Joining the Bitcoin party
I've decided to join the Bitcoin Party, and thought I'd share my notes on how I'm reasoning about all of this.
To me, this is gambling, but much more fun and interesting than a casino or lottery. First, I set my limits. In my case I have decided that the maximum money I will commit to crypto currencies is 0.5% of my net worth, because I can afford to flush 0.5% of my net worth down the toilet.
There are many things in the world you can gamble on for high potential returns. XIV (an inverse volatility bet) has returned 51% per year for the last 5 years, resulting in nearly 8x gain. PCLN (Priceline) has returned 42.7% per year for the last 15 years, resulting in over 200x gain.
Both of those have provided steadier long term gains than Bitcoin & friends, which have only been trending up strongly for 2 years. I wouldn't even put 1% of my net worth into XIV or PCLN, so 0.5% for crypto currencies feels about right, and possibly even too much.
Revolutionize the world?
Crypto currencies and block chains are very interesting, and have many uses. But will Bitcoin (or Ethereum, Litecoin, etc) revolutionize the world and global money? Maybe, maybe not - nobody knows. Frankly I don't really care. I am treating this as a lottery ticket. I think there's a reasonably good chance that Bitcoins will keep gaining value, but I don't believe strongly in it.
On the other side of the argument, there are many experts and journalists who insist that Bitcoin is fundamentally worthless and that it's a giant bubble that is doomed to collapse. Are they right? Maybe, maybe not. After insisting it was worthless, the financial industry recently created two different futures contracts (at CME and CBOE) for Bitcoin. Clearly, there is enough institutional interest in Bitcoin to justify a futures contract.
Nobody knows which way this will go long term.
The only bet worth making
I spent some time studying the Bitcoin (and other crypto currency) ecosystem, including message forums. Many of these people sound like day traders, the kinds of people who would have flipped tech stocks to get rich quick. My first reaction is that these people sound awfully impatient, and many expect quick gains.
I think that short term speculation is a bad idea with Bitcoin & friends. In my view, the only bet worth making is a long term bet that Bitcoins will keep gaining value.
To dip my toes in the water, I bought $100 worth of Bitcoin at $15,390.
I am using a similar technique to stock investment and speculation. I want to join the trend, but I want to buy at a sensible price. For this purpose, it's helpful to look at the $NYXBT symbol on stockcharts.com
$NYXBT lets us chart the Bitcoin price using the same framework that's used for stocks. This is published by the NYSE based on the Bitcoin price at 16:00 London time.
The first thing to note is that the price is way above its 50 and 200 day moving averages. When it comes to stocks and commodities, that's usually a bad entry point.
Bitcoin routinely touches its 50 day moving average. From the price shown in the chart, Bitcoin could fall 40% to get to this level. Also note that (based on traditional technical analysis) Bitcoin could even fall down to its 200 day moving average, and still not violate its long term uptrend. That could mean a 70% to 75% drop and still be trending up!
At this point, I am waiting for Bitcoin to drop down to one of these key moving averages. This could take many months, but I am confident it will happen. Once I make my purchas(es) up to my gambling limit, I will leave the coins alone for several years.