The 2015 blockbuster movie “The Big Short” starts with a great opening line that stuck with me:
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
– Mark Twain
It takes a lot of maturity, that is too often lacking among my peer-group, to admit when you are wrong.
Nobody likes to be wrong. Nobody likes to admit that they were wrong, for it is often times an admission that you were misled or duped, and since Reality TV has us all convinced we are the smartest people in the room this admission swings a sledgehammer of reality into that idea.
In my defense, I had a very strong 2016 in going against the social media echo-chamber bubble. I bet all of the money in my Betfair account on Trump to win the presidency, and made a smaller bet on Brexit which paid off handsomely.
Disregarding the opinions of others and sticking to what I felt to be right, was true.
I knew Trump would be the next President.
I knew the UK would leave the European Union.
I also *knew* that Bitcoin was a bubble…
This third point remained fairly academic through 2016 as Bitcoin barely touched the public conscious. The price of a Bitcoin in 2016 bounced around, going up and down but mostly sideways, with some spikes and some troughs.
It doubled in value, but that’s not really here or there, a hot tech stock could double in a year.
If anything this just reinforced how risky of an investment it was, I told myself.
I remembered back in 2014 when Reddit and 4Chan invented “Doge Coin” as a joke.
That’s what these cryptos are, I thought, one big old 4chan mischievous joke.
After all, what can you actually do with a Bitcoin?
You can’t take it into ‘Lau Pa Sat’ market and buy a ‘Masala dosa’.
I can’t pay the rent to my 60 year old Chinese landlord.
I’d much rather have a $100 bill tucked away in my wallet when I’m travelling through rural Pakistan than a bitcoin on a keyring.
The utility of Bitcoin still, really, eludes me if I am honest.
However, someone far richer than me this week spent $450M on an old painting, when he or she could have bought a poster of it for $5.99 in the museum gift shop, so I guess the raw utility of an object doesn’t always define its price.
If you buy gold as an investment, what is the actual utility of it?
Gold doesn’t do anything, it’s just a dumb shiny brick that we pay people to dig out of the ground, refine, and then bury underground again in vaults and pay gruff men with guns to guard it.
A certificate of stock ownership is just a fancy bit of paper that you hope, should push come to shove, that some legal system somewhere would recognize.
A $100 bill in your pocket has no inherent utility in and of itself. It only has a value because we all agree that it does.
If you found yourself abandoned in the desert, a bottle of water and a compass would have far more utility than a briefcase full of dollars.
So, anything can exist as a store of value provided that enough people agree that it is one.
But for the longest time, the only people that agreed a Bitcoin was a store of value were society’s oddballs, nerds, and criminals, and they were seemingly up against the global central banks that control the financial market status quo.
You can forgive me, I hope, for thinking Bitcoin was on course to be the ‘Google Plus’ of the financial world.
This summer I attended RISE Hong Kong tech conference and a guy was giving out 1000 Satoshi’s (1/100,000,000’s of a Bitcoin) for free if you used his mobile app to store them.
This was all the exposure I ever had to any cryptos.
As 2017 rumbled on, the tech world lit up with ICO’s (Initial Coin Offering) as a ridiculously easy way to raise money by essentially running a bootleg IPO for your company, without the downside of giving up any equity.
This, surely, was it for the crypto boom, I thought.
These barely regulated, penny stock gambling, house of cards, mockery of finance, were surely just more proof that I was right to sit out this whole crypto ride.
Among them, was the “Useless Ethereum Token” which states very clearly on the website:
“You’re going to give some random person on the internet money, and they’re going to take it and go buy stuff with it. Probably electronics, to be honest. Maybe even a big-screen television.
Seriously, don’t buy these tokens.”
At the end of July this year, the “Useless Ethereum Tokens” had a market capitalization of just under a Quarter of a Million Dollars.
Forks and Hacks
Then there was the complexity and lack of agreements that sent Bitcoin into a fritz.
All the talk of a “hard fork” and the splitting into Bitcoin and Bitcoin Cash, just sounded like an idea with no consensus on where it was going, or what it even wanted to be.
Then there were the constant stories of hacked wallets, raided exchanges, and then the infamous “Someone accidentally deleted $300M of Ethereum” story.
The Investing section of Reddit laughed in delight, and felt smug to still not be in the crypto game.
Silk Road => Wall Street
But for all of the above, Bitcoin kept on marching.
And the bankers started to take note.
For every article on JP Morgan Boss, Jamie Dimon, Calling Bitcoin a “Fraud”, there’s an article showing JP Morgan dabbling in it.
Goldman CEO , Lloyd Blankfein, came out, quite rightly, to say that “People were once skeptical of paper money”.
Then the political coup in Zimbabwe saw local demand for Bitcoin spike as Zimbabweans looked for a safe haven for their wealth and found, not gold, but crypto currencies.
Africans living in Europe begin to use Bitcoin as a means of remitting money back to Africa to their friends and family that, in many cases, don’t have a bank account but do have a mobile phone.
So, Bitcoin is already at a point at which it is being listed by JP Morgan on Wall Street, and exchanged between the unbanked, poverty stricken masses in Africa.
As a measure of an accepted “store of value” it’s hard to think of further opposing ends of the financial spectrum that it could reach at this point.
Aside from the U.S Dollar, the Euro, and Gold, it’s also hard to think of other traditional stores of value that would tick the same boxes.
We have to accept it.
Bitcoin is now a widely accepted store of value.
Wall Street is late to the game, but trying to make up for lost time.
The CME (Chicago Mercantile Exchange) plans to list Bitcoin futures contracts as early as next month (December 2017), which will open a whole new derivatives market to speculate on the future price of bitcoin.
This will undoubtedly be a catalyst for Bitcoin as the derivatives market adds a lot more volatility to an already very volatile asset.
But at the same time, the listing of Bitcoin futures on the CME alongside Oil futures, or Gold futures, further legitimizes crypto currencies as an asset class.
Futures contracts are already trading on US exchanges, albeit less prominent ones than the CME.
In addition to this, Exchange Traded Notes and Exchange Traded Funds for Bitcoin and Ethereum give traditional investors a very easy vehicle to get into the crypto asset class within their existing brokerage platforms.
Bitcoin, and to a lesser extent, Ethereum is on the verge of being opened up to the masses of institutional finance, and a slew of new Bitcoin tracking ETFs are in the pipeline to really put the cryptos in the domain of retail investors.
That could see it rise another 10x in 2018, or be squeezed mercilessly to within an inch of its life.
The point is, crypto currencies are an asset class now, and they have their own place in your investment portfolio alongside commodities, real estate, equities, and bonds.
As a techie, I have to say I’m entirely clueless when it comes to crypto wallets and have tried a few times but never really got very far.
However, much to the disgust of my crypto friends, I did finally bend the knee on cryptos as an asset class and put 5% of my portfolio into Bitcoin and Ethereum ETNs (Exchange Traded Notes) today.
If cryptos crash over the next year, 5% is small enough for me to shrug it off and walk away.
If they rally with the inflow of institutional money, then I hope I keep the discipline to rebalance them down each quarter.