I play poker and trade options, seeking edges from study, reflection and analytics.

Before You Chase Bitcoin

Before You Chase Bitcoin

To be participating in the meteoric rise of Bitcoin (BTCUSD, $7,355.00 +325.00 or 4.62%, 11:55 am), one needed, a couple of years ago, an interest turned conviction and never money.

I looked into bitcoin mining in 2013. The research said: acquire specialized, relatively expensive hardware, join mining pools, use lots of electricity, occasionally earn partial coins with little perceived practical application and roughly break even versus costs. I didn't follow through. Then Mt. Gox.

This year, I received/ sold Bitcoin via Coinbase to cash out online poker profits, the last transaction at around $1,800 per coin. The total market capitalization of cryptocurrencies has tripled+ since, and I have been doing more related reading.

Consistent with the price action, most new stories, Tweets and message boards reference Bitcoin's bull case. Less common are the counterpoints, the focus of this post. If you decide to chase Bitcoin's exploding price, or one of the countless forks or alt coins, do so with an awareness of all potential outcomes.

One of the most salient counterarguments I've consumed was presented by Erik Townsend in a recent podcast.

Chat with Traders, Episode 141: Software millionaire fooled by ‘the dream’ and saved by global macro w/ Erik Townsend -- September 6, 2017 (crypto timestamp: 1:04:39)

Erik prefaces the segment by praising cryptocurrencies, Bitcoin and ethereum specifically, calling them "wonderful innovations, government interference proof." He goes on to paint a dystopian picture of their potential future. (Some minor transcription edits were made for readability.)

"I don't think it's going to be allowed to exist. Governments will hijack all the best technological innovations of first-generation cryptocurrencies.
It will be an arms race between governments to see who can control this. The PBOC is hiring blockchain engineers to work on the digital RMB. China and Russia are likely working together on crypto and de-dollarization.
Government-backed cryptocurrencies will have exactly the opposite set of design criteria. Centralized government systems can always track and know who has any penny of worth in the financial system. They will outlaw cash and first-gen cryptocurrencies, enact laws saying anybody caught having first-gen cryptocurrencies will be subject to forfeiting them and say Bitcoin is the tool of terrorists, tax cheats and the 1 percent (to gain the people's support).
Governments will figure out that Bitcoin is every bit a threat to them as it was designed to be. It was designed to give people the financial freedom and independence of not being subject to government overreach. But, government doesn't see it as overreach; they see it as their duty, and in this social environment they can very easily get away with just about anything by saying it's necessary to fight terrorism.
I don't like any part of that story. But, I think that is far more likely to play out in real life than this pipe dream that Libertarians have that Bitcoin will change everything: everybody is gonna go to Bitcoin and enjoy free commerce online; government won't be able to tamper with or interfere or tax it... That's not going to happen! The government's going to outlaw this stuff because it's not in their interest. It's in the people's interest.
People in the space (e.g. blockchain engineers) say they know this is coming and are thinking about competing, in terms of selling the benefits of independent crypto vs government-backed crypto. What I fear is they won't be able to compete because it will be just outlawed.
Right now, it's not big enough to cause any problems."

In his recent Medium post, Daniel Jeffries echoes Erik's narrative, but he's more optimistic that decentralized crypto will have a place in our digital future.

What Will Bitcoin Look Like in Twenty Years? -- October 31, 2017

One of the more interesting parts of his disjointed writing is the section "13) Bitcoin Has a 50/50 Shot At Surviving."

"Bitcoin is a beautiful, brilliant idea and it’s already changed the world. It won’t fail because it’s a fraud or a scam, but because of its own hard coded rules, in-fighting and lack of governance."

That's his conclusion after discussing several technological and organizational challenges of Bitcoin, many of which I've independently synthesized this year.

Is the first major U.S. political challenger to Bitcoin emerging with President Trump's appointment of Jerome H. Powell as the next chairman of the Federal Reserve (Fed)?

I think we can all relate to this humorous tale of terror: ‘I Forgot My Pin’: An Epic Tale of Losing $30,000 in Bitcoin. Is the complexity of today tomorrow's opportunity?

Okay. That's a lot of interesting information. What are the key takeaways?

If participating in the boom, expect:

  • extreme volatility (i.e. rapid ups and downs)
  • big failures and consolidation (i.e. coins go to zero and others capture their demand)
  • war between centralized and decentralized technologies (i.e. Bitcoin versus governments)


  • be aware of negative outcomes and their probabilities (i.e. avoid euphoria and emotional decision-making)
  • use relatively small amounts of capital (i.e. don't invest more than you can lose)
  • identify platforms/ communities with broad developer support, well-executed ideologies and clear, available use cases

Or just take the red pill and jump!

In addition to the majors, I am following the Electroneum project (mobile mining) and others related to UBI (universal basic income).

Lead image source: Google Search. Assuming Creative Commons license until I learn otherwise. Modified.
Hidden Variance

Hidden Variance

Quarterly Report

Quarterly Report