Bitcoin continues its remarkable runup. How high will it fly?
We interviewed five Seeking Alpha experts on Bitcoin to find out what they think about it, and what other cryptocurrency opportunities they're seeing out there.
What does 2018 hold for Bitcoin and cryptos? Read on to find out.
How high can Bitcoin go? The price seems to vary somewhat depending on the exchange, but at the time of writing (Friday, December 8th), it was at $16,140 - down from a high of $19,000 the day before (based on Coinbase's index). And it's more than doubled in the past two weeks! Is this irrational exuberance at its finest? Is Bitcoin poised for even higher highs? Or will it eventually come crashing down to zero, leaving a trail of broken dreams and empty digital wallets?
Whatever happens, it's already been one heckuva ride. In any case, Bitcoin is getting investors' attention - especially on Seeking Alpha. So we thought it would be a good idea to tap some of our most avid Bitcoin watchers to get their take on the crazy hype train surrounding the cryptocurrency and the current market environment, as well as their outlook for 2018.
(Editor's note: Due to the wild action in Bitcoin this week, we have noted the date that each author submitted their responses).
Seeking Alpha: When relatives ask you over the holidays what Bitcoin is, how will you explain it?
Joe Albano , author of Tech Cache (December 4th) : I try to start simple and use systems we've seen before. I usually begin by saying it's the Napster of digital currency. While that's a loose analogy on several levels, it at least lays the idea of peer to peer transactions up front. Bitcoin's entire purpose is to transfer bitcoins from one person to another without a third party/clearing house - it eliminates financial institutions. Bitcoin is different because it uses a digital ledger that exists anywhere there is a node, and a node is someone (ultimately a machine) that decides to keep the ledger on their device (typically a mining device). Sending transactions is confirmed through this network of nodes and confirms my transaction from me to you - the bitcoin has really gone from me to you and no one can question it.
SA: What intrigues you more as an investor, bitcoin the currency or the blockchain technology, why?
JA: As an investor, it's the currency - clearly, as that's where the money is being made. As a technology guy, I find the blockchain system fascinating - even if it's not all that complicated once you lay the groundwork. Of course, many companies are implementing the blockchain technology to create more efficient methods of data validation, but it's incremental compared to the value investors are seeing directly with the currency. The currency is proving to have market value and has been a way to ride the boom.
CDM: Both. It took me several months after the white paper (Editor's note: Authored by Bitcoin "creator" Satoshi Nakamoto, the white paper explains how Bitcoin and blockchain technology work) was published to really understand bitcoin, but my first interest was in a market solution to a government problem: all fiat currencies were reacting to central banks that were closely coordinating policies.
AH: Both. Blockchain is the child of bitcoin so for me, while blockchain will increase efficiency and settlement with applications across myriad businesses, considering one without the other is like ordering a hamburger at a Chinese restaurant.
J Mintzmyer , author of Value Investor's Edge (December 2nd) : I am far more bullish/interested in the blockchain technology due to its potential in dozens if not hundreds of applications ranging from financing transactions to healthcare records to logistics improvements. Bitcoin (BTC) itself has first-mover advantage as a currency proof-of-concept, but there have already been significant improvements in transaction timing and records/safety that I believe will eventually render it obsolete.
John Rhodes , author of the Digital Coin Collective (December 5th) : Bitcoin is like talking about beds, sheets, and pillows. Blockchain is like talking about sex. The truth is that there are an extremely limited number of use cases for Bitcoin. On the other hand, you can theoretically build an entire business on one small slice of a single blockchain.
SA: Besides bitcoin, is there any other cryptocurrency that interests you as an investor? Please elaborate on why it appeals to you.
JA: Litecoin is another currency I like and own because it's different than Bitcoin as far as its hashing method. It allows for quicker transactions and is more GPU-friendly, whereas Bitcoin is ASIC (application specific integrated circuit) dependent - which is those $3k-4k machines that mine Bitcoin. More than this though, it's just another diversification in the cryptocurrency space. It's clear there's money to be made in Litecoin as well as Ethereum as they both are mainstream enough for the casual investor.
CDM: Yes. In addition to Bitcoin, I mine Litecoin, Dash, Ether, Zcash, and Monero. In fact, while Bitcoin was my favorite currency for 2017 , it has been my worst performing digital currency to date.
AH: All 1320 and counting do: All Cryptocurrencies | CoinMarketCap . However, right now I am focusing on the various Bitcoin digitals: Ethereum, Dash, Litecoin, and Ripple.
