Screen Shot 2018-04-24 at 7.50.25 AM
One month from March 23rd, 2018.

From a low of $6620.41 on April 6, 2018 Bitcoin has been steadily rising. It currently sits at $9300.  Steady is good.  These prices do not reflect impulsive behavior or a “fear of missing out” (FOMO) nor “fear, uncertainty and doubt” (FUD). Bitcoin’s price, as a global phenomenon, is battered between U.S. investor sentiments and those of South Korea and other parts of Asia.  There seems to be agreement in the past few days.  When investors are not busy doing other things and can focus on their personal Bitcoin holdings it is interesting to see what they do.  For that look, at Sunday prices until 3:30pm EST when Asia is awakens Monday morning.  What we see is good. Steady is good and a steadily rising straight line is the best.  We’ve had many such days in the past two weeks.  Yesterday, too, there was a sudden $250 jump midday.  There was no news to account for the rise. That is also a very positive sign.

The next milestone is the $10,000 level.  This will sound overly simplistic but from that level the price will either rise or fall.  From that level the investing community will be deciding whether or not Bitcoin is on a new uphill climb or exhausting the current one.  If it crosses through $10,000 then you can expect it to go much higher.  At the end of February and the beginning of March Bitcoin was testing $11,000 before it fell to its low of $6620.  It hadn’t seen those lows since a week before Thanksgiving last year.  Bitcoin will be testing the same factors now as it did two months ago. But the market never waits for the obvious.

If the predictions of so many Bitcoin enthusiasts are prices between $25,000 and $50,000 by the end of the year, at some point Bitcoin has to resume its upward momentum. The ‘big one’ may look like last November’s meteoric rise.  However, a slower, steadier climb would foretell a more positive, much calmer future.  At the current rate we would be somewhere around $35,000 by the end of the year.  But that can never happen in a straight line.  After a few weeks of steady growth, investors would pile on and we would have boom and bust days again.  As such, without regulation or governing bodies to tamp down the enthusiasm, Bitcoin exuberance and fear-of-falling may control short-term prices.  We should see a clear direction for the market after May 1, 2018.

Bitcoin: Case for Dollar Cost Averaging

Dollar cost averaging is a strategy in which the same dollar amount of Bitcoin is purchased on a regular basis, $10,000 per month, for example.  Another similar strategy would be to purchase a fixed amount of Bitcoin on a regular basis, say, one Bitcoin per month.

To the bottom and back in the wink of an eye.  Bitcoin hodlers are all saying the same thing. “Bitcoin can still go lower, but when it finally does reach bottom, it will come roaring back so fast that if you blink you’ll miss it.” Most are describing the bottom, not by a monetary amount but rather by an emotional attitude.  “You will know Bitcoin has reached the bottom when you, the longtime bitcoin believer, feel it isn’t happening, and it may never happen.”  When you doubt your own long-held belief that Bitcoin ultimately rules, feeling that your holdings might indeed be worthless or are moving towards a zero value, then the bottom is nearby.

Do you have enough objectivity?  Do you know yourself well enough? Most investors, even seasoned professionals, aren’t objective enough to have those kinds of insights, and for a good reason.  It is counterintuitive to objectify and distance yourself from your feelings to better understand the marketplace.  Professionals prefer to work in quantifiable, predictive ways such as dollar cost averaging.  In that way, they can leave the emotional component out of the equation.   The problem is that it is precisely the ’emotional component’ we seek to understand, to recognize and to react to when it occurs as we expect it will.

Dollar Cost Averaging makes sense.  Let’s say you have been purchasing Bitcoin every time you see it going lower than you thought  possible saying to yourself “This looks like a good buying opportunity.”  You would have purchased at $14,000, $12,000, $10,000, $8,000 and $6,000.  Your average purchase would have been $10,000.  Now, compare that with absolute buying brilliance, buying Bitcoin at the bottom.  For argument sake, let’s say bottom turns out to be $6,000.  You buy an equal amount of Bitcoin, and you pay an average of $6,000.  If Bitcoin ultimately goes to $20,000 than your dollar cost averaging will net you $10,000 per Bitcoin or $50,000 while buying at the bottom will net you $14,000 per Bitcoin or $70,000.  You would have earned an extra 29%.  That’s nothing to sneeze at.  But look what you risk by trying to catch the bottom.  Let’s say Bitcoin reaches $6000 and then quickly bounces back up to $9000.  You then have to decide, was that it?  Was that the big one?  Do you go all in at this moment or was this just a blip and we’re still going back down? If you hesitate and you are wrong, then Bitcoin could suddenly see $11,000 or higher and then you’ve missed out altogether.

