Bitcoin-too late to the party?

[mattee2264]

 

  Bitcoin is all over the papers and magazines. You now have adverts for crypto trading sites on the metro. It enters into everyday conversations. And the price has gone parabolic from $1,000 to almost $20,000 in just one year. I was interested in the summer but it had already had a good run and as it had a prior history of crashes I figured it would be safer to pick up a few coins once the price halved. But I never got my chance. So I figured I missed out.

 

But another poster on here commented his friends were expressing similar sentiments and calling it a bubble. And the media coverage is also pretty skeptical. And it is still a bit of a hassle investing in these things. And fiduciaries certainly can't do it. And I don't think people are pulling money out of their tax sheltered pensions or remortgaging their houses to invest in these things (aside from a few crazies who obviously make headline news). And the market cap is still relatively low so it is not as if everyone is buying it. And it is still not institutionally recognized as a separate asset class. And maybe there are people thinking they missed it who willl be suckered in if prices continue to rise.

 

Obviously it is pretty much impossible to value and for now at least these are primarily speculative vehicles. So you are playing the greater fool game. So it is crazy to invest more than you could comfortably afford to lose and take a philosophical approach about. But this game of enjoying a nice ride and then selling on to the next guy who also enjoys a nice ride etc etc can go on for some time especially in a global economy. And maybe the fact that it has become more mainstream and accessible means the game can go on a bit longer. In the past when it was less mainstream it seemed to make some progress and then crash when an obstacle to its adoption was presented.

 

I dunno really I am just thinking aloud. But it is interesting when guys like Bill Miller and Murray Stahl are still on board and very bullish.

 

 

 

 

 

 

 

 

 

 

 

 

[rkbabang]

I don’t expect 20X returns in 2018, but I am still bullish on its prospects. But I didn’t expect 20x gains in 2017 either and here we are. Your guess is as good as mine. Maybe it will be back at $100 this time next year or $100,000.

[netnet]

Well there is no way to value it, so basically you are trying to estimate demand, hence it is Keynes's beauty contest problem.

 

In that case you are not judging what contestant you think is beautiful rather, you are try to guess what contestant other judges will deem beautiful, then trying to assess what they assess others will find beautiful, and so on recursively. In hindsight everything is of course is obvious, but prospectively....

[Voodooking]

Bitcoin is not an investment, it is speculation.

 

I personally think it is akin to a pyramid scheme. I would not advise investing / speculating any more than 1% of your net worth in it, and if you are interested in financial gain (which you obviously are given that you are posting on here, I would advise reading You Can be a Stock Market Genius; The Intelligent Investor, and the Buffett Partnership Letters.

[mattee2264]

  What do you think the chances are of some kind of shake out? Presumably the more recent buyers aren't blockchain fan boys with an almost religious faith in the technology and could be scared out of their positions. And I guess the options thing means traders can short it now and for the innocent there is nothing scarier than seeing easy gains evaporate. And for now at least it is in the interests of financial institutions to see this thing fail or at least for people to lose interest and stick to their 60/40 stock/bond portfolios.

 

And yeah as I made clear in my original post I am fully aware these are speculative vehicles and 1% was about the amount I'd commit if I did decide to have a flutter.

[Partner24]

History repeating itself. Human nature at work.

[SnarkyPuppy]

The immediate kneejerk reaction of "bubble" continues to keep me interested.  No debate that this is inherently speculation/gambling (as opposed to investing with a margin of safety) - but simply because something is speculation does not warrant immediate rejection (in my opinion). 

 

If you're offered the opportunity to bet on a 50/50 coinflip with a payout of +$1000 if you win and -$100 if you lose, it would be irrational not to take the bet, despite the fact that this is quite literally gambling without a margin of safety.

 

I think the kneejerk reaction of calling bitcoin a tulip misses the point.  The 'gamble' has become less attractive at $16k, but the replacement of gold as a flight to safety store of value is a sound thesis.  The lunatics of the world have proven there is a $7tn demand for this type of asset (it's not a currency) - and what better attribute to have in a flight of safety asset than a decentralized coin which cannot be tampered with by the government?  It's perfect for gold freaks (long term). 

