Bitcoin, The $28,000 Derivative Of Netizens’ Collective Imagination

I suppose I’d be remiss not to mention Bitcoin coming off a Christmas rally that saw the digital token hit $28,300 by the end of the holiday weekend.

If that makes you chuckle, you’re not alone. Anyone engaged on the long side is probably giggling like a schoolgirl after watching the value of their make-believe holdings skyrocket — laughing straight to the bank, as it were.

Meanwhile, traditional investors and traders unwilling to dabble in what, at the end of the day, is just an amorphous derivative of netizens’ collective imagination, are amused too. After all, the figure (below) is nothing if not amusing.

It’s worth noting that the Bitcoin/gold ratio hasn’t yet touched the highs seen three years ago.

While crypto adherents are fond of lampooning non-believers, I think it’s safe to say that’s akin to tilting at windmills at this juncture. That is: I doubt there are too many fence-sitters left. The universe of people who are perturbed about “missing out” is likely much smaller than it was during the last surge, in late 2017.

By now, you’ve either decided to allocate to Bitcoin (accepting the possibility that it might one day collapse and never recover) or you’ve sworn it off forever (accepting the possibility that it could conceivably rally into the hundreds of thousands at some point).

Either way, this is funny. Consider that Bitcoin is on track for a second consecutive 40% monthly gain.

As ever, I think it’s important to emphasize that this isn’t real. It’s just not.

As much as that perturbs some readers, anyone who’s frequented these pages for any length of time knows I endeavor to tell the audience the truth at every possible turn. This is no exception. Bitcoin isn’t “real” in any sense. There are any number of angles you can take in the course of making that case, one of which is detailed here.

I also think it’s incumbent upon folks to consider whether they’re projecting their own psychological perturbation vis-à-vis Bitcoin onto other people. This happens unconsciously when a subset of the population either believes, or wants to believe, in something their rational side knows isn’t plausible.

In situations like that, people have a tendency to suggest that largely impartial observers aren’t impartial, but rather “emotional,” “biased,” or involved in some kind of conspiracy. In fact, though, it’s usually those people’s own emotional discomfort that prompts the allegations — they just don’t realize it.

While it’s true that complete impartiality is rare, especially as it relates to controversial topics, this phenomenon is readily observable both with regard to Bitcoin and Donald Trump. The simple act of writing about cryptocurrencies or Trump is guaranteed to generate allegations of clouded judgement, no matter how neutral one’s cadence and no matter how infrequently one weighs in.

Last month, for example, one reader suggested that Bitcoin is “an emotional topic” for me, while another said the purported “frequency” with which I write about it is proof.

Reality tells a different story.

Over a 60-day period, there have been just seven articles (including this one) published on Heisenberg Report that even mention Bitcoin. Only five of those were specifically about Bitcoin. Over that same 60-day period, we have published a total of 403 articles. So, Bitcoin-specific posts have comprised ~1% of the total since the latest exponential rally in the coin began.

Additionally, I’d note that two of those five articles were prompted by comments from Ray Dalio and Guggenheim’s Scott Minerd. In other words: The articles weren’t really about Bitcoin — they were about Dalio and Minerd.

The point here is the same as it ever is when it comes to Bitcoin. If you truly understand both the nature of the thing itself and also the psychology driving the price action, then you may well be able to reap huge gains without risking too much in the way of severe mental stress in the event something goes wrong. Alternatively, if you simply have so much AUM that dedicating a fraction of it to Bitcoin is conceptually similar to burning premium on lottery ticket options, then that fractional allocation makes complete sense. If you don’t like the options analogy, then consider it no different from allocating a tiny fraction of a large portfolio to a speculative biotech.

Outside of those two cases, market participants should be wary. They should also be conscious of their own psychological state. Regulatory scrutiny of Ripple should have been an uncomfortable reminder of the dangers lurking in crypto land.

Even smart people who understand all of the above are prone to saying things that either don’t make sense or, worse, simply aren’t true because they can’t be. For example, a Bloomberg article published Christmas Eve carried this headline: “Bitcoin Crushes Doubters as 224% Rally Proves It’s Here to Stay.”

That headline can never be definitively true. Not about Bitcoin and not about anything else. There is no case in which a rally “proves” an asset is “here to stay.” That goes for something as stodgy as Kimberly-Clark or Walmart just like it goes for Bitcoin.

A spectacular rally may properly be said to have “silenced critics,” but no matter how large, a rally can never rule out the possibility that the underlying may one day effectively disappear. Just ask Research In Motion.

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24 thoughts on “Bitcoin, The $28,000 Derivative Of Netizens’ Collective Imagination

    1. Again, though, note that I’m not necessarily saying that everyone should avoid it. In fact, I’m saying the opposite. For certain subsets of people, it makes sense. But the issue, from my perspective anyway, is that the number of people who think they fall into those subsets is much larger than the number of people who actually do. Mistaking yourself for one of the people for whom Bitcoin is appropriate can lead to huge, giddy gains, but if it wasn’t appropriate for you in the first place (i.e., if you misjudged yourself initially), the volatility could cause severe psychological distress, especially considering it trades around the clock and there’s nobody there to step in (i.e., a circuit breaker) if it just decides, out of the blue, to plunge 50%.

      Ironically, I’m far better positioned than most people to dabble in it, but I don’t, because I don’t need that in my life. There are activities that are capable of producing similarly large monetary gains (in % terms), but they too come with considerable amounts of stress, and are not generally appropriate for the vast majority of people. 🙂

      1. … which is why I’m professionally invested in BTC but not personally. I’m yet to build the real estate portfolio exposure I think I need (to replace fixed income) so my equity allocation is tiny and my BTC allocation is zero.

        Professionally, I work for people far richer and the calculus is noticeably different.