Strategy 1: Dollar Cost Averaging Strategy 2: Buy Bitcoin at bottom
Bitcoin Price Bitcoin Price
Purchase 1 $14,000 $6,000
Purchase 2 $12,000 $6,000
Purchase 3 $10,000 $6,000
Purchase 4 $8,000 $6,000
Purchase 5 $6,000 $6,000
Subtotal $50,000 $30,000
Average $10,000 $6,000
Profit w/Bitcoin at $20,000 $50,000 $70,000
Profit w/Bitcoin at $50,000 $200,000 $220,000

If you expect Bitcoin to ultimately go back up to December values than the difference between strategy 1 and 2 would be 29%, not a negligible sum.  But if you expect Bitcoin to ultimately go up to $50,000 than the difference between strategies 1 and 2 would be $200,000 vs. $220,000.  In other words, it wouldn’t make a whole lot of difference.  Conclusion: Dollar cost averaging is the way to go here.

Bitcoin Investing — All-in vs. Dollar Cost Averaging

Bitcoin Investing Investments
Purchase Dates All-in Earnings calculated from purchase date Dollar Cost Averaging Earnings calculated from purchase date
5/18/2017 $22,644 $83,580 $1,887 $0
6/18/2017 $29,304 $68,068 $2,664 $2,276
7/18/2017 $22,440 $66,080 $2,244 $4,530
8/18/2017 $38,844 $40,824 $4,316 $8,333
9/18/2017 $32,136 $38,680 $4,017 $12,102
10/18/2017 $39,165 $22,799 $5,595 $17,269
11/18/2017 $47,058 $6,054 $7,843 $24,485
12/18/2017 $94,800 -$50,540 $18,960 $41,585
1/18/2018 $44,564 -$9,156 $11,141 $52,148
2/18/2018 $33,276 -$6,720 $11,092 $62,783
3/18/2018 $15,724 $1,980 $7,862 $70,565
4/18/2018 $8,163 $689 $8,163 $78,635
$7,148.67 = AVG
April 22, 2018 $8,852

If you believe, as I do, that Bitcoin is here to stay and will be valued in the tens of thousands of dollars in the not too distant future, then the only problem is considering on how to invest.  There are two investment strategies that seem to be favorites of Bitcoin enthusiasts.  The first we’ll call, All-In, meaning just what it says.  Decide how much money you want to invest in Bitcoin and buy that much Bitcoin.  Period.  End of story.  Don’t hesitate.  Don’t wait for lower lows.  Don’t wait.  The second is called Dollar-Cost Averaging.  Decide on an amount that you can invest in Bitcoin on a regular interval and begin to accumulate. Let’s compare the two.

For comparison sake let’s say you invest with the All-in strategy twelve months worth of Bitcoin a year ago.  Bitcoin was selling for $1887 and you would have had to invest $22,644.  It would have earned you $83,580 today; a nice tidy sum.  Had you waited and gone all-in the following month, you would have had to invest $29,304 and it would have earned you $68068 today.  In fact, the longer you waited, the less you would earn.  By December your investments would be in the negative numbers only beginning to look better as an investment now.  Of course, you would have to wait for Bitcoin to reemerge above the $19500 mark before seeing profits.

If you had purchased a Bitcoin each month in a dollar-cost averaging strategy your earnings would have improved each month.  Looking backward, the earlier you started the better off you’d be today.  The strategy even weathered the precipitous fall from December’s highs.  Dollar cost averaging seems to be the better strategy in this case.

Timing is the most difficult aspect of investing.  To be able to predict when to buy and when to sell is almost impossible.  Dollar cost averaging mitigates the need to get your timing right especially with Bitcoin which is, thus far, a totally unknown phenomenon to the investing community.

Bitcoin ($8,852) Daily Chart Confidence

coindesk-bpi-chart
Bitcoin daily chart for April 22, 2018, confident, optimistic, without fear-of-missing-out.

Bitcoin is $8852 this morning. Investors who read charts often, this would appear to be a rising straight line. The small blimps along the way are never more than $10.  What’s more, this chart is 24 hours from Saturday morning, April 21, 2018, in NYC, or evening in Korea.  This is a period of time not influenced by other markets, or investors at work unable to pay attention to Bitcoin.  No, this chart reflects investors’ wholehearted attention and from the look of it, it’s full-steam ahead.