 

Bitcoin today is valued at $277bn market cap.  If there's a >= 4% of bitcoin replacing gold, this is a "good bet".  Not investing, but a good bet.  At $1k per bitcoin, the breakeven was >= ~0.3%.  Those who saw this without screaming bubble made money. 

 

In the short/medium term, I also would be keeping a close eye on the impact of institutional liquidity flooding in to an asset which today only trades at 1x the daily volume of Apple.  In some ways this is a reverse bubble in that retail is first to hold the bag.

 

I've sold some as the expected value has gone down, but I would be absolutely thrilled to buy more at a certain price.

[mattee2264]

 

  What is the significance of the futures contracts being launched on the CBOE and soon the CME (with perhaps exchanges in other countries to follow)? My understanding is that easily tradeable derivatives available to institutions allow big levered bets in both directions and being cash settled they could avoid the complications of actually owning bitcoins and associated custody issues etc.

 

  Has leverage been much of a feature in the run up to date? Presumably some of the bitcoin brokerages allow you to buy on margin. And of course there is little to stop people taking out a personal loan and promptly putting it into bitcoin.

 

    My issue with the flight to safety store of value argument is the volatility. Do you see the institutional liquidity/futures markets increasing or reducing that volatility?

 

 

 

 

[SnarkyPuppy]

 

  What is the significance of the futures contracts being launched on the CBOE and soon the CME (with perhaps exchanges in other countries to follow)? My understanding is that easily tradeable derivatives available to institutions allow big levered bets in both directions and being cash settled they could avoid the complications of actually owning bitcoins and associated custody issues etc.

 

  Has leverage been much of a feature in the run up to date? Presumably some of the bitcoin brokerages allow you to buy on margin. And of course there is little to stop people taking out a personal loan and promptly putting it into bitcoin.

 

    My issue with the flight to safety store of value argument is the volatility. Do you see the institutional liquidity/futures markets increasing or reducing that volatility?

 

 

Not sure I understand the volatility argument.  There's naturally going to be volatility in a new asset class as it becomes a store of value.  We're valuing the future state which is why the bet is so asymmetric.  If it hits $7tn, it won't be volatile.  Volatility has actually decreased as the price has risen over time. 

 

There's an interesting phenomenon in bitcoin where the bulls generally have an intricate understanding of the value proposition and underlying aspects of the technology (and breakthough) and bears have very limited understanding largely due to kneejerk reactions. 

[Paarslaars]

There's an interesting phenomenon in bitcoin where the bulls generally have an intricate understanding of the value proposition and underlying aspects of the technology (and breakthough) and bears have very limited understanding largely due to kneejerk reactions.

 

Maybe a very small % of the bulls actually understand the technology.

Most people are just jumping on the hype... recently had a friend (kind of a stoner, never invested in his life, does some football gambling) tell me he's concidering going into bitcoin as it seems like a guaranteed investment.  ;D

[rkbabang]

There's an interesting phenomenon in bitcoin where the bulls generally have an intricate understanding of the value proposition and underlying aspects of the technology (and breakthough) and bears have very limited understanding largely due to kneejerk reactions.

 

Maybe a very small % of the bulls actually understand the technology.

Most people are just jumping on the hype... recently had a friend (kind of a stoner, never invested in his life, does some football gambling) tell me he's concidering going into bitcoin as it seems like a guaranteed investment.  ;D

 

Based on the number of investors many of which just jumped in the last month and own very little you are correct, but weighted by the number of coins owned SnarkyPuppy is correct.

 

[SnarkyPuppy]

There's an interesting phenomenon in bitcoin where the bulls generally have an intricate understanding of the value proposition and underlying aspects of the technology (and breakthough) and bears have very limited understanding largely due to kneejerk reactions.

 

Maybe a very small % of the bulls actually understand the technology.

Most people are just jumping on the hype... recently had a friend (kind of a stoner, never invested in his life, does some football gambling) tell me he's concidering going into bitcoin as it seems like a guaranteed investment.  ;D

 

This is a very recent group of people who have joined post $10k+.  It's fine if you don't buy it, it's inherently speculation given there is no margin of safety.  I just wouldn't be as proud as some who think they're Ben Graham by yelling the word bubble without any actual analysis other than looking at a historical squiggly line. 

