If anything other than the year of T-Rump, 2017 was
the year of cryptocurrencies. I’ll let you look up what they are and their
returns as that’s not the point of this entry. What I do want to discuss is MY
experience buying Bitcoin.
Over the last few years I’ve known a few people that
have owned Bitcoin and until last year really didn’t know much about any of the
other cryptos. Heck, even Bitcoin was a bit of a mystery and at one point last
year I even told Lovely Laura that Bitcoin is either the next internet or the
next tulip craze. Even now I don’t know which it is, though I’m leaning towards
the latter. If I believed that, why buy it? Because you don’t really have to
believe in something to make money on it. For years I held Phillip Morris
stock, despite not having smoked anything in my life. Those people I knew who owned it though.....they believed in it. REALLY believed in it. Almost blindly believed in it.
Stocks. That’s a nice segue into my next section:
valuation. There are no earnings or dividends or even assets behind Bitcoin.
Hell, nobody even really knows who invented it!! In those ways it is
dramatically different from a stock, but is not terribly different from a hard
asset such as gold, silver, etc. If you buy gold, you don’t get earnings or
dividends, you don't know who made it (for sure at least) and its value (unless you personally make jewelry or computer boards)
is dependent solely on demand. Bitcoins valuation is almost solely dependent on
demand with its supply relatively fixed. Other cryptos have different levels of
supply, some more fixed than others. XRP or Ripple is a crypto that’s owned by
one company. They control 60 billion of the 100 billion potential Ripple. Every
month they may, or may not, make another billion Ripple available in the market
place as they are essentially in a series of CD’s that mature every month. If
they are not put into the market, they are put back into the CD with an
expiration in the month following the last current CD due date. But Bitcoin’s supply,
while not completely in “circulation”, fluctuations are minuscule
compared to the float. Demand is what drives Bitcoin.
In the month leading up to Thanksgiving, Bitcoin was
making some impressive gains moving from $5k to $7,500, after being under
$1,000 in January of 2017. With those
kinds of returns, I could just picture families getting together for
Thanksgiving and talking about all sorts of things, but definitely cryptos
would come up for those who were invested and probably even for those not. Who doesn’t want to stick it to Uncle
Lou for mocking your investment in Bitcoin that was now worth 8 times what you
invested (at least)!! Then news that the CBOE would begin trading contracts
on Bitcoin starting in mid December fueled even more action in Bitcoin.
Personally, I felt the listing on the CBOE would legitimize the asset class and
would lead to further upside in Bitcoin.
As the price held and continued to rise even, I
decided to open an account with Coinbase, the largest of the e-wallets that
sell Bitcoin. You can buy with a credit card or link it to your checking
account, though my first purchase was limited to $2,500. After it settled, my
weekly transaction amount went up to $5,000. It's very convenient and slick, so I can see how they became so popular. I was not alone however.
The weekend of Thanksgiving, Coinbase opened over
100,000 new accounts! Apparently Uncle Lou heard the success stories and was convinced to get in on
it. By the time the CBOE started trading futures contracts, Bitcoin was up over
$18,000.
Then, demand dried up. But not only did demand
falter, that economic boon of being listed on the CBOE came home to roost. You
see, for the last eight years or so, you could poo-poo Bitcoin, but you
couldn’t bet AGAINST it. There was no financial way to sell it short or bet
that the price would drop. Suddenly, not only could you do that, but the PROS
could do it. People who manage positions in asset classes everyday could do it.
Future cab drivers, who are new to the investing game, could do it (haven’t we
all ridden with a cabbie who used to trade on the exchange but lost all their
money?). Though there was a small run up, to about $20K, there was swift downward
pressure applied and the value went scurrying below $13k. Having made close
to 30% in a day or two, those contracts were covered by purchases or were sold and the
value rebounded slightly to the low $14,000’s.
Eventually I sold in the $16,000’s and made about 40% on my investment
which was great (paid for Christmas!), but some lessons were learned.
First, you need to know what’s driving the price and
value of an asset. Is it earnings, expectations of earnings, dividends,
expectations of dividends or just pure speculation? Second, if it’s pure
speculation, you have to be ready to bail at any moment and not be tied to
selling at a given price to make a profit. If the market turns, it will turn
quickly. This is why well known investors (like Buffett) and leaders (like the
top financial guy in the UK) said you could lose everything by investing in
cryptos. Third, can investors bet against the asset? If you can’t bet against
the asset, it’s really just a speculation, demand driven gamble. Those can be
just fine, but you need to be able to identify it for what it is (like going to
Vegas) and not bet the house (also like going to Vegas).
I’ve been in finance all my adult life and have a
finance degree from the University of Illinois and I completely missed how
important the last point is. What I thought would be a legitimizing boon for Bitcoin,
will ultimately lead to its demise.
While all of this was going on, the government stepped
in as well and told Coinbase that they needed to hand over the records for
anyone having transactions involving more than $20,000 in a year. That really
is another hit to the demand side of the equation as what was a viable way to
exchange large sums of funds for potentially illegal or immoral transactions
was now severely limited.
What will happen to the crypto currency world and
Bitcoin? I have no idea. Am I glad I took my money and ran? Yes, yes I am.