 

coindesk-bpi-chart
Bitcoin daily chart for April 22, 2018, confident, optimistic, without fear-of-missing-out.

Bitcoin Status Update

The Financial District awoke this morning to Bitcoin trading at $8510, a level we haven’t seen in some time.  Bitcoin hodlers, in for the long haul, uniformly agree that there will come a time when Bitcoin, resuming it’s advance, does so with a vengeance.  Current prices somehow feel different from those we’ve seen in recent months. They might be the same prices but they certainly feel different on the =way up than they did on the way down.  Perhaps this is the rise they have foretold.  It makes sense, too.  For these Bitcoin holders, the biggest fear is the fear of missing out.  If there is a perceived price rise, these folk are more apt to jump back into the fray than most any other investor pool.

bitcoin price
One year Bitcoin price chart, from April 20, 2017. From a low of $1244 at the beginning of the year until the price topped out at $19,343 on December 16th, Bitcoin could not be stopped.  Since then Bitcoin has fallen to a low of $6914 on February 5th and again to a lower low of $6618 on April 6th.  

The last time Bitcoin rose more than $2200 from a new low was in February.  It managed to stay at that level for two weeks before resuming its fall.  Bitcoin has already recovered $3400 from its April 6th low and has done so in a solid, steady advance.  Hodlers looking at this progress now are more likely to feel a FOMO than a feeling it can’t go much higher.

Standards

 

traffic at night
A sea of red taillights on Sunset Blvd at night.

One of the finest examples of a stated and enforced standard is the specifications written for the automobile.  Every aspect of the automobile is specified so that every manufacturer is required to provide the same features and quality.  Every consumer can expect those same features and quality.  It is a tribute to our society for having created and enforced these standards. Most people do not appreciate what this body of work does or why it is so important.  The automobile industry is over 125 years old and it’s taken much of that time to sort out these standards.

 

Picture yourself driving down a busy highway at night.  Before you are several hundred cars going in the same direction.  What you see are rows and rows of red tail lights.  That’s is to say not just any tail light but the red color specified under Title 49: Transportation, PART 571—FEDERAL MOTOR VEHICLE SAFETY STANDARDS, Subpart B.  Looking down the highway you see each and every red tail light lens’ color matches every other precisely.  Wow.  When we glance down the road we can see in an instant that everyone is headed the same way.  If one of those 100 cars were coming at us, we would spot that in an instant.

Imagine what we would see if there were no standards; if every automobile’s owner decided for his or herself what he wanted for a tail light color.  Looking down the highway we would see something more like a Christmas tree then a column of red.  Is the car ahead of you slowing or stopping?  No one would know. Chaos would ensue.

New technologies take decades before manufacturers and consumers can agree on and set standards and rightly so. To set standards too quickly in the life cycle of a new technology means quashing inventiveness and creativity.  To wait too long before setting standards allows the biggest players in the space monopolistic control over the marketplace which drives up prices and further limits choice and ultimately hurts consumers.  Until standards are set and enforced that new space might behave like the wild West where anything goes.  The law is slow to catch up to the reality of the times, too.  Price gouging, failure to supply the promised value of a new product, and lack of truth in advertising are rampant. Misalignment of consumer expectations with manufacturer’s deliverables is common.  The resultant feeling is one of mistrust and disappointment.

With cryptocurrencies, we’re experiencing the early days of a new technology, characterized by much of the same.  There is a general feeling of mistrust and disappointment with software that doesn’t work as expressed or expected, and developers (the manufacturers, in this case) who are too quick to make promises and not experienced enough to understand why they should not cut corners or speed production in a trade-off with quality assurance and testing. Unfortunately, until standards are set and maintained, we can expect more of the same.  Furthermore, standards take a long time before they are written and ratified.  Until then, expect cryptocurrencies to feel like part of the wild, wild, West.

Electric Knives

 

electric knife
How are altcoins like the electric knife?

