As most of you know who follow my twitter feed know, I think buying bitcoin is a good idea. Most of the time I blog about poker and poker strategy, but today I thought I would mix it up a bit and share with you some of my thoughts on bitcoin. Initially, I was a bit skeptical about the technology, but a series of events in my life has inspired greater confidence.
For those of you who aren’t familiar with bitcoin it is a peer to peer payment system that is ideally suited for the 21st century. Bitcoin is commonly referred to as a cryptocurrency, digital currency, electronic money, digital cash, etc. All bitcoin transfers are recorded on a public ledger also known as the “blockchain”. Once you have your bitcoin wallet you will be able to transfer funds to other people who have a bitcoin wallet without fees (or really nominal optional miner fees to expedite the transfer process). You can setup that wallet here.
When I first bought a small amount of bitcoin (late summer 2013) the price spiked 5x in just a couple of months that fall. Along with the dramatic price spike over $1,000 per bitcoin came calls of a “Tulip Bubble” in bitcoin. When the price rapidly started crashing following news that the Chinese government was cracking down on bitcoin the “Tulip” thesis was verified. However, a funny thing started to happen along the way. Bitcoin didn’t die. After bottoming at $339 on April 11th bitcoin started to show signs of strength again. It is currently trading at $570, which is about 50% off its all time high. Unlike Tulips that have little value aside aside from their beauty, bitcoin is a breakthrough technology that allows rapid and secure peer to peer transactions to occur. One of the amazing aspects of this technology is its security. With credit card transactions conducted online there is a transfer of personal financial information that occurs, with bitcoin that isn’t the case. That is key because it is during that transfer of information that it your information is most vulnerable and gets stolen. See recent Target Theft.
There is little question that bitcoin is a high risk investment. It could go down and it could go up. In fact, it frequently moves 5-15% in a single day. However, I think the key with bitcoin is that the potential upside is much greater than the potential downside. With all of the potential applications for bitcoin technology in the world and its relatively small market valuation the potential is enormous. So far bitcoin has been a relatively underdeveloped technology experiencing many of the growing pains that are frequently seen with new companies. The largest bitcoin exchange in the world (Mt.Gox) went bankrupt and was plagued by allegations of theft and mismanagement. However, in the past year bitcoin has started to gain some serious venture capital funding that has created more legitimate and well run businesses like Coinbase and Circle.
Even if we give bitcoin a 50% chance of going to 0 it may still be a significantly plus EV bet. Let me explain… If half the time it goes from 500 to zero and the other half it goes to 2000 then the EV is positive. This is because when you win your profit is $1500 and when you lose your loss I only $500. I don’t believe it has a 50% chance of going to nothing, but I do recognize there are significant risks involved. However, with no real cap on the upside I think this is a great looking bet.
It appears likely that a US based bitcoin exchange will open for the first time this year and be based out of NYC. This along with the Winklevoss twins wanting to create a bitcoin ETF should create some positive momentum behind the price later this year. Bitcoin’s current market cap is just under 7.5 billion at $570, and it is still subject to major price fluctuations. Currently, if I look on Bitstamp (the largest bitcoin exchange) a purchase of just 278 bitcoin would move the price around 1.3%. That is incredible if you think about it. With around $160,000 you can move the market 1.3%. That may sound like a lot of money to you, but it is a relatively small sum to major players. Midsized Wall Street hedge funds often have 100 million in assets under management. If Wall Street and major hedge funds start entering the market the price will have to go significantly higher.
An ETF of bitcoin would also be an incredibly popular trading instrument among Wall Street traders. The price volatility would create significant opportunities for traders. Ultimately, I expect that as the price rises volatility will gradually drop over time. The early days of bitcoin were far crazier than the recent moves have been, and I expect that trend to continue over time. While this may still seem wild on an absolute basis they should be less relative to what came before.
One of the knocks on bitcoin has been that it is used for illicit activities such as the Silk Road. While it may be true that many of the early adopters were tempted by the anonymity of bitcoin, that is rapidly changing. Keep in mind that unlike cash there is a record on the blockchain of all transactions that occur. Increasingly, as regulators get involved with the technology it will drive these more fringe elements out. In fact, I have a feeling that while libertarians may have started out loving bitcoin they are going to end up hating it.
One of the more ridiculous things about our modern economic system is that with literally everything that you (the consumer) buys, there is a 2-3% premium due to the payment processor. The biggest payment processors are Visa, Mastercard, and Amex who charge retailers this fee (indirectly you) and drive up prices. Bitcoin allows for a rapid and secure transfer of funds without these exorbitant fees. While I would love to think that all of us will simply adopt bitcoin tomorrow and stop paying these fees, I doubt that will happen. Rather, I think that Visa, Mastercard, and Amex will be forced to focus more on the credit side of the business. Some people need that credit in order to make a purchase and bitcoin can’t offer that to them. Bitcoin is currently more comparable to a debit card than it is to a credit card. If you don’t have the bitcoin in your account you can’t do the transaction.
What I have realized over the past several months is that we need bitcoin… I went to a Canadian bank not long ago with an overseas check that was denominated in CAD. They told me that because it was a CAD check drawn on a foreign bank account it would have to be “manually cleared” and would take 2 weeks and cost me $20. Annoying! In the 21st century it takes 2 weeks to clear a perfectly legitimate check drawn off a major financial institution in the western world. Absurd!
Aside from this little experience I was working on the self publishing of my recently released book Exploitive No Limit Holdem. In the process i was signing up with various companies like Google, Apple, Barnes and Noble, etc. What I realized is that receiving payments can be in a pain in the butt. First, you need to give them all this sensitive financial information (bank account #, routing, etc) and even then it doesn’t always work seamlessly. With one of the companies I had to call my bank to confirm the routing number because in Canada we don’t have an IBAN #, which is what they wanted. There are often several terms for essentially the same thing and every country in the world does it differently. Some countries might call a number a bank code while another country calls it something completely different. The bottom line is it’s a giant pain the ass and it would be made a lot easier if people just used bitcoin!
Alright, well I hope that you enjoyed my blog and I accept bitcoin donations to help support it. Just send it to the following address. Its that simple! I just wish many more transactions were like this… Thanks!
Written by Paul Ratchford “ThePokerCapitalist”