I wrote this message in March 2014 about how I thought I had done the trade of my life buying and selling Bitcoin.
For those of you who have teenage daughters you may be able to relate to my incredulation. On Thursday this week that scrawny punk Justin Bieber arrived in Sydney. My daughter Gabriella is a “Belieber” so for her birthday she got a ticket to his Saturday night concert. On Thursday I came home from work at 6:30pm and was told my 14yr old had gone with a friend and her mother to stalk Justin at his hotel in the city. My wife and I felt comforted by the fact that they were under “adult” supervision but were concerned that they were not back at 9pm on a school night. I called the mom and said this is ridiculous she said sorry I have a different value system to you and I have not given my daughter a curfew. That is all I needed to hear so I got in my car and drove to the city and arrived at the Sheraton on the Park where I found about 30 “Beliebers” standing like crazed people waiting to catch a glimpse of their Idol. I don’t think it was that cool for Gabriella when her dad cruised into the hotel driveway and got out the car and said, “GET IN !!!!” We fought the whole way home as she was hysterical and could not see anything wrong with staying up the whole night standing on the curb waiting for her hero – Justin. It turns out my daughters mate stuck it out until 1:30am and then threw in the towel. All the while this obnoxious punk was at a strip-joint only arriving back at his hotel at 5am.
On the 12th of July 2013 I bought 2 bitcoins for ~$100 each. If you don’t know what Bitcoins are they are in my opinion the ultimate virtual currency. The bitcoin is created using complex cryptography and has an inbuilt algorithm that will allow a maximum number of 21 million possible bitcoins to exist. This makes it different to the likes of our fiat currencies, that can through quantitative easing and a well oiled printing press produce infinite amounts of notes. Like gold, bitcoins are “mined” by computers solving complex mathematical problems which increase in complexity as more coins are mined thus keeping the size of the bitcoin economy predictable and its money supply increasing at a decreasing rate, thus keeping inflation in-check. Well this week Bitcoins traded over $1,000 for the first time and took my return to more than 1000% in less than 6 months. I don’t know about you but for me that was a good enough ride and I took 80% off the table. Let me add buying and selling bitcoins is no simple matter as you need a virtual wallet to house these complex sequences of digits, but I got quite a kick figuring it out and whizzing these codes around the world in a sequence of purchases to lock in my gains, I also sold a portion for cash.
The question on every ones lips is whether the bitcoin price rise is a bubble. In the last 30 days the price is up 473%. I would like to discuss the merits of an asset backed currency like the dollar to the gold standard in a separate letter as I think it is important to understand the clear points Murray Rothbard one of the fathers of the Austrian School of Economics wrote in his brilliant book “The Case for the 100% Gold Dollar” printed first in 1962; however for now the question remains are bitcoins a bubble?.
I cannot answer that question but what I will say is that just like “Beliebers” do the most ridiculous things in honour and allegiance to their idol, so to do investors who believe in the merits of a virtual currency take their believing to extraordinary heights. One of the big drivers of the most recent rally in the price is the notion that the Chinese are buying the currency as a way for them to externalize their assets from the foreign restrictions in their country, but the stories are getting pretty fanciful, such as Ben Bernanke suggesting their is a place for a virtual currency and other such “supportive” stories. There is still a lot to be understood about the risks the various sovereigns may impose on the currency as well as “hackings” of the various wallet servers, and therefore I think it is very fair to say that the price has gotten ahead of itself caught up in the emotional distortion that comes with a great success story well packaged. I am not yet calling a top in Bitcoins or Bieber stock but the log price is starting to get parabolic and that always makes me nervous.
Finally I would like to make 2 points on why I believe the Bitcoin trade was so successful for me. The first is I fundamentally believed in the logic and philosophy supporting the Bitcoin story (and still do) which gave me the resource to stay with the story, and secondly my position size was so small that I was totally unemotional with the trade. The 2 coins I owned at $200 didn’t merit me checking on their price every couple of hours or days. No I researched and loved the concept of this virtual currency that had a limited supply of coins in its lifetime and the ability to be transferred around the world in seconds via a peer-to-peer network. After the excitement of acquiring the coins and setting up my Bitcoin wallet I completely forgot about the investment, I was in it for the long haul, my risks were minimal and therefore I could give this currency experiment ample time to unfold, that was until the mainstream media started reporting about the Bitcoin price rise 10 days ago.
My only regret is I never read about the Bitcoin story earlier; if I spent the same $200 in October 2010 I would be writinig about a $2m profit.
Michael Berman, Ph.D.