My Bitcoin Call, One Year Later

I often say that the least rewarding phrase to speak is, “I told you so.” Any time you have the chance to remind someone that you warned them something bad would happen,  point out that the bad thing warned against did in fact eventuate, and that they (or often, we) suffered a negative result because of their failure to heed your timely warning, it means a bad thing happened that might have been avoided. That sucks.

It is rarely a good thing when bad things happen, and suffering bad outcomes is not made better by the knowledge that they might have been avoided. That just makes it worse, because objective damage is compounded by emotional regret.

Right now I’m enjoying the rare circumstance where “I told you so” is a source of pure satisfaction, because none of those suffering the ill effects from failing to heed my advice are people I especially care about.

On January 5 of 2018, in this blog post, I stated the reasons I thought Bitcoin was in the blowoff phase of a classic bubble, and advised Bitcoin holders to immediately sell half of their position and reinvest the proceeds in assets with durable value, specifically US stocks, foreign stocks, and cash. (Real cash, not crypto-nonsense.)

Anyone who listened, and I have zero evidence anyone did, would have avoided a catastrophic loss. How big a loss? When my post went live, Bitcoin was worth $14,574 per coin. At close of business yesterday, it was worth $3,556. That is a 75% loss. You don’t need to help investors to avoid losing more than 3/4 of their wealth many times to justify your entire career as an advisor .

Last month I got an email from a guy at Morgan Creek Capital, announcing a new, diversified cryptocurrency fund. Since on the face of it this appears about as exciting as announcing a sale on luxury berths aboard the Titanic, a few days after that ship’s unfortunate encounter with the iceberg, his firm is offering a challenge to sweeten the pot, based on Warren Buffett’s famous wager against hedge funds.

Back in 2007 Buffett offered a $1 million bet to any hedge fund promoter who would take it. The hedge fund person would bet that a chosen basket of hedge funds would beat the S&P 500 over the next ten years. The winner could pocket the million, or (if Buffett won) donate the winning bet to charity.

Buffett won the bet going away. The S&P 500, with its low costs and inherent tax efficiency, also produced much higher economic returns, +7.1% annually for the S&P versus a lousy +2.2% for the hedge funds.

Recently Morgan Creek has suggested a similar bet, apparently failing to recognize the obvious outcome-by-analogy suggested by Buffett’s wager. I’ll help them out.

The trillions of dollars of actual wealth represented by the S&P 500, and the hundreds of billions of dollars of actual free cash flow produced by the companies in the index, have profound and (in the long run) growing economic value. Whereas cryptocurrencies are worthless and are likely to continue to decline in value.

I predict another big win for the S&P 500.

Bitcoin Bubble

Our office has been closed the last two days because of the winter cyclone that hit the East Coast. I’ve spent this unexpected time off reading and thinking about Bitcoin. I’m putting together a white paper that will pull my thoughts together in long format, but I think it may be useful to get a few tentative conclusions out there quickly, just in case things fall apart in the near future.

The nature of bubbles is that inexperienced investors think they are making huge money because they are smarter than everyone else. This illusion is self-reinforcing. It is why bubble pricing goes parabolic before it crashes. The reality is always that the late stage of a bubble is when the greedy and inexperienced make big profits, while the expert and experienced stand on the sidelines shaking their heads. And then it all falls apart, and perhaps one of twenty of the peak-era traders has actually gotten out with substantial wealth intact.

My opinion, as someone who has been running investments since 1978, and has seen bubbles in gambling stocks, precious metals, oil services stocks, tech stocks, shore real estate, residential real estate, tech stocks, shore real estate, tech stocks, residential real estate, tech stocks, and cryptocurrencies, and has correctly identified the last five or more of them, is that we are in the blow-off phase of the cryptocurrency bubble. I’ll develop this thesis further in the coming white paper.

So this blog post is aimed at Bitcoin hodlers (a deliberate misspelling with meaning to Bitcoin enthusiasts) who are sitting on significant wealth, and who are open to the possibility that they might, just possibly, maybe perhaps, be making a mistake by holding a large portion of their net worth in Bitcoin and/or other cryptocurrencies.

I have come to three semi-firm conclusions about Bitcoin and its variants (including Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond et al) and competitors (including Litecoin, Ripple, et al):

  1. Blockchain is a powerful new technology, which is likely to have huge impact going forward, especially in those parts of the economy (brokerage, real estate, insurance) where assets are bought and sold, and their ownership tracked.
  2. Bitcoin innovated blockchain, but has no priority claim on using it. People can design their own novel blockchain applications and Bitcoin does not benefit. Indeed, competitors or would-be successors can duplicate Bitcoin’s software in every respect, make a few tweaks, and launch their own competing cryptocurrencies.
  3. We can’t know the future. Even you, Mr. Bitcoin Hodler. In one possible future, Bitcoin becomes as valuable as Netflix, Google/Alphabet, Amazon, or Facebook. In another, a different crypto makes it big and replaces Bitcoin. And a third possibility is that all cryptos become worthless, while the big money from blockchain applications will be earned based on another use-case entirely.

Which leads to one simple suggestion. If you are sitting on big money in Bitcoin, especially if you got in early and your net worth has exploded, even more especially if Bitcoin and other cryptos represent most or all of your portfolio, do two things:

  1. Sell half your holdings right away. Take the proceeds, hold back enough to pay the capital gains taxes, and invest equal amounts in three things: an S&P 500 Index, a global stock index, and a money market fund.
  2. With the remaining holdings, consider diversifying, again into three equal buckets: Bitcoin, a “portfolio” of three to five credible crypto alternatives, and a portfolio of public companies that are doing important work in the crypto space.

If Bitcoin is gonna be Google, and cryptocurrencies as valuable as the Internet, you’ll still get filthy rich, but not quite as rich as you might have. A billionaire, perhaps, instead of a multibillionaire. If some other crypto replaces Bitcoin as the future Google, you’ve still got a shot at owning it, and getting much richer than if you stay concentrated in what might end up a loser. And if the whole digital currency thing is not the second coming of electricity, the internal combustion engine, and the internet rolled into one can’t-miss digital asset, you’ve still got a chance for profits owning real companies that derive economic advantage from blockchain innovation.

If Bitcoin is in a stupid bubble, and loses 90% or more of its value, you will have changed your life, and you will be the envy of your techie friends who didn’t get out, even a little bit.

Either way you win. Fail to diversify, and there is a non-zero possibility you end up with nothing, or something close.

This is going to be real interesting to watch.