The 3 Rules Of Bitcoin

Unlike Jamie Dimon (here), I think that bitcoin and bryptocurrencies can fit into your portfolio - but only as a highly speculative allocation (here). I currently do not own any crytpocurrency and would be selling some as I think the next move is further downside, but there may be a time when I choose to add again.

In any case, I find these three rules to be useful in terms of thinking about how and when to buy and sell Bitcoin and other cryptocurrencies. I believe they are important things that you need to factor into your thinking and analysis on the subject.

Rule #1: Bitcoin Is Smarter Than Me

This is the first and most important rule about Bitcoin.

I cannot speak for everyone who reads my reports, but Bitcoin is definitely smarter than me. I do not say that lightly. I have a Bachelor of Mathematics in Computer Science and Combinatorics and Optimization, worked as a software engineer at Microsoft, and have taken several PhD level courses in math and finance, but from what I can tell, I do not have the intelligence that the people who really know Bitcoin do. I might be able to muddle my way through setting up a mining operation, but the reality is that I have to accept that the people who know blockchain and cryptocurrencies are much smarter than me.

To put that in perspective, in my ordinary course of business I deal with a lot of economists, many with PhD's. They are very smart people and some have specific knowledge that I lack, but I don't feel overly intimidated by their knowledge. With crypto I think I am orders of magnitude behind in terms of the knowledge the best and the brightest have in the field - it is both humbling and useful to understand that.

There are lots of things that I don’t fully understand. I don’t really know how my cell phone works, but if there is a problem I can call the maker of the cell phone and try and get it resolved. Or I can call my cell phone service provider and get them to help. Products like that come with a group of people there to help make it work. They are in the business of making it work when it breaks.

There is no one in the business of helping you if Bitcoin breaks, and there may well be a group of people who are out to take advantage of anything and everything they can about Bitcoin.

Rule #2: There Are No Rules

It seems silly to say there are no rules in a piece titled the 3 rules of Bitcoin, but let’s just go with it as this is important and ties into rule #1.

On a simplistic level there is nothing to stop anyone from attempting to manipulate their position. With no good way to get short Bitcoin (that I know of) the manipulation would be to force the price higher.
Someone could buy Bitcoin and do everything in their power to make it go higher. Bitcoin may not even be a prohibited “investment” for people who normally have investment restrictions due to the nature of their jobs. So, for example, the financial media, while typically restricted on investments due to their position may not be uniformly prohibited from owning Bitcoin.
Not to mention the anonymous nature could make it relatively easy for anyone who wants to break their rules, to break them.

The exchanges and leading Bitcoin pundits can tell you things about Bitcoin, but it is almost impossible to verify or prove, especially if you, like me, fail Rule #1.

You almost have have to go into Bitcoin assuming someone is out to get you. You have to treat any advice (including mine) with a healthy dose of skepticism and consider the source's motivations.

Not everyone is out to get you, but the likelihood that someone is, and that no one is able to monitor that someone, is a real danger.

Rule #3: The Sustainability of Bitcoin’s Advantages are Questionable

Bitcoin or other cryptocurrencies are frequently said to have some of the following benefits:

Low Transaction Costs
Easier Cross Border Transactions
Anonymity
Limited Supply
No Government Control

The low transaction cost makes some sense. American Express, Visa and Mastercard are all large companies because the credit card business is extremely profitable. Then there are the fees that banks and other providers make on top of the fees generated by the credit card companies themselves.

The most obvious question is will these institutions cut fees to compete with Bitcoin and cryptocurrencies? Probably not near term, but competing on fees is a possibility.
The other question we should as, is what do you get for those fees? Do they protect you from fraud and other risks enough to justify that fee? When stories of Bitcoin being stolen from electronic wallets appear - it is clear there is little recourse. When fraudulent charges show up on my cards - it might take some effort but they have been reversed.

Like many things, we need to compare total costs versus total benefits and on that basis the fee advantage may be less than it seems at first glance.

The Euro has been great. It is great travelling across most of Europe with only a single currency. It beats the days out of coming back with an odd collection of bills from each country and the transaction fees involved in all of the currency exchanges. So being able to move money globally without all the high fees would be great. Though I still can’t understand why you can convert $1 million for next to nothing in the FX market, but converting $1,000 is a license for currency exchange booths to pillage you. This advantage seems interesting, even compared to credit cards which often charge a lot for overseas use.

Anonymity meet the NSA. There is simply no way that governments will be comfortable with a lot of anonymity or the potential for the money to be used for “nefarious” purposes. The Patriot Act introduced so much “know your client” information that KYC became a whole new department at most banks. The governments don’t like anonymity. They do like taxes. Can the industry be “self-regulating enough” that other governments don’t intervene

Source: forbes.com

The 3 Rules Of Bitcoin