Why is Bitcoin "digital gold" crashing right now?

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WolfeTone said:
If so, how did you calculate $10k as the price to short it?
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Hi Wolfie

The valuation is clear - Bitcoin is worth zero.

However, as long as there are irrational fanatics around, there is risk in shorting it.

I did short it at $14,000 initially and set a price to close out at $3,000. I stuck to that and it came down close to $3,000 but I didn't close out. I was greedy and waited. And it bounced back. I watched a lot of my gains fade away.

So it approached $5,000 on the way down again which coincided with me needing cash, so I closed out.

I can't forecast the irrational movement of Bitcoin. I can only tell you the end point - zero. I will short it at $10k when I have the cash. I understand the risk and will close out if it rises to $20k or if it falls to $5,000. That is the rough plan at the moment. When I have the cash I will firm up on that.

As with all short sales, if there is no change in the underlying information, it becomes an even better value short as the price rises. But it's hard to stake more money on a bet which is under the water.

Brendan
 
Duke of Marmalade said:
Oh I think that is a gold herring.
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i wonder does that mean I'll be getting the same answer as I got in July 2019? (A refusal to answer).

So as folks unfamiliar with Bitcoin try to weigh it up here, I'd encourage them to join the dots and figure out what claims check out and which ones don't.
 
WolfeTone said:
So if you are going long or short on bitcoin, its all irrational behavior?
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Hi Wolfie

The ultimate price is zero. So it's a bet with a positive equity. The average person who shorts Bitcoin will make money.

However, it's still risky. In my view, the gain is well worth the risk. But I have to manage the risk.

People who are willing to pay $10k for something which has no fundamental value but shares some common features with toe nails and currencies could well push the value up to $100k. There is not accounting for the irrationality of people.

I freely admit that if I had been aware of it when it was $800, I would have shorted it.

So hopefully it will fall from $10k to $5k.

Then hopefully it will rise again and I will short it again.

And so on. While I am disappointed that my forecast that it would not last a year turned out wrong, it could well be the gift that keeps on giving.

Brendan
 
Brendan Burgess said:
There is not accounting for the irrationality of people.
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No there is not, so im somewhat intrigued as to how you came to the notion of shorting it at $10k. Why not $8k, or $12, or even $20k or $100k?
How did you come to decide $10k was the price you would short it?
Seems like to me, and having you acknowledge that it could go to $100k by virtue of all this irrationality, then the potential gains are very much on the buyers side.
But that's just my take, you have your view. In the end, the market will determine the price at which all this irrationality, including your own, is to be valued - just like gold.
 
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Hi Wolfie

Good questions and hard to answer.

The ultimate destination is zero.

So shorting it at any price has a net positive expectation.

Buying it at any price has a net negative expectation.

So buyers will lose more than sellers.

It is tough to close out at $5k when you know what you are, in effect, buying, is worth nothing.

Given all that, my gut feeling is that it seems to go up and down. I doubt it will trouble the $20k level, but it might.

I could wait for $15,000 , but it might never get up there and I would have missed out the opportunity of shorting it.

Brendan
 
Brendan Burgess said:
The ultimate destination is zero.
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For sure, just like the thousands of fiat currencies throughout history, they all return to zero.

Brendan Burgess said:
So shorting it at any price has a net positive expectation.

Buying it at any price has a net negative expectation.

So buyers will lose more than sellers.
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I think there is a critical element which is entirely missing in your thought process - time.
You have already acknowledged that the market price of bitcoin could go either way by quite some significant margin, before it returns to zero, but you haven't assigned a period of time to any of these fluctuations which is a critical error.
And I think we can all agree that it is virtually impossible to time the market?
So the question is, between now and then (returning to zero) which way will the price go?
For my part, I have no expectation that bitcoin will return to zero anytime in the foreseeable future. Quite the opposite in fact, I expect it to feature more prominently in our increasingly digital and internet based interactions. Admittedly, I do find a lot of tech talk goes over my head, but then again, most sectors develop their own lexicons detached from the lay person. But I don't have to understand the complexities within to understand the concept. I also garner confidence from the extent and prevalence of informed opinion that permeates from the IT industry that is continually investing time in bitcoin. You would have to be blind not to recognize that a lot of well educated and informed people are innovating, developing and working on solutions on the bitcoin network.
Its my guess that after 11yrs, if bitcoin was BOHA, this topic would have been consigned to history already. Instead, im of the view that bitcoin is merely in its infancy.
I have no idea what price bitcoin will be at any undefined time in the future anymore than knowing what the price of my house will be. With the distinction that my house is a finished product, bitcoin I feel, is just at foundation stage.
My expectation is that bitcoin is here to stay for the foreseeable future and that if the concept continues to develop then that, in my opinion, represents an opportunity to buy.
 
