Bayesian Investor Blog

Ramblings of a somewhat libertarian stock market speculator

Cryptocurrencies

Posted by Peter on January 16, 2018
Posted in: Investing. Tagged: bubbles.

I’ve donated/sold more than 80% of my cryptocurrency holdings (Ripple and Bitcoin) over the past two weeks, after holding them without trading for around 4 years.

When I last blogged about Bitcoin, I said I would buy Bitcoin soon. That plan failed because I didn’t manage to convince the appropriate company that I’d documented my identity, so I didn’t find a way to transfer money from a bank to an account from which I could buy Bitcoin. (Difficulties like that were one reason why cryptocurrencies used to be priced too low). I procrastinated for two years, then found a convenient opportunity when MIRI needed to unload some Ripple.

My guess is that the leading cryptocurrencies will be somewhat higher a decade or two from now, but the prospects over the next year or two seem fairly poor compared to the risks.

Much of my expected value for the cryptocurrencies used to come from a 2+% chance of a hundred-fold rise. But a hundred-fold rise from current levels seems a bit less than 1% likely.

I compare cryptocurrency trends mainly to the gold bubble of 1980, since gold is primarily a store of value that pays no income, and is occasionally used as a currency.

I made some money once before by predicting that an unusual market pattern would repeat, with the same seasonal timing. So I’ve been guessing that cryptocurrencies would peak in mid-January. Yes, that’s pretty weak evidence, but weak evidence is all I expect to get.

I’ve also tried to extract some evidence from price trends. That usually provides only a tiny benefit in normal markets, but I suspect I get some value in high-volume inefficient markets (mainly ones where it’s hard to short) by detecting how eager traders are to buy and sell.

I watched the markets nervously in December, thinking that a significant bubble was developing, but seeing signs that any peak was still at least weeks in the future. Then I got nervous enough on January 2 to donate some Ripple to CFAR, even though I still saw signs that the market hadn’t peaked.

By January 5, I stopped seeing signs that the trend was still up, but I waited several days before reacting, hoping for rebounds that ended up being weaker than I expected. I ended up selling at a lower average price than CFAR got for what I donated to them, because dissatisfaction with the lower-than-recent price made me hesitant to sell.

An important lesson to draw from this is to always try to sell financial assets before the peak. Endowment effect is hard to avoid.

P.S. – It’s unclear whether cryptocurrencies are important enough to influence other stores of value. My best guess is that gold would be 5 to 10% higher today if it weren’t for cryptocurrencies. And the recent rise in cryptocurrencies coincides with a rise in expected inflation, but that’s more likely to be a coincidence, than due to people abandoning dollars because they see cryptocurrencies as a better store of value.

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