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Published December 26, 2017:
Isn’t Christmas time just wonderful, so much time with family, really, just… so… much time. With family.
If you caught the irony in that statement, you, too, need a distraction, an excuse to detach from the conversation and take a little “me” time. So take a few minutes to read this, our fourth column on bitcoin and all that it has unleashed. Your relatives will appreciate that you did.
Gold, the precious metal found in dental work, beautiful jewelry and Fort Knox, has been a “store of value” for five thousand years. Invented by nature or God (take your pick), it is able to survive global economic meltdowns and even nuclear meltdowns. It has been said that if you accumulated, in one place, all the gold mined since humankind started doing it, you’d have enough to fill only three or four Olympic-sized swimming pools.
An ounce of gold currently trades at $1,280 or so.
Now compare that to bitcoin: extant less than a decade, invented by unknown creators in 2009, said to be in a finite supply of only 21 million coins, and weightless, invisible, untraceable. It started the year 2017 priced near $1,000 and just bumped up against the $20,000 mark before settling down near $15,000, with millions of people trying to get in on the Bitcoin Bubble.
So, what holds up the price of bitcoin? Not GDP growth or earnings at any particular company; not the price of gold. The main thing keeping bitcoin prices aloft is little more than speculative frenzy and the virally spreading desire to own a piece of this newfangled invention. This is emotional, and it is important to force the emotional to bow to the rational.
Here are five easy pieces of advice for investing in bitcoin and its lesser brethren:
1. Bet only money you are willing to lose. When you buy a stock, usually the chances are almost zero… that the price will fall to zero. Buying crypto-coins is more like trading in puts and calls on the CBOE, options that have a definite expiration date and which often end up worthless. So invest only what you are willing to lose at this roulette wheel.
2. It is utterly insane to borrow money from elsewhere to invest in bitcoin or any other cryptocurrency, whether the borrowing is from a new low-interest credit card or from a second mortgage on your home. Be smarter than that.
3. It may be safer to buy bitcoin and skip the imitators. In the long run, anyway. In this realm, the Shakespearean axiom that a rose-is-a-rose-is-a-rose seems untrue to us—there’s bitcoin, and then there’s everyone else. We would advise betting more on bitcoin. Other currencies such as Litecoin (LTC) and Ripple (XRP) may rise higher in percentage terms when they do rise, given bitcoin’s extraordinary climb, yet bitcoin’s price may fall less that that of its knockoffs.
4. Even bitcoin may be only a short-term play. Some “investors” may ponder putting up $20,000 for one bitcoin, locking it away in some Coinbase-like account (“cold storage”) and returning ten years from now to unearth a coin worth $20 million. One-thousand-fold returns have happened for the earliest bitcoin buyers. Now, however, the Law of Large Numbers makes a thousand-fold rise from these levels much more difficult. So if you do make a wager, watch it closely and constantly, and be ready to bail.
5. If you invest, consider the “halfsies” rule. I know, it’s pussy, right? (As in “pusillanimous,” gutless, timid.) Yet it is a way to avoid Bitcoin Bubble Bankruptcy! So if you put up, say, $10,000 in a bitcoin account, and the price doubles from where you started, sell half your stake to recover your original bet, and let the other half ride. This way your principal will be preserved, yet you retain a stake in the next round of upside.
Remember, my friends, the way to get rich is focused more on preserving and protecting what you have earned than on finding the next windfall. Good luck.
Evan McDaniel, aka @sellputs, is a derivatives trader, algorithm wizard and advisor to hedge funds. You can reach him at firstname.lastname@example.org.
Some content provided by Dennis Kneale Media.