Bitcoin Hedge Fund Proliferation
By Roger Nusbaum, AdvisorShares ETF Strategist
The New York Times took a look at some of the people involved with Bitcoin and other cryptocurrencies in the Bay Area. It covered a lot of ground in terms of the ideology, the personalities and how they cope with the mercurial nature of the prices.
On the one hand there is a general acceptance that the price could do anything, that it very well could be a bubble that goes poof. One person mentioned in the article is a blockchain lawyer (I don’t know either) who said that if it goes to zero, a lot of people will need a lawyer.
There is a do-gooder aspect to this that is interesting. I mentioned a while back having met someone very involved in Bitcoin who felt strongly that one of the big features of Bitcoin is that no government can debase it. This ties in with the NYT article talking about the banking system being rigged, only benefitting a few people and that Bitcoin can distribute the wealth more equitably. I am not sure how true this in terms of reports about how concentrated Bitcoin is, the article noted that 4% of Bitcoin holders might own 95% of the tokens.
Another interesting idea is the extent to which a lot of twenty-something Bitcoinarians (a term I might have originated on Twitter) have started or plan on starting a cryptocurrency hedge fund. Are hedge fund managers part of the system they say is rigged? I don’t know but some people would obviously say yes. I am not critical of someone trying to expand their sphere, but this is a watchout situation in terms of markets, and the behaviors that drive them, being a different realm than working in cryptocurrencies. There is an element of luck here for the Bitcoin mega-millionaires. Yes, they had foresight to get on board, but you have to believe that other twenty-somethings got very involved (both financially and with their time) in potentially transformative technologies that failed and maybe the only difference was luck. If you are one to invest in hedge funds, you might want to move slowly in giving money to a 27-year-old manager with no markets experience.
Investing in Bitcoin offers the potential for very favorable asymmetric risk. I actually think one of those crazy sounding price targets is possible but the probability of zero is also high. As I have said in a few places; the internet is alive and well without Netscape or AOL. Someone with $200,000 in accumulated savings who puts $5000 into a cryptocurrency could see that $5000 become $200,000 or $0. Growing to $200,000 could be life changing in a great way while $0 might not have any negative impact. It’s not literally a no-lose situation but is close. The key is position sizing and not using a credit card.
One additional aspect from the article to cover that I like a lot is captured in the following passage;
This is one of the core beliefs in this community: HODL, “hold” typed very fast, as if in a panic. HODL even if you feel FUD — fear, uncertainty and doubt. If you show wealth, it means you don’t really believe in the cryptocurrency revolution, a full remake of the financial system, governments and our world order that will send the price of ether up astronomically. “HODL when everyone has FUD,” Mr. Hummer said quietly, to explain why he still lives in a dorm room.
To the extent wealthy, young, Bitcoinarians are living well below their means, that is an encouraging behavior. Based on the anecdotes in the article, and you’ve read about other young people who’ve made life-changing sums of money, real wealth is being created and I would hope that anyone sitting on a large Coinbase account balance would let it actually change their life. Take a little off they table, let the rest soar or implode, you still benefit handsomely.
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