2019-04-11

After the 2008 financial crisis, a thing called Bitcoin was created. The idea: a way to dodge government/central bank/fed reserve regulation through technology. Basically a giant two-fingered salute to the establishment.

I first came across it in 2013 when a work colleague mentioned that he had $73 worth of it. I remember downloading a whitepaper, glancing at it, and honestly, it made no sense to me. That is partially due to my dismissal of it before giving it a chance, and, laziness in trying to understand what it was all about. Then one day, the aforementioned colleage mentioned how his hard drive on his laptop fried, and with that, he lost his then $78 worth of bitcoin. I thought no more of it.

Roll on a few years, I was at a party in early September 2017. A guy there had the Coinbase app installed on his phone and showed me the price of Bitcoin (it was around $4600). He was annoyed that he didn't follow a friend's advice to buy bitcoin a month earlier when it was only $2900, and how he'd be over 50% up. 50%! Even Bernie Madoff would have had a hard time competing with that!

Here's what happened then between mid July 2017 and 15th December 2017:

There's a phrase I remember reading in a cycling magazine back in the 1990s about descending technique (I was into bike racing at the time):

Whatever goes up, has to come down.

That's a bit simplistic of course, but as with all bubbles, something's got to come crashing back to Earth. This is what happened during the course of 2018 with Bitcoin:

I remember during my Finanancial Strategy studies a few centuries ago, a concept any sane investor will generally avoid is price volatility. If you do choose a volatile stock, ensure it makes up only a small part of a diverse portfolio. Investors generally loathe uncertainty. Yet, everyone I asked who had "invested" was unable to answer a few simple questions about what is really driving the price of it (My assumption is that it was the only investment they talked about, so I am assuming their portfolio was, well... Bitcoin). If they tried to answer the questions, I was never convinced by their answers.

1. What drives the underlying price? OK, "demand" you say. Demand from who, other than speculators and those who control the price?
2. Who determines the price?
3. Why can't I buy stuff on my favourite ecommerce websites with it? Or use it to buy stuff in a local shop? Or any shop for that matter?
4. Why is the supply capped at 21 million? What happens when there's "demand" for 21.5 million units? This is like a country which has 21 million dwelling units and has no plans to allow any more to be built. When they are all occupied, the price is therefore maxed out surely? So some day, the price declines?
5. Why are piracy websites, drug traders, and child-pornography sellers, almost always only accepting Bitcoin on that cesspit of hatred otherwise known as the Dark Web?
6. Why can't I pay for my Google Drive subscription with it?

I read a hilarious (hilarious for me that is) article recently in The Econmist about a Canadian cryptocurrency exchange, Quadrigacx, and what happens when your bitcoin banker dies?. The Boss of the exchange died suddently. Because he was the only guy with the password, the only guy who handled payouts, and ran everything from his laptop, Quadrigacx’s 90,000 customers couldn't get to around C$180m ($136m) of bitcoin and other cryptocurrencies. The sheer stupidity of such an arrangement makes for a good episode of The Simpsons. It's only a matter of time before more similar stories emerge. Along with some disgruntled staff in a crypto exchange stealing tokens... that will make for more comical reading.

As for that work colleague with the fried hard drive, that $73 would still be up 70x even at today's price. But he still wouldn't be able give me convincing answers to my few questions above.

No doubt a few people got burned (badly) during 2018. We've been here before. Think of Isaac Newton and his investment in the South Sea Shipping company. It is summed up perfectly in a graph by a Swiss investor, Marc Faber.

I sleep well at night. I intend to keep it that way. I won't be "investing" in Bitcoin. Go enjoy yourself and put a few bets on horse races instead.