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WolfeTone said:
You have already acknowledged that the market price of bitcoin could go either way by quite some significant margin, before it returns to zero, but you haven't assigned a period of time to any of these fluctuations which is a critical error.
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Hi Wolfie

I had my last short position for 18 months. I was annoyed and frustrated that it did not fall to zero quicker. But I was in no hurry as I was in the money soon after shorting it.

When I short it again, I will face the uncertainty that comes with volatility. If it rises by 50%, it will be disappointing. If it falls by 50%, I will close my position and hope that it rises again.

But we agree that we can't get the timing right.

So I won't bet the shop on it. I will just allocate a percentage of my portfolio that I am prepared to lose in full.

It is not like buying a portfolio of shares which rise over the long-term.

But it is part of a portfolio. Some will be profitable. Some will be loss making.

Brendan
 
So after all this discussion your claim that bitcoin will return to its ultimate destination of zero is not predicated on anything other than the realization that everything will, one day, return to zero?

Excuse my ignorance, comparisons with toenails and proclamations of BOHA I assumed, naively now it seems, that you were calling out bitcoins ultimate destination , if not imminently, but within at least a short-term period of 18-24 months?
If so, your strategy to close out your position after a 50% price drop is wholly irrational in the face of the ultimate destination.
 
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@Bren
Brendan Burgess said:
Hi Wolfie

The ultimate price is zero. So it's a bet with a positive equity. The average person who shorts Bitcoin will make money.

Brendan
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Do you have evidence to support that the average person will make money? That appears quite a careless statement and could be misconstrued as a statement of fact to the untrained eye.

On a separate note......you have made two statements
1. Bitcoin has a value of zero
2. The reason it has not gone to 0 is that the market is irrational

In this instance, I agree with those sentiments, but I don't see how as an investor you can get comfortable enough to put on a trade knowing the market is irrational? Or is it a case your reason for the previous trade failing (shorting at 10k with a close of 3k) is due to the market being irrational.

Therefore if you short it now, you will make money not because the value is 0 but rather the irrationality of the market that leads to volatility. You could also go long and make money.

Ultimately your first point on Bitcoin will only be proven true if it goes to 0. In the meantime, you will be able to make money shorting it due to the market being irrational.
 
Dublinbay12 said:
You could also go long and make money.
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And given the irrationality of the market, the price could go either way. However, if you short bitcoin your potential profits are limited, but if you go long, the potential profits are unlimited.
So accepting for a moment that the market is irrational, and that this is the only information available to the investor, then surely the rational investor interested in gambling a few punts would try to exploit the potentially unlimited profits and buy bitcoin rather than limit those potential profits by going short?

Unless of course the investor has some other additional information that at least indicates to them that the market will bring forth the ultimate destination of bitcoin within a given timeframe.
The investor may still be wrong, they may get the timing wrong, but without this timeframe in mind, then the potential gains going long far outweigh the potential gains going short.
Surely a rational investor can see this?
 
This is a good summary of bitcoin as a store of value:
Investopedia said:
One of the biggest issues is Bitcoin's status as a store of value. Bitcoin's utility as a store of value is dependent on its utility as a medium of exchange. We base this in turn on the assumption that for something to be used as a store of value it needs to have some intrinsic value, and if Bitcoin does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won't be appealing as a store of value. Like fiat currencies, Bitcoin is not backed by any physical commodity or precious metal.15
Throughout much of its history, the current value of Bitcoin has been driven primarily by speculative interest.
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Two important takeaways. Ultimately bitcoin's status as a store of value stands or falls on its acceptance and penetration as a medium of exchange. Secondly, to date its pricing has been almost totally speculative.
Note that Gold is not used as a medium of exchange at all in the developed world and yet it has established itself as a store of value. On these grounds alone the representation of bitcoin as digital gold and pictures of gold bitcoins on the internet are almost irresponsible.
tecate tries to separate bitcoin's store of value from its use as a medium of exchange (understandably) but this summary from Investopedia shows that he is deluding himself. He is in fact just one of the speculators behind the current price. He is speculating that ultimately bitcoin will be a store of value but what he does not seem to realise is that in effect he is speculating that it will ultimately establish itself as a major medium of exchange.
So a question for tecate, which I do not expect him to answer. If it is finally recognised that bitcoin will not achieve meaningful penetration as a medium of exchange does he still think it will survive as a store of value?
 