JM: I view all cryptocurrencies as extremely speculative right now and there won't be significant long-term value without backing from an international organization or at least one major country. Due to the nature of currency markets, it seems unlikely that we'll see a major player like China, US, or the EU backing one of the existing technologies. Most likely they would want to pursue their own version with backdoor controls, which then sort of undermines the "anti-Fed" sentiment a lot of these cryptos are benefiting from.
JR: Allow me to spin this around. Investors shouldn't care about making money with any specific cryptocurrency but instead they should first seek to protect their capital. Safety first! Example: Any new cryptocurrency ("ICO") that is trying to act like a financial security or some type of "money token" makes me pull out the barf bag. Can you say regulation? That's why I'm more interested in product-use and utility tokens, along the lines of maybe Filecoin or IOTA. Not an endorsement; those are just some flavors of cryptocurrency ice cream to sample. Due diligence required.
JA: I'm not particularly a fan of the crypto funds. The premiums act more like options on the currency itself, which is fine if that's what you're willing to chase. For me, I like the straightforward, direct approach. This aligns with my stock investing approach also as I don't own any funds there either.
CDM: Bitcoin Investment Trust is a great short. I would avoid it , would short it, but never have and never would own it. GBTC is worth less while OTC:BITCF is actually worthless. Winklevoss Bitcoin Trust ETF? It is impossible to answer that question without a price. Risk is always and everywhere a function of price.
AH: Unless they have a secure platform to store coins with full disclosure, I will not touch these products. Derivatives in the form of futures and options will provide the ability to issue more robust ETF/ETN products. Can't wait for the leveraged ones; they will be like heroine for action junkies.
JM: It's a great concept to have an equity vehicle for exposure to BTC or other cyptocurrencies, but such a vehicle should trade near its underlying net asset value ("NAV"). It's my understanding that GBTC has been trading at a substantial premium recently. That's fine, it's a market, but I'd prefer to see options available on these instruments to allow for a more stable situation and to allow investors to hedge their positions.
JR: First, GBTC traditionally has traded with an average premium of 42%, and that premium moves up and down significantly. There are times where Bitcoin goes up, but GBTC drops because the premium shrinks. Wrap your noodle around that because it means you're trading through the underlying BTC volatility but also through premium volatility. It's worked so far because BTC has been on a rampage upward, plus GBTC can be bought on the market directly and in IRAs and 401(k)s. However, with competition coming, futures launching, and more, GBTC could be a wonderful short if the premium explodes upward. That said, I have zero plans to buy Long or go Short. The sign says "Beware of Dog!"
SA: Government crackdowns are often brought up when people discuss cryptocurrencies. How does that risk play into your investment outlook (if at all)?
JA: It does to an extent, but I've been seeing a lot more acceptance of Bitcoin in major countries than I have been seeing crackdowns or regulations. China flops back and forth and is likely orchestrating it as a method of controlling the market, either in price or in mining - to little more than temporary avail. But if you take a look at the list of countries that deem it legal, it far outnumbers those that have outlawed it. In other words, governments would have to do a lot of reversing (taking wins away) rather than a neutral to negative/illegal stance in order for Bitcoin to begin taking hits.
CDM: Government's manipulating and interfering with market price discovery is why I would keep about 10% of cash in Bitcoin and would have a significant amount of the rest in other digital currencies. When I hear of government crackdowns, it makes me question why I would hold almost 90% of my cash in government-backed fiat.
As an American, I prize owning an anonymous and borderless store of value. But were I in Zimbabwe, Venezuela, or even China, I would prize those characteristics all the more. If any state makes any move to restrict your (or your money's) movement: get out now. Drop what you are doing and get yourself and your money to relative safety. In terms of economic freedom , I live in a top 20 country (formerly top 10). There are 23 repressed countries and another 65 that are mostly unfree. If I lived in any of those, I would flip my 90% government/10% digital currency and instead hold 10% government and 90% digital.
Let me mention one country in particular. I have long been a Russia bull despite its place among the mostly unfree countries. The current and foreseeable administration was once highly discouraging of Bitcoin; today, they are highly encouraging. At the personal level, public sector leaders may see some of the same virtues (anonymous, borderless) that are so prized in the private sector.