 

Electric knives weren’t as popular as the 1986 Christmas sensation Cabbage Patch Kids but there was a period of time in 1965 suburban America when they were one of the most desirable gifts to be given or received. Shortly after its introduction, the electric knife became a popular kitchen tool. However, there were many drawbacks. The knife required constant maintenance. It had to be taken completely apart and cleaned thoroughly after each use to prevent the spread of germs and the corrosion of rust.  Busy people soon found this more of an inconvenience than an advantage. When the blades weren’t set back in place exactly, they snapped or caused injury when the knives were turned on. After the novelty wore off, a majority of households returned to the old-fashioned knife for slicing food and reserved the electric knife for carving meat at the holiday table.  You can still find electric knives for sale in places like Bed Bath and Beyond but I can’t remember the last time I saw one in use.

The electric knife is a good example of an invention that came on the scene, was popular, and then, for all intents and purposes, disappeared for lack of use and a good raison d’etre.  Altcoins that have no good reason for being will suffer the same fate.

Bitcoin

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Bitcoin is a cryptocurrency.  “Crypto” meaning encoded; “currency” meaning money.  It was invented by someone named Satoshi Nakamoto in 2009.  He was trying to solve the problems of digital currency such as using money online for shopping or banking.  His solution was so thoroughly thought out that one could say he gave birth to Bitcoin whole and fully formed.  In 2008 he published a white paper describing his invention, then formed a group of programmers who could create and follow his design. He then disappeared and no one knows who he is or where he is to this day.

Bitcoin is the result of something else Nakamoto created called a blockchain.  A blockchain is a distributed, decentralized network.  You all know what a centralized network is where every node in the network is directly attached to a central hub.  Our online banking systems work like that.  Every transaction goes through a central hub.  A decentralized network might have several hubs scattered throughout the network.  This would be what you would imagine our fire department looks like with stations scattered throughout the city.  A distributed, decentralized network is slightly different from these.  With a distributed, decentralized network there are no hubs.  Every intersection in the network between two or more users is considered a node.  Each node has several neighbors.  A blockchain is a distributed, decentralized network of nodes.  The Bitcoin blockchain has over 11,000 nodes at the moment.

In Nakamoto’s design for Bitcoin, each node would have a computer running the Bitcoin blockchain program.  The program would do several things.  It would each a ledger of every transaction made anywhere on the network at any time from the beginning of the network until the present.  It would communicate with its neighbors.  A typical node might have five or six neighbors.  Remember, this is all running on the Internet so a cyber-neighbor on the Internet does not mean it is a physical neighbor.  The nearest neighbor for a node in New York could be Chicago, London or South Australia.  The time for a signal to travel around the world is a small fraction of a second.

distributed network

When some at node A gives a Bitcoin to someone at node B that is called a transaction.  A transaction would be written as “A gives B one Bitcoin”.  The program at node A tells its neighbors this transaction.  Let’s say its nearest neighbor is node C.  The program at C receives the message “A gives B one Bitcoin” and records it as a new transaction and marks it as “Pending”. It then checks all previous transactions to see if A really has enough Bitcoin to give one Bitcoin to B.  If it finds the current amount of Bitcoin at A is sufficient to pay B one Bitcoin it sends a message back to A and B and says “Transaction confirmed” meaning that transaction can proceed.  Node A and B record the confirmation and write “Transaction pending.  1 confirmation”. C then goes on to tell all of its neighbors about this new transaction.  Node C tells D, E, F, G, and H.  They, in turn, check their ledgers to confirm that the transaction is authentic and allowable and send back confirmations if they do.  The process continues until Node A and B have 1000 confirmations.  At that point the transaction is considered authentic and allowed to proceed.  “Pending” status is changed to “Confirmed.” The 1000 confirmations make the network very, very difficult to cheat.  You would have to get 1000 strangers whom you do not know in advance to collude with you in order to cheat the system.

The transactions continue until there are a sufficient number of transactions to fill a block.  A block is about 1 kilobyte of data. When that happens the block is attached to the previous block to continue the chain. Now, Satoshi Nakamoto realized that he would have to get people to maintain all of these nodes, with a computer and a large disk drive at each one.  He created a very unique method for doing that.  These people would be called “miners.” A Bitcoin miner had 1) to be motivated to do the work, and 2) be chosen at random so that no one could take over the system for themselves.  His solution was this: he would pay them (in Bitcoin) for doing the work, and, he would create a very difficult mathematical problem for people to solve.  The problem was so difficult that even with a super-fast computer the miner would take about ten minutes to solve the problem.  And, the solution would be totally random so that even smart, fast computers did not have an advantage over anyone else doing the same thing.  The problem was to guess the password for the next blockchain.  This would be a random thirty-character password that took even the fastest computer about ten minutes to guess and looked something like this: 00RasOd2FsM5Gsdfd88up8pUs5QdWss:426SD38E1a.

