Bob Fogg is an anonymous finance insider and works at a large buy-side firm, which provides him with an intimate view of the industry.
In my last post, Decentralization mean Direct Access, I discussed the trend of companies and services moving in a decentralized direction. The high valuations of many new companies are, in part, due to increased access for consumers through decentralization. The advent of the internet has allowed direct access in areas of life where it previously seemed impossible. Digital currencies, most prominently bitcoin, are an expression of the direct access trend. Bitcoin tweaks traditional models of financial transaction. Bitcoin is a cheaper and more efficient way to move capital (just as mp3’s are to music, Uber is to cabs, and email is to communication), which allows consumers direct access to one another without banks or clearing houses.
No one likes traffic and digital currencies add another lane to the financial highway.
Since I published the article on January 2nd, the price of bitcoin has plummeted, and in the last 12 months, bitcoin is trading for a fraction of what it had been trading for (~$800 to ~$200). Frankly, I can't imagine anyone who invested in bitcoin in 2014 has a smile on their face, and that includes me. Overall I’m down pretty big.
The price hasn’t gone down straight either. It’s been incredibly volatile, undergoing huge swings, showing huge susceptibility to seemingly irrelevant news stories and market manipulation. I imagine checking the price of your bitcoin investment on a daily basis this past year could be deemed a masochistic act.
Despite the negative movement, positive things can be garnered from the poor price performance. The pressures and stresses of the price decrease has forced the hand of many in the bitcoin space, and shown the real reasons they are involved. There are widely divergent agendas of the members of the bitcoin “community,” and I imagine the responses to the price drop to differ depending on the agenda.
First off there are the traders, who probably have the most to gain and lose from the price fluctuation volatility; and who are closest to the daily minutiae. I wish I had the time and know-how to day-trade bitcoin, because it seems like one can make a killing with not much capital. Its not that hard to buy a 40x leveraged short, and then dump a relatively small amount of bitcoin into the market (taking advantage of the lack of liquidity) and watch the price drop as you collect big. It’s obviously not the most honest thing to be doing, but I completely understand the mindset of those doing it, as its human nature to take whats available, without regard for others (not condoning). Traders doing this are making quick, large gains and do not really need to have any concern for how the currency will be doing in a year or ten years. There is no incentive for them to care about to long term value proposition of bitcoin. Traders ride volatility, not price. 2014 has been a good year.
In the opposite corner, there are those that view bitcoin as a expression of their own political ideals. Bitcoin, to them, is more than just a new way to transfer and store value. Bitcoin is also a tool that can be used to free the lower classes and third world from the bonds of the classist oligarchs who take advantage of the poor and weak. Bitcoin is a way to break from the chains of the current financial structure. These idealists need the price to go up in order to validate their views. Without widespread adoption, their ultimate dreams cannot be realized. Many people from this faction want to, whether they admit it or not, have bitcoin release a new world order much the same fashion as Daemon and FreedomTM. Regardless of what they say about the underlying fundamentals, this has been a stressful year.
There are also the “geeks,” coders, hackers, etc who see the technological potential in bitcoin and view the blockchain as an opportunity to tinker and build something new and exciting. I think a lot of VC’s fall into this category too, as many companies are being invested in to build on top of the blockchain. The price is not as important in the sense that these companies are built on the bitcoin protocol, so there is a level of freedom to move away from bitcoin if it were to go under. These companies would survive, as well as the concepts that could be replicated in other digital or fiat currencies. If the price of bitcoin were to skyrocket these folks will absolutely benefit, however they are more dependent on the long term “underlying fundamentals” and new potentials of the blockchain.
The final category of bitcoin investors is made up of those who see the potential outsized, long term returns. Would I prefer the price to go up tomorrow so I’m looking at 100x returns? Of course. However, when I originally invested in bitcoin I did so with an all or nothing mindset. Bitcoin is a very cool new technology that could impact the world in a huge way (both positively and negatively). I dont have the ability to day-trade. I don’t pray for a proletarian uprising fueled by bitcoin. And I don't know enough about the nuts and bolts of the technology to be able to meaningfully participate in the protocol and blockchain side of things. I view investing in bitcoin as the aggressive end of an overall barbell strategy, where I will not allow myself to weep over a single dollar lost once I use it to buy bitcoin. I expect to sit on it for a long time and the nominal amount I have invested in bitcoin will be the down payment of an option to own something that may rise to astronomical valuations. I check the price on a very irregular basis over long periods of time, because the difference between a price of $217 or $834 is ultimately irrelevant in the big picture. As long as the price isn't $0 or $10,000, I’m not going to sell.
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