WolfeTone said:
And given the irrationality of the market, the price could go either way. However, if you short bitcoin your potential profits are limited, but if you go long, the potential profits are unlimited.
So accepting for a moment that the market is irrational, and that this is the only information available to the investor, then surely the rational investor interested in gambling a few punts would try to exploit the potentially unlimited profits and buy bitcoin rather than limit those potential profits by going short?

Unless of course the investor has some other additional information that at least indicates to them that the market will bring forth the ultimate destination of bitcoin within a given timeframe.
The investor may still be wrong, they may get the timing wrong, but without this timeframe in mind, then the potential gains going long far outweigh the potential gains going short.
Surely a rational investor can see this?
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That is my point, any profit made from shorting Bitcoin currently is not because the value is 0, it is because the market is irrational. Unless as you say there is non-public information known.

I guess if Brendan were to short it at 10k on the basis that the value is 0, he should set his close price at $0.

At the minute it seems like it is just a gamble and thus the directionality of any bet does not matter.
 
I thought that insightful summary from Investopedia was worth two posts.
Investopedia said:
Like fiat currencies, Bitcoin is not backed by any physical commodity or precious metal.
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And now I see it with such clarity. The remarkable success and occasional spectacular failure of Fiat was the spawning ground for bitcoin. Until relatively recently, the idea of a currency without intrinsic backing would have been a laughing stock. The great silver lining of the 30s depression was the recognition that money did not need the backing of physical gold. The very first thing that hits anyone in the eye, including Satoshi, is "but what does the digital entry signify?". And the stock answer from the cultists is "what does Fiat signify?". The follow up is that unlike Fiat which can do a Venezuela or a Zimbabwe bitcoin is untouchable. In fact current conditions could hardly be more propitious for this narrative - QE and helicopter money play into the bitcoin mantra. It is a wonder that it is still less than half the price it was two years ago.
Yes, Fiat does not have intrinsic value, though it is backed the debts of economic agents. Nonetheless, our ancestors would be right to be vary wary of a money which had no intrinsic value. That the concept survives and serves society so well in the main requires very careful management and oversight. If I ever do worry about the value of my humble Fiat holding, I reassure myself that there is a sophisticated machinery in place to support it.
Some day, soon, when Fiat has weathered its current storm and when the bitcoin speculators get burnt yet again the Satoshi will drop that there is no machinery in place to actually underpin its price. It will then drop to earth like a stone.
 
Fella said:
Duke do you think shorting Bitcoin has a positive or negative expected return over a 1 year /3 year / 5 year period ?
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Assuming this question is in good faith I attach the tool I use for evaluating bitcoin shorts. It uses a macro so your blockers may not allow you to open it.
The model allows for 3 time periods for lognormal simulated performance. As sent from factory it has the following inputs.
First 50 weeks 1% downward weekly drift; 10% weekly volatility
Next 50 weeks .5% downward weekly drift; 10% weekly volatility
Thereafter no drift 10% weekly volatility

The test example is to short 1 bitcoin with a stop loss of $10k and a close out if btc hits $1000.
A two year holding period is simulated
The summary result is an expected gain of $1,050 but a 23.3% chance of hitting the stop loss.
I don't like those odds.
 

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Dublinbay12 said:
At the minute it seems like it is just a gamble and thus the directionality of any bet does not matter.
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Hi Dublin Bay

If you give me odds of 6/1 on a throw of a 5 on a die, I have a positive expected outcome. If I roll it 120 times, I will roll a 5, twenty times and win €120. I will roll something else 100 times and lose €100. So I can expect a profit of €20 from the 120 rolls.

It's not quite the same with Bitcoin, but it's something similar. I could short it now and it could rise. If I could do multiple shorts I would expect a profit as the ultimate price is zero.

Brendan
 
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