The miner that guessed the password correctly was paid 12 bitcoin and had the privilege of creating the next block and communication that to the network.  Twelve (12) bitcoin today is worth over $100,000 so there are many people who want to do mining.   There are a total of 21,000,000 bitcoin in the system.  There will never be any more than that.  16,800,000 have already been distributed and there is enough bitcoin to pay miners for the next 100 years.  In the year 2108, the miners will have to charge fees to do the work.

Bitcoin is just one cryptocurrency.  Since it was created in 2008, there have been many more cryptocurrencies created.  To date, there are over 1500 cryptocurrencies recorded.  Not all will survive.  Each one was designed to do something different from the others.  There are currencies which are just for real estate.  There is one just for contracts.  There are several for online gaming, sports gambling, international finance and so one.  Their creators hope that they become popular and successful.  Some will.  Some won’t.  The most popular ones today are Bitcoin, Ethereum, Litecoin, and Ripple.  To see the Bitcoin network in action take a look at bitlisten.com. Since all transactions are public, at this URL the programmer created a bubble for each transaction and displays the size of the transaction in the bubble as they appear.

So what’s the big deal about Bitcoin?  Why all the fuss? How to get Bitcoin? How to keep Bitcoin safely? What are bitcoin wallets? These and many more questions are subjects for future discussion.  You can read more about Bitcoin at bitcoinARL.com.

 

(?) To Be or Not To Be

Bitcoiin.jpgAt the core of the crypto- controversy “scam or new asset class?”, is a personal belief from which all else flows.  If you think that Bitcoin is a Ponzi scheme, everything which is generated from that essential belief only serves to confirm a negative opinion of cryptocurrencies. No amount of ‘evidence’ is going to dissuade one of these thinkers from believing bad things will ultimately updo Bitcoin.  The only problem for them is how to prove that the value of bitcoin will go to zero, even though Bitcoin hovers around the $10,000 mark.  If they wanted to profit by the misfortune of others, they might even purchase a Bitcoin short position.

On the other hand, if you believe Bitcoin is only the beginning of a new asset class, that hundreds, if not thousands of other cryptocurrencies will follow, that many of them will be widely traded and prove to be a very lucrative investment for those who bought in early, your problem is two-fold.  First, you have to prove that the value of bitcoin will go as high as one million dollars per coin, even though bitcoin presently hovers around the $10,000 mark.  Second, to take advantage of this glorious insight you have to choose in which cryptocurrencies to invest.

Ultimately, a sufficient number of use cases will prove the value of cryptocurrencies, or not. Be on the lookout for those.  Uses cases are the best argument you can make about in which cryptocurrencies to invest or if to invest in Bitcoin at all.

J.P. Morgan’s Risky Behavior

725_Ly9jb2ludGVsZWdyYXBoLmNvbS9zdG9yYWdlL3VwbG9hZHMvdmlldy8zZDczMWVhYjBjZWFlZDUxZjhmZTZhMDVhZThmYTVhMy5qcGc=Today’s headline reads: J.P. Morgan Chase Bans Buying Cryptocurrency With Credit Cards.

“At this time, we are not processing cryptocurrency purchases using credit cards, due to the volatility and risk involved. We will review the issue as the market evolves.”

That’s about as disingenuous as Jamie Dimon’s “bitcoin is a fraud.”  Since when does the bank watch out for consumer risk and volatility?

“I’m sorry.  You were attempting to place a bet on a 15 to 1 shot in the 7th race.  J.P. Morgan will not facilitate that bet due to the long odds.  How about that favorite, Sugar Biscuit, going out at 3:1 in the eighth race?”

Overheard at an Atlantic City casino:

“Damn credit card won’t work. J.P. Morgan says they don’t fund buying an inside straight.”

Message from the online escort website:

“Due to the risky nature of unprotected sex, use of this credit card without a condom is prohibited.”

Message on a pack of cigarettes:

“Cigarettes are risky business.  J.P. Morgan credit cards should not be used in the purchase of cigarettes and other tobacco products.”

Bartender in an Irish pub to a customer:

“Your bank credit card won’t work here.  Sometin’ about binge drinking and risky behavior. Don’t know.”