AH: Governments must crack down on these eventually as it impacts their ability to control the money supply. I expect a government or supranational institution to issue a digital currency in 2018 and that should attract lots of attention and liquidity. The real threat, in my opinion, is not to governments, but to banks, credit card companies and their fees. I am considering shorting some of the high-profile credit card companies as I believe margins will narrow dramatically as competition for consumer business increases because of the digital revolution.
JM: I'm generally opposed to any sort of "crackdown," but I do think a substantial part of the current BTC valuation is based on a misguided belief that these currencies will eventually replace the global monetary base. That would require massive adoption and a general surrender of sovereignty in the realm of monetary policy, I believe the odds of that (from a major country) is near-zero. It doesn't take a "crackdown," but rather a continual stiff-arm, coupled with new developments, to decimate the current value of an instrument like BTC.
JR: Winter is coming! That said, I generally ignore how this impacts Bitcoin and Ethereum and a few others that I can't discuss in public. What I will say is that all ICOs are at risk. And I expect that somewhere between 95% and 99% of ALL smaller coins will be destroyed by "Crypto Winter" once governments come in to protect themselves, their central banks, and their taxes. Of course, this will be for the safety of their citizens, right?
SA: What do you think 2018 holds for cryptocurrencies?
JA: It's going to be an interesting year and could be a make or break for the currencies as far as adoption and market value. There will be significant gyrations and volatility in the value versus the dollar, but I don't foresee them collapsing and becoming obsolete - there was too much traction in 2017 for 2018 to be looking bleak. But this is new territory and no one can say with certainty what the price and adoption rate will be this time next year.
CDM: ICOs. I am looking at one or two that should be great opportunities. In addition to ICOs, we should see BTC volatility decline as mining becomes less and less profitable and as wider acceptance make transactions more and more practical. I hope for a few major government auctions, which are good opportunities for anyone who wants to buy significant blocks of BTC.
AH: A continuation of massive volatility and unprecedented successes and failures.
JM: I have no idea where BTC (or smaller players like Ethereum, Litecoin, Ripple, etc.) trade in the short term. You might as well ask me to predict the movement of the S&P 500 or the exact price of oil in two months. Prices right now are a function of supply/demand - BTC has a relatively fixed supply (and a hard cap) and interest (demand) has been spiking over the past year. This "shortage" has led to massive price spikes and as folks see BTC spiking, there's a sort of drive to catch the "next big one," which I believe has led to the spikes in almost all other cryptos.
Eventually, I expect this to unwind, and a lot of folks will be in extreme pain as they see their account balances plummet. I'm not sure if we've seen "peak Bitcoin" yet. Last spring, I suggested BTC could pass $5k, perhaps even $10k later this year, back when even BTC bulls weren't expecting that. Never underestimate the potential for a bubble to get bigger, and long BTC has been a phenomenal trade for those with the foresight and the stones to take it. Eventually though, I believe the vast majority of these coins will be nearly worthless. Will it occur in 2018 or 2019 or 2020? I'm not entirely sure, nor am I making such bets yet.
JR: First, Bitcoin has fallen 50-80% several times. Futures and derivatives are on the horizon. More, more, more uncertainty. Expect a flood of volatility. Second, the momentum for cryptocurrencies is incredible. If we're in a bubble, we're not in the euphoria stage yet. Main Street and Wall Street aren't really even in the game. PROOF: We're not seeing "Bitcoin Accepted Here!" signs at the QuickLube down the street or online at Amazon. I think it's pretty obvious what happens when you add all this fuel to the already burning fire. Danger!
SA: If someone has sat on the sidelines until now, what would your investment advice be if they are considering investing in bitcoin?
JA: Take 1% of your portfolio and put it into Bitcoin and perhaps another percent into another crypto like Litecoin or Ethereum. Many have called for it all to collapse this year, and the market continues to move upward. I'm not saying I can substantiate the why or the return, but risking a small amount of your portfolio can potentially bring in large returns. I did it just as a diversification into something off the beaten path in the middle of last year and it has turned into my largest return in 2017. Will that continue? Perhaps, but I say there's a good chance of more appreciation to come, even if the rate is smaller than this year.
1. Get 10% off of your first $100 BTC purchase on Coinbase.
2. Get a good digital currency hardware wallet .
3. Use your credit card if you have one with good rewards (3% cash back, etc.).
4. If you are interested in mining, only go for it if you have access to very low cost or no cost electricity. Otherwise, the only chance of profitable mining is here .
