Summary
- Group think is very dangerous. Don’t follow the herd unless you understand the why and where.
- Bitcoin and Blockchain are two different things but often presented as one.
- Invest, if not study in detail, the Blockchain technology.
- Invest what you can afford to lose.
Related Topics
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- The Independent Thinker
- How to Be Successful in Life
- You Want A Golden Goose? Building a Cash Generating Machine
The Herd Mentality
It’s easy to be carried away by hype! When a vast majority of people are going after the same thing, there must be something to it, right? But, is there something to it? That is the real question.
Bitcoin and Blockchain
Let’s define Bitcoin (BC) in layman’s term. Before anything else, let’s also bifurcate or split BC into two components. The first is Bitcoin as a currency. The second is the Blockchain technology.
Bitcoin as a currency. Unlike the US dollars which is, in large measure, reflective of the goods and services of the US economy, Bitcoin is not tied to any economy (maybe I am too biased to use the US economy, so lets’ take Argentina for example). When Argentina’s economy started tanking in the last several years, its currency – the Peso – which is reflective of the revenues, earnings, production, etc. of Argentina, started to weaken against a basket of currencies. To dig deeper, suppose that you want to purchase a restaurant in Buenos Aires, Argentina. There are certain things you can evaluate to make a rational and a well-thought-out way of valuing this restaurant. These include reviewing and analyzing its revenues, cash flow, debt levels, and balance sheet. You can also assess qualitative factors like how many people come in and eat there every day and are very satisfied. You can verify the prices of the offerings. What I mean to say is that you have sources of data to check and compare the purchase price against the factors that drive the success or failure of the business.
I am not sure about what Bitcoin’s economic drivers are. For now, I can only think of one thing that could be considered as an “economic” driver, and that is if everyone agrees that BC can be a currency of storing value. Under this scenario, you can estimate that there are 7.5 billion people on the planet. From here, you can calculate how many people might agree on using it as a currency, and accordingly, deposit US dollars or EUR in exchange for BC. If this were the case, one should only think of a fixed value instead of the wild ups and downs of prices.
Blockchain is the technology driver of BC. Blockchain, in many aspects (I am simplifying it quite a bit and defining it loosely), is a decentralized mechanism by which Bitcoin transactions are administered. Unlike conventional data processes that store information on cloud that is managed by Google, Amazon, FB, others, the Blockchain technology does the same thing, but the data is handled and warehoused by multiple data miners (your next door neighbor perhaps), and all of them have a way to verify (account for) and validate (analytics) what you store. This way, no one can cheat the system. Interesting and novel? Yes! It’s just the way technology is!
Where Is the Real Value?
My personal opinion is that there is a lot of value in the Blockchain technology. It has tremendous applications or value to companies that file share and/or network services, web security, and global accounting of exchange of goods and services. And the reason why this new development threatens many established institutions is that if their primary business is going to be taken over by smaller and decentralized data miners, this means their market will diminish or may be gone. This is very much similar to the glory days of IBM where they dominated the Goliath mainframe server industry only to be overcome and surpassed by the smaller personal David computers. Sure winners of this battle are the providers of hardware like data storage systems, graphic cards, and other components who sell to data miners. And, if more and more of these “Coins” are offered, these products will be in hyper demand. To quantify the market requires a lot more in-depth analysis and will be a separate topic altogether.
Bitcoin’s value is currently based on people’s sentiment. Others say that it is the fear of missing out that is causing the run-up (now, there are those who invested very early that are making boatloads of money). This creates a bubble, and that is why you see the price of BC going up rapidly. Where can you see a business growing that fast? Over ~1,200% increase in less than four months. Now, I will use these words by Warren Buffet very carefully and acknowledge the fact that this reminder may be rude and dirty, but I will share them here to emphasize a point (because saying the words “be patient” or “it takes time to build a business” has lost its value many times over):
“You can’t produce a baby in one month by getting nine women pregnant.”
How Can One Participate in the BC World of Trading?
Since BC is very speculative, the amount you trade should be money that you are willing to part ways. A small amount. You don’t bet your whole life savings and/or house to buy BC in the hopes that you get a significant return down the road. Let’s say you have $10,000 you don’t need for the next five years and want to invest this amount, take 5% to 10% of that or $500 to $1,000. The rest you can invest in other less risky trades like paying down your mortgage or buying some blue-chip stocks. This is the amount you can invest in speculative trades. If you lose this amount, then “No tears!” But, if it makes 10x your original investment, then, outstanding!
You can also think of it as just like your term life insurance (i.e., gambling your health). In the US, the probability that you die very early is remote, let’s say less than .0005 (or .05%). But if it does happen, the consequences are grave! Hence, how insurance companies price the premium is equal to the probability of an event of you dying early multiplied by the payoff amount (e.g., .0005 x $1,000,000 payoff = $500/year). If you live your life like the vast majority of people lives out their lives, then you will only lose $500 in a given year. But if you do pass away, your family or survivors won’t worry much about where they’d get money to buy food or pay their mortgage. This could, at least, partially offset some grief in the event you pass away.
Like I mentioned above since there is no way of knowing what the real value of BC, you have to set automatic trading limits in your buy and sell orders. For example, let’s say, the BC price is $15,143/coin. You set an automatic limit buy at $13,000/coin. If the price goes down to that level, the system will automatically trigger your buy order without you being in front of a screen manually doing the transaction. The same goes for selling. You can set a limit sell order at $16,000, that if it hits that price, the system will automatically sell your positions (you can do the same process by locking your profits. Let’s say you had purchased at the price point of $5,000, and the current price is $15,000. Let’s also say that you had planned on going on a vacation and won’t be there to sell your position if prices started collapsing. Under this scenario, you can set up a stop loss order at $13,000. If the market becomes erratic and the price does go down to $7,000/coin, the system will automatically sell your position at $13,000).
The Rearview Mirror is Always Clearer When You are Past a Certain Point.
Did you lose if you didn’t invest? The answer is no. You see, hindsight is 20/20. It is so easy to beat yourself up by saying, “Man, if I had bought at this price I would have made 10x my original investment.” That is true. But, imagine if the other way around happened. You would be the sorry loser. And, investing is not a zero-sum game where if you missed one does not mean you missed the other opportunities. The key is not to make this a big deal, and you continuously invest in opportunities you see fit to invest in.
I have been in situations where I didn’t know about a particular investment that went big. It happens all the time. But I do not feel sorry for missing out on these opportunities. I have other opportunities that are providing me with excellent returns. While many people equate a missed opportunity with lost money, I do not. And the reality is that you did not lose any money at all. Your net worth did not become negative. It stayed flat. So where is the lost money?
I have many favorite sayings when it comes to investing. One is the word: “Next.” There is always the next investment opportunity around. Another is “while cash does not generate any investment return, it does provide firepower to seize opportunities in a short period.” So, for some who got in a little later in this BC craze, don’t beat yourself too much. There’s always another opportunity coming!
Action item
I would love to hear your thoughts about this topic so feel free to comment, share ideas, and/or leave a feedback.