 and basically a 200% gain from  1980. There definitely were times to buy and sell gold since we've been off the gold standard. It wasn't just a continuous climb upwards even with the risks of a fiat currency.  Perhaps it can be said that though Bitcoin is a protection against inflation and has high potential as a currency, it too will be at the whims of a market, where there are definitely times to buy and times to sell. As you can see using a strict buy and hold forever strategy with gold would have been foolish, almost regardless of the time you bought.

3. Other potential pitfalls of buying and holding forever:

1. At some point there could be a shift in the market and people loose faith in bitcoin.  It could potentially reach $100 or maybe it settles somewhere around $20,000, regardless there is a multitude of scenarios where the price of bitcoin is less than it is now. For a buy and hold forever mentality to be profitable from this point forward, the market has to maintain faith in bitcoin for as long as you hold it, and the market has to maintain faith at that time your forced to sell/retire/die/etc. Also that money tied up in bitcoin has to earn a return better than S&P, Gold, bonds, or some other asset class.   On the other hand if you buy and sell and take profits from time to time, regardless of the faith people have in bitcoin, you can still be profitable.

2. Another way to look at this is imagine two scenarios, with both you invest $200,000 and the payout is five years down the road. Scenario 1 is you have a 50% chance of walking away with a $100,000 and a 50% chance of walking away with $3 million. Scenario two is you have a 20% chance of walking away with $200,000 and a 80% chance of walking away with a $1 Million. I'd take scenario two even though scenario 1 is technically a better investment, because I could get a 400% gain over 5 years, and had no chance of losing money, especially if I had a significant amount of my capital invested. One in the hand is worth two in the bush.

4. Concentation of bitcoin wealth could be risky*

1. Another thing I think contributes to the downside potential of Bitcoin are the fact that some estimates point to over 95% of bitcoins are held by 2% of users. This is interesting, as it gives some doubt to believing it could be a widely accepted currency as it isn’t very widely distributed. If it were to become so valuable that it started to threaten the US dollar, pounds, yen, gold, and other currencies and people actually used it as a store of wealth that would mean a huge transfer of wealth to those 2%. 

2. This concentation of wealth could mean that in a large market sell off you could have huge offloads of bitcoin, as the wealthy 2% of bitcoin holders try to sell off. This selloff would be to preserve any meaningful amount of wealth they have accumulated via bitcoin so far.

Short Article Opinion

My gut is that the Short article has some weight. The main argument is in the short article is that a large chunk of the dollar value of bitcoins is bought with Tether, which issues these tether coins that are supposedly backed by a US dollar, so one tether coin is one backed by one US dollar. On some exchanges you can use these tether coins to buy bitcoin, and some of these exchanges offer incredible leverage on top of that.  Looking briefly into an article describing how tether works it seems to be very murky, and one glaring red flag is that it hasn’t had any independent audits to verify it actually has the dollars to back up its Tether coins. 

“Although some misconceptions regarding Tether are addressed in this article by analyzing how Tether works, it is likely that the controversy surrounding Tether will continue until Tether and Bitfinex provide full transparency and independent, conclusive audits.” 

In addition there is an article showing that the last bitcoin boom may have been price manipulation using tether.  The counter argument article doesn’t really address all the issues laid out, especially two points I ran across in the Smoking gun section. One of these issues is the incredibly generous promotions some of the bitcoin exchanges do with Tether, and the other is the argument on bank reporting in the Bahamas that could leave a hole in tether's legitimacy.   

 If you are substantially long bitcoin, I would not take my case on this article alone, I would highly recommend doing an investigation yourself to see if the case laying out potential fraud has any legs. I don’t have any bitcoin myself, so my dive has been rather short. I just want to share this article as I hope it may inspire people to seriously consider their bitcoin stance.  

I  have  respect for the Bitcoin blockchain technology as it has many compelling advantages. However,  it just seems to me the ecosystem of exchanges, cryptocurrencies, and the like that have built up around it are complicated and murky, and the gains up to this point have been tremendous. I know people often just want to get down to the recommendation so I’ll give it.  With all the gains in bitcoin and the risks around it, my gut is to take your bitcoin winnings off the table, and if you’re concerned about inflation then just move that bitcoin money to gold. 

*This fourth point was added in April. Just didn't think of it in January.  Another related point to the concentration of wealth is the concentration of processing power in china. I'm putting this point in the footnotes as I am not as confident about its merit as the other points listed. 'My understanding of bitcoin is that it's value comes from decentralization and that so long as no one miner accounts for more than 50% of the processing power, then the general ledger that records transactions has no real possibility of being manipulated. Research shows that 65% of this processing power is coming from miners in China. This was a red flag for me. Considering the amount of control Chinese government has over its businesses, if bitcoin was a threat to its currency I imagine they could undermine its legitimacy by effectively controlling the processing power via those companies.' Here is another link that points out some of the opposition governments might have to bitcoin.