It has been a while since I am studying Bitcoin and crypto; my assumption for this post is that you know the basic stuff and if you do not, go and inform yourself because in a way or another this will have an impact on you in the future.
I am very optimistic regarding the technology behind Bitcoin, the blockchain, I am not so sure what to think about Bitcoin and the rest of cryptocurrencies from an investment point of view.
The first analogy that came to my mind is with Magic cards. Magic the Gathering is a game I used to play while I was at university; due to two random events, I am old enough and I started to play in the infancy of the game, I had a lot of old cards in my collection. Bitcoin is limited in supply by design, as old Magic cards are in a finite number and cannot be reprinted. Due to the game growth in popularity, old cards became scarce and as per Econ 101, their value grew with their demand. When I stopped playing the game, I sold all the valuable cards (at the time) for around €4k: I was out of university with no savings, no income, and I needed the capital to finally started to do what I studied so far, trading stocks. I was also quite happy that I enjoyed the game AND got back more money than when I started, which is not something you can say of playing console game, for example, where you need a big investment upfront, the new game, and its value goes down in time faster than a car out of a dealership.
If only I knew the mistake I made!
Ten years later my stock investments where kind of breakeven, I was learning and trying everything, technical analysis, IPOs, options, short selling, commodities. Obviously the lessons were extremely valuable, because there is no real teaching in paper trading, but yet it felt like I did not move at all.
On the other side, Magic success grew and grew, and if I hold on those cards my investment would have increased at least 20 times. Yes, the most valuable Magic card today is sold at more than 10k.
Even being an insider at the time, I was and I am in love with the game, where I would have put the probability of a trading card game that has to reinvent itself every 3 months not only to survive, but to thrive for more than 25 years? What about the competitors? Every mayor franchise tried to steal the podium from Magic: Star Wars, Pokemon, The Lord of the Rings, and yet Magic is there on top.
Bitcoin and Magic cards have no intrinsic value (well, you need Magic cards to play Magic), their value is given by the fact that other people give them value, and the moment the crowd tastes change, their it goes the value. How can you make investment decisions based on someone else whims?
Based on this fact alone, you could say that the more the value of Bitcoin goes up, the more its value makes sense because it means that more people think that is valuable. Obviously also the reverse is true, and if comprehensibly you do not understand what I mean, here is Josh Brown with a similar case.
Then there is what I call the ‘HODL factor’.
Hardcore supporters of Bitcoin buy and hold for the foreseeable future, further reducing supply and helping the price go up (every person who lose his private key also contributes to this, some studies estimate that 20% of existing Bitcoin are already lost and gone). There is nothing wrong with it but I always wonder, if you do not have a way to measure the intrinsic value, then what?
I do not play Magic anymore but I keep an eye on the game. Last year I realised that the price of all the old cards, even the ones that have no professional-playing value, went up: it was a combination of factors, casual players grew in numbers and were inventing new ways of playing, and some vendors decided to speculate and buy all existing old cards to resell them at exorbitant prices. When visiting my parents, I looked into the pile of cards sitting in my old room and, surprise, I put together another stack worth almost €3k. Came back to London and visited a shop to sell my newfound treasure.
In financial markets, the difference in price between what a seller is willing to accept and a buyer to pay is called bid-ask spread. For very liquid asset, let’s say euro dollar exchange rate, is basically zero (and no, I am not talking about the exchange shops you find in high street). Turns out that the value of my cards was at least a third lower if I wanted to sell them then and there, because yes, maybe there was someone, somewhere looking for that specific card, but the appetite for those cards in the Magic-playing world was low and their value inflated by the speculators, who want to sell high but buy at discount. After a bit of negotiation, I sold everything and invested the proceeds half in FundingCircle and the other half in a return plane ticket to Sidney for my next holiday. Again not too bad for a pile of square papers sitting in a dusty corner of my teenager room.
What has all of this to do with Bitcoin?
If I was confident that the success of Magic would continue for the next twenty years, the best financial move would have been to hold on those cards; in fact, the return on investment so far had been better than RenTech’s Medallion Fund. But where can you find this type of conviction without a way to measure value? Would I sell when the value reach 10k? 100k? Would I HODL forever? What if I am wrong and tomorrow what was half of my mortgage turns out to be zero?
The Winkerlevii twins owns 1% of all the Bitcoins that will ever exist and base on current valuations they are (Bitcoin) billionaires. When you buy on the way up, reducing supply like the Magic card speculators, you arrive to a point where you set the price and if someone else wants to buy, he has to buy from you at the price you set. This way, you also set your net worth. But since no one can live eating Magic cards, or Bitcoins, in order to use your own defined net worth you have to find buyers willing to pay your price, and the more asset you accumulated, the more buyers you need to cash out.
Last week I listened to this interview of Michael Novogratz and finally all the questions I had in my head about Bitcoins started to at least have a sense.
To trade Bitcoin profitably you need to have his skills…good luck with that.
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