Comments: (C) The ABC of Making the Bitcoin Investment Decision - part C first - Currency, buy the Coin!

> Unlike stock markets, if you've just put $75m of VC cash into Bitcoin currency, you have just purchased yourself a rather nasty little problem #3: you can't sell out!

How did you put $75m in in the first place without any little problems?

> Are you lucky? To avoid the curse of excessive luck we typically suggest ... wait for it ... Diversification! And therein lies the rub. Although you've diversified from the risk of business collapse, you've just picked up other risks, being bubble popping, liquidity and fraud. Indeed, given the nature of Bitcoin, I think we can pretty much dismiss /buying the coin/ as a diversified strategy across the business of Bitcoin.

I don't follow. Your argument here seems to be 'strategy C has non-zero risk; strategy B has non-zero risk; therefore, strategy C is as risky as strategy B'. That does not follow, to say the least. Just because there is some risk in holding Bitcoin because you may have bought at the top of one of the 4 or 5 Bitcoin bubbles thus far, doesn't mean that the risk is exactly the same as investing $75m in MtGox. Does this pass a quantitative look? Typically the bubbles' peaks are something like double the steady state, like the current one peaked at $1000 and has declined to $500; so you risk losing half your money. Can you invest in Bitcoin companies where your risk is only losing half your money? Or do only half of Bitcoin companies fail? How would that work, exactly? How can each company be as safe as the overall market? Would this argument work anywhere else? 'Holding dollars is just as risky as investing in the local lemonade stand which sells in USD, therefore, we can dismiss the idea of holding dollars as a way of diversifying away from risk'?

> Rather, buying the coin is a precise investment on a particular instrument -- the herd.

Where the herd is everyone who uses or invests in Bitcoin, including all the individual companies one might invest in otherwise. Sounds pretty diverse to me.

> You've staked your future on the Bitcoin bubble. The only way that a bubble grows is if more people come in than go out. Or, more money, in than out.

...and Bitcoin companies haven't? Coinbase is going to have a hard time growing if fewer people use Bitcoin as time passes!

> And generally, what we find when we investigate the complaints is that everyone knew it was a bubble. Everyone believed. Everyone knew it was the opportunity of a life time. And everyone turned on their friends and families and pulled them into it.

And everyone knew Bitcoin was a bubble at 5 cents, at 50 cents, at 5 dollars, at 50 dollars, and at 500 dollars.

'There is a common-place book argument,
Which glibly glides from every tongue;
When any dare a new light to present,
"If you are right, then everybody's wrong"!
Suppose the converse of this precedent
So often urged, so loudly and so long;
"If you are wrong, then everybody's right"!
Was ever everybody yet so quite?'

Posted by gwern at April 22, 2014 03:35 PM

The problem with hoarding

Wilson said that rampant speculation, bitcoin hoarding and price volatility go hand in hand, arguing that most people still decide to sit on bitcoin, effectively hoarding it and waiting for the price to go up. Such behaviour causes supply problems, affecting volume and price in the process.

Posted by Wilson pulls his punches... at July 21, 2014 11:33 AM
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