[mattee2264]

 

  Given the concentration of users as well as the lost coins what is a rough estimate of the number of free floating bitcoins? I would imagine that the institutionalization of bitcoin would make it a lot easier for large holders to unload their coins onto the market and this supply response would weaken the bull case of increased institutional demand driving the price up a lot higher.

 

 

 

 

[SnarkyPuppy]

 

  Given the concentration of users as well as the lost coins what is a rough estimate of the number of free floating bitcoins? I would imagine that the institutionalization of bitcoin would make it a lot easier for large holders to unload their coins onto the market and this supply response would weaken the bull case of increased institutional demand driving the price up a lot higher.

 

 

 

I disagree

[JimBowerman]

Well there is no way to value it, so basically you are trying to estimate demand, hence it is Keynes's beauty contest problem.

 

In that case you are not judging what contestant you think is beautiful rather, you are try to guess what contestant other judges will deem beautiful, then trying to assess what they assess others will find beautiful, and so on recursively. In hindsight everything is of course is obvious, but prospectively....

 

something like other forms of M1 or M2 money supply i'd argue would let us get an approximate value.  I think MV =PQ gets you close.  If you told me that the entire world was using bitcoin as a currency, i could get a pretty accurate fair value.  Next step is to guess what the final number is for "% of world using btc" and chances of that happening. 

 

it won't be exact but you'll get the right order or magnitude

[wachtwoord]

The problem with that is that it's much less a currency than it is a store of value comodity such as gold. I don't think your formula applies to such a situation or does it?

 

Replacing gold is the only true target. Perhaps one order of magnitude higher due to the benefits it has over gold. Then apply a probability of that happening and calculate your EV (there is a margin of safety in this calculation as we are disregarding all situations in which it only partially offsets gold). Think the probability is extremely low? Then this is probably a bad bet and vice versa.

[SnarkyPuppy]

The problem with that is that it's much less a currency than it is a store of value comodity such as gold. I don't think your formula applies to such a situation or does it?

 

Replacing gold is the only true target. Perhaps one order of magnitude higher due to the benefits it has over gold. Then apply a probability of that happening and calculate your EV (there is a margin of safety in this calculation as we are disregarding all situations in which it only partially offsets gold). Think the probability is extremely low? Then this is probably a bad bet and vice versa.

 

Ding ding ding

[JimBowerman]

The problem with that is that it's much less a currency than it is a store of value comodity such as gold. I don't think your formula applies to such a situation or does it?

 

Replacing gold is the only true target. Perhaps one order of magnitude higher due to the benefits it has over gold. Then apply a probability of that happening and calculate your EV (there is a margin of safety in this calculation as we are disregarding all situations in which it only partially offsets gold). Think the probability is extremely low? Then this is probably a bad bet and vice versa.

 

Don’t disagree with you on the store of value calculation though I’d be curious why you think bitcoin can’t eventually become a currency?  Skabo and other have written about how medium of exchanges (bitcoin now or bitcoin when lightening is implemented) can gradually and eventually become a unit of account.  Unit of account is in my thinking a bit of a spectrum.

 

http://www.konradsgraf.com/blog1/2013/9/14/bitcoin-as-medium-of-exchange-now-and-unit-of-account-later.html

 

[RichardGibbons]

Don’t disagree with you on the store of value calculation though I’d be curious why you think bitcoin can’t eventually become a currency?

 

Bitcoin can't even process 10 transactions per second.  (In contrast, Visa has processed 47,000 transactions per second.)  To actually do a transaction, it costs $6-20.

 

If the network can't handle people purchasing stuff with bitcoin, and people get charged huge amounts to actually make a purchase, it seems unlikely to ever be a currency.

[JimBowerman]

Don’t disagree with you on the store of value calculation though I’d be curious why you think bitcoin can’t eventually become a currency?

 

Bitcoin can't even process 10 transactions per second.  (In contrast, Visa has processed 47,000 transactions per second.)  To actually do a transaction, it costs $6-20.

 

If the network can't handle people purchasing stuff with bitcoin, and people get charged huge amounts to actually make a purchase, it seems unlikely to ever be a currency.