Despite the price move over the past few years, I remain optimistic about Bitcoin's future and would consider holding 10% or more of your cash in Bitcoin.
AH: Be careful, get educated, and look at the new issues coming to market each day. Bitcoin is likely to go a lot higher, but on a risk-reward basis, it is dangerous.
JM: First, I'm not a fan of the word "investing," as we are clearly in the realm of vast speculation. There are a few "true believers" who plan to hold indefinitely and legitimately expect BTC to replace global currency, but the vast majority of the buyers are playing a greater fool game where they hope to "buy high and sell much higher." There will be futures trading within a few weeks, and I believe this will significantly de-risk the market by allowing longs to hedge their position and for potential shorts to have an avenue to bet against BTC without risking account wipeouts on margin.
Overall, if someone wants to try to ride the wave, I believe it's best to understand the game: you're buying to flip to someone else down the road, and you're betting on the mania getting even more wild. This isn't some sort of permanent investment. There have been MASSIVE profits for anyone who bought BTC in the past 5 years, even the past 5 months, and there might continue to be massive trading profits. One day, it's going to be all over. Don't be the sucker holding these last. Finally, position exposure is everything - gambling 5% is probably fine for most people. Mortgaging the house... not a good idea. It should go without saying, but lots of "day-traders" during the dotcom bubble lost everything when they forgot they were playing a "greater fool game" and instead believed they were making investments.
JR: Investing in Bitcoin to make money is stupid and dangerous, but maybe fun. On the way up, it's like rock climbing; on the way down, it's like skydiving without a parachute. And yet, if you're not investing a little bit of money into Bitcoin, or maybe Ethereum, then you're missing out on getting a true informational edge. Putting money in the game gives you experience, no matter how the dice roll. Bitcoin could go to zero (it won't!) but even if did, you're left with blockchain. It's a game changer. Therefore, even $100 can dilate your mind. This is coming from a conservative, dividend-oriented, value investor. I'm kind of like the Crypto Curmudgeon and yet I'm saying that $100 is table stakes; let's do this.
SA: What resources would you recommend for readers looking to learn more about the mechanics of bitcoin mining or wallets?
JA: Read from the sources themselves, like this and other straight-from-the-open sources that give you a handle on what it is behind the seemingly wondrous five-digit market value. Some light reading may also include Bitmain's blog , the company that develops and sells ASIC mining hardware (may require a Google translate to English). Finally, reading up on wallets from Coinbase is a more practical approach if one was closer to purchasing bitcoins or the like.
CDM: Read. I recommend Digital Gold to start off with. It can teach you a lot and describes aspects of the early bitcoin revolution that captivated me at the time. Then I would check out the two perspectives compared and contrasted in Bitcoin Bull Vs. Bear At $10,000 .
AH: I would watch Seeking Alpha, as it is an unbiased source for lots of information and contributors are offering lots of views and opinions on a daily basis. Read those comments - sometimes those who comment know more than the authors.
JM: There are thousands of articles and reports across the internet that discuss Bitcoin and other currencies, ranging from technical explanations to economic theory/treatises. There are also several writers on Seeking Alpha who have submitted good bullish and bearish cases. Chris has came out as a BTC bull, and Ian Bezek has written a good bearish angle . I've also shared my thoughts in a recent blog post .
I encourage everyone to read all the angles and make their own decisions. Be wary of those who claim to know exactly where the price is going or those who are hawking "trading systems."
SA: Thanks again to our panelists.
This interview was conducted by Robyn Conti, SA Marketplace contributor success strategist.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Joe Albano owns Bitcoin and Litecoin. Chris DeMuth Jr. is long Bitcoin, Litecoin, Dash, Ether, Zcash, and Monero. I reserve the right to make investment decisions regarding any security without notification except where notification is required by law. Disclosed ideas are related to a specific price, value, and time. If any of these attributes change, then my position might change. This post may contain affiliate links, consistent with the disclosure in such links. Andrew Hecht always has positions in commodities and other markets in futures, options, ETF/ETN products, commodity equities, and other financial products. Those long and short positions change on an intraday basis. John Rhodes is long BTC, ETH, LTC.
Seeking Alpha is a crowd-sourced content service for financial markets. Articles and research covers a broad range of stocks, asset classes, ETFs and investment strategies. Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by Seeking Alpha, on December 8 , 2017. Petroleumworld reprint this article in the interest of our readers and does not necessarily reflect the opinion of Petroleumworld and its owners.
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