  1. just allocated 1-5% of your liquid net worth to it based on your risk tolerance and cash flow needs and be done with it. Thats my approach anyway. If it goes to zero that sucks but not a huge deal. If it goes to 100k, I’m plenty happy.

    1. Exactly. Just allocate 1% of NAV, or less, or whatever.

      For those who go in and don’t have the nerve, take out your original capital when, or if, it doubles. Pay your taxes, and just let the rest ride.

      I see it as an opportunity. Speculations with the asymmetry present in this trade don’t come around often, speaking as someone who doesn’t use options. (Yes, shares of OXY I can buy in my brokerage account might be a 5x from here.)

      Re regulation, it’s a good thing. The scrutiny of Ripple is a good thing. KYC is welcomed. The recent release of FinCen intentions about 10 days ago (with a 15-day comment period!) is rushed and all do hope Treasury gets it right.

      …clean out a “bad actor” or two, send a message, regulate the space, make reporting to the IRS by exchanges required, approve the ETF, launch the ETF.

  2. I’m with H …..on this one…. Doesn’t much matter about outcomes I just don’t like being herded by artificial circumstances that create the likes of Bitcoin and you can include Tesla and a half dozen recent startups.
    I used to think of markets as an intellectual pursuit but things change from time to time and euphoria surfaces it’s head.. Gotta’ learn to duck when the s–t is flying .. On the sarcastic note …’you want a bear market in some of this I can accommodate you all by changing my mind and buying LOL !!!

  3. Why doesn’t anyone seem to notice that bitcoin and its mini-mes only have substance when their value is expressed in dollar terms? I’ll take the dollars; others can take the air.

  4. If you spend a few hundred dollars on a Bitcoin ASIC, you can create bitcoins for about 4-7 thousand dollars per coin in electricity depending on where you live. Most of the big mines are in China and the mining consumes a large percentage of worldwide power generation. The longer the price remains substantially above $10K, the more people that will be enticed to start mining bitcoins.

    1. As someone who has a pathological distaste for inefficiency and waste, that fact about bitcoin and its ilk has always gotten under my skin more than any other: it demands massive power dissipation to provide a service that goldsmiths and governments have delivered for millennia for peanuts.

      There’s a crypto-geek answer to that problem, of course: proof-of-stake algorithms, where the network votes on how to move forward based on who owns how much, instead of who’s willing to throw away CPU cycles to solve meaningless hard problems (aka proof-of-work). However, proof-of-stake has had a rocky start because it is a kind of distributed consensus, and it turns out that secure voting at scale without central authority is HARD.

  5. The thing I am most intrigued about is the impact that Quantum computing will have on the encryption underlying Bitcoin security. When one of the emerging Quantum computers can perform, in minutes, what today’s super computers require a year or many more to do, well, it is interesting. No?

    1. Jeff, yes; however, the function that bitcoin etc are based on — the hash function — is notoriously resistant to quantum cryptanalysis so far. Things may change but it’s not a slam dunk.

    2. Additionally the underlying code for bitcoin is subject to modification and should a quantum cpu emerge with sufficient working capacity the code would be altered rapidly for fear of it destroying the chain. The chain fails only if the community decides to let it.

  6. Thank you for the article. A rare piece on bitcoin that is built upon rationality.
    What strategies do you think high profile investors such as Michael Saylor, Ruffer LLP and Paul Tudor Jones are trading for bitcoin?
    Each bought bitcoin on a different thesis (MS spends 99% of his time on youtube championing BTC as the next big thing) and Ruffer LLP says it is a “defensive move”. However, their entry prices are just slightly above 10,000 USD.
    Do you think they are trading opportunistically, long term or just creating their own ponzi?

    1. Kinda hard to answer without looking into their minds, but I would assume somebody who is talking his own book on youtube acts opportunistically at least.
      For somebody like Ruffer or PTJ it probably makes sense to allocate a small percentage of AUM to BTC for reasons indicated above.
      Somehow, personally, I cannot imagine somebody “investing” in BTC for the long term, as it does not constitute an “investment” my eyes (it is not an asset, offers no yield, equivalent to gambling on appreciation).
      But that is just me.

  7. Whatever Bitcoin is , It is not a currency. There are no governments that accept it for settlement of tax liabilities.
    And it’s volatility precludes it from being a viable means of exchange. Example if you bought a $20,000 car at beginning of 2019 and paid for it with Bitcoin you would have paid for it an equivalent of $128000 for it in today’s Bitcoin price.
    Not a currency and not a means of exchange but definitely figment of imagination.

        1. What can be said about bitcoin that can not also be said about gold, which has been around as a store of value since before the dollar? In other words, why can’t bitcoin be used as a store of value in perpetuity, gaining when the dollar falls and vice versa just as gold has. Gold might be a greater fool theory but it doesn’t matter because it worked as a trading vehicle before any of us were alive and will likely work long after we are all gone. I don’t understand Ray Dalio’s criticism of bitcoin while embracing gold.

          1. Gold has been a medium of exchange for thousands of years. It is stable (not in terms of price relative to fiat currencies, but in terms of physical appearance), can be stored, split up, etc. with relative ease.
            Bitcoin replacing gold as a safe haven would require literally billions of people (think India, for example) changing their minds about the merits of owning BTC as a “store of value”. So far, given the absurd volatility of BTC, it is not, by any means a “store of value”.
            Plus, BTC is hardly able to replace gold as a “doomsday hedge”. I am neither a gold bug nor a doomsday prepper (frankly I chuckle when reading about people preparing for the imminent collapse of the entire “system”), but if there ever should be a situation in which the entire monetary and societal system breaks down the last thing I would stock up on would be non-tangible virtual tokens which require a stable internet connection to trade the much-needed canned goods for.

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