 

Have to skate to where the puck is going on this one.  Lightening network and/or sharding, etc make 100k tx/s fairly easy.  We are a long way from bitcoin being needed to buy a cup of coffee.  But technically it’s not a big problem

[RichardGibbons]

Lightening network and/or sharding, etc make 100k tx/s fairly easy.  We are a long way from bitcoin being needed to buy a cup of coffee.  But technically it’s not a big problem

 

Yes, it is.  There have been hundreds of different coins created, none of which even comes within two orders of magnitude of 100K tx/s. It's certainly a big technical problem, even if it's a problem for which people have proposed solutions.

 

Richard

[mattee2264]

 

  Surely if the value of these cryptos as a medium of exchange is avoidance of need for a middleman then speed is not a huge issue. They wouldn't be replacing the debit/credit card networks but rather the bank transfers. Even in developed countries with bank transfers you are talking same day or payments within a few hours and that really isn't much of a hurdle to beat. And for international transfers it is even more of a hassle.

 

 

 

 

 

 

 

 

 

 

[wachtwoord]

The problem with that is that it's much less a currency than it is a store of value comodity such as gold. I don't think your formula applies to such a situation or does it?

 

Replacing gold is the only true target. Perhaps one order of magnitude higher due to the benefits it has over gold. Then apply a probability of that happening and calculate your EV (there is a margin of safety in this calculation as we are disregarding all situations in which it only partially offsets gold). Think the probability is extremely low? Then this is probably a bad bet and vice versa.

 

Don’t disagree with you on the store of value calculation though I’d be curious why you think bitcoin can’t eventually become a currency?  Skabo and other have written about how medium of exchanges (bitcoin now or bitcoin when lightening is implemented) can gradually and eventually become a unit of account.  Unit of account is in my thinking a bit of a spectrum.

 

http://www.konradsgraf.com/blog1/2013/9/14/bitcoin-as-medium-of-exchange-now-and-unit-of-account-later.html

 

 

I'm not saying it can't (gold has been a currency for a long time), I was just disregarding it in my previous piece because I doubt it's needed to make the valuation attractive. See it as a hard to value extra margin of safety.

 

Szabo is awesome btw.

[JimBowerman]

Lightening network and/or sharding, etc make 100k tx/s fairly easy.  We are a long way from bitcoin being needed to buy a cup of coffee.  But technically it’s not a big problem

 

Yes, it is.  There have been hundreds of different coins created, none of which even comes within two orders of magnitude of 100K tx/s. It's certainly a big technical problem, even if it's a problem for which people have proposed solutions.

 

Richard

 

Fair enough...however my point is that it is disingenuous  to say "Bitcoin can't even process 10 transactions per second." While technically true at the moment, no reasonable person in the community (whether big blocker or small blocker) believes that in 5 years we will still be limited to 10tx per second.  This is still a new space and many teams are taking a precautionary approach to implementing new features (good thing).  That said, do you see any technical reasons why at least lightning network won't be able to add at least 100x improvement to tx rates (as well as doing transactions for a few pennies per tx)?  Its been in test net for a while and seems to be working fairly well.  Furthermore, I know many on here are anti ethereum, but I believe there's a decent chance that sharding ends up working.  I think the whole "tx limited to 10 per second and at $20 per tx" is a bit like yelling "where are my streaming movies over the internet?" in 1995.  You gotta give it time.

[mattee2264]

 

Bitcoin today is valued at $277bn market cap.  If there's a >= 4% of bitcoin replacing gold, this is a "good bet".  Not investing, but a good bet.  At $1k per bitcoin, the breakeven was >= ~0.3%.  Those who saw this without screaming bubble made money. 

 

I was having a think about this EV framework you proposed. For the price to go up 20-fold in a single year under this framework the odds of bitcoin replacing gold must have gone up significantly. Can this be justified by developments such as widespread trading and public interest in Asia that is spreading to the West, the advent of futures trading, the anticipation of bitcoin ETFs, and the virtuous cycle of a rising market cap increasing institutional interest which in turn increases the likelihood financial regulators will find a solution that allows institutions to invest etc? Or is the price over-capitalizing hope?