Cryptopocalypse 2018!

Down 75%, does Bitcoin make any sense?

Earlier today I grabbed this screenshot from Yahoo's Cryptocurrency Screener showing a lot of declines for the day including Bitcoin below $5000, it took back that level shortly thereafter but is back below as I publish this post.

I've written about Bitcoin a few times and traded it once in late 2017. The crypto concept fascinates me and if it evolves into some sort of portfolio diversifier I would be willing to use it for clients. That is not where we are now and there is no way to know if it will ever get there. Proponents are still on board with it but I don't know to what extent they must be on board, if as an asset manager your reworked your entire firm/process/philosophy/reputation, or at least a major portion of those things, toward cryptocurrencies wouldn't you have to continue to be all in? Maybe that is wrong but it is a reasonable question.

Thomas Lee recently cut his 2018 year end target for Bitcoin to $15,000 from $25,000. Again, that's 2018, like it's going to triple in six weeks. Interestingly, if it were to actually go up anywhere near that amount that quickly I believe that weakens the case for it becoming some sort of reliable medium of exchange, here I am saying reliable in terms of buying a car for ten Bitcoin today to only have Bitcoin go up dramatically in two weeks such that if you'd waited you could have bought the same car for eight Bitcoin. Remember, the first transaction with bitcoin was someone suing 10,000 bitcoin to buy some pizza.

There has been chatter and news stories about governments creating digital currencies. One of the huge appeals of bitcoin is that a government cannot debase it but that doesn't mean that government created cryptos won't still provide crushing competition, demand for something that end users have a better understanding of.

A question about Bitcoin that I have asked repeatedly to which no one has replied (on Twitter) is why can't all the potentially positive attributes ascribed to Bitcoin ultimately accrue to a different crypto? There is plenty I don't know about this which is why I am curious but it seems to me that some other cryptocurrency could supplant Bitcoin and play the same role that the wildest of Bitcoin bulls expect.

For now I think it is still a lottery ticket. I wouldn't tell someone not to buy it but I would caution about how to size it which is to keep it very small. John McAfee thinks it is going to $1 million in a few years. Would $5000 gambled today, that turned in to $1 million in five or ten years be enough to improve your life? Would $5000 gambled today that went to zero in a few years be ruinous? If the answer to the first question is yes and the second question no then you get a sense of the potential asymmetric payoff. Payoff is a gambling term because that's what this is for now in my opinion. If you have $700,000, $800,000, $1 million accumulated then $5000 lost is not a calamity. If you have $100,000 accumulated then obviously $5000 is a much bigger bet (another gambling word). Gamblers can win but success comes from managing losses (not a sentiment ascribed to long term investing with index funds).

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