What on earth is going on with Bitcoin? 

As I get asked this question a lot I decided it was easier to post something that I can link to.

We are now (Jan 2021) in one of many bull markets since the first coin was mined in 2009. Each bull market has been driven by different types of people:

    • 2013 was the cypherpunks (deeply techie and anti authoritarian)
    • 2017 was retail investors/speculators (hoping for a fast buck)
    • 2020/21 is professional and rich investors (older, not digital native, more cautious)

Of course some of each type of person participated in each of those bull markets, but those are exceptions that prove the rule.

To get perspective on the wild swings look at the charts with Log not Linear view. Log view makes the 10x from 10c to $1 the same as from $1 to $10 or $200 to $20,000. To an investor that makes sense.

The investing game is known as the great humiliator with lots of conflicting advice. Should you “let your winners run” or “take profits and diversify”. This story from 2013 is somebody taking the latter advice:

“Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.” This enabled him to buy an apartment in central Oslo.

It is a wonderful story but, as I write, those 5,000 bitcoins would be worth $185m. Hindsight says “let your winners run” in this case.

I am older, not digital native more cautious. So I understand that mindset. That is why in the 2019 bear market I wrote:

5 reasons why I am an economic Bitcoin Maximalist.

For the older more cautious investors it is a question of asset allocation. If you invest 1% and it goes to zero you can live with it as there is a better chance of getting a 10x upside return.

There are lots of methodologies claiming to predict where bitcoin price will go – like Mayer Multiple or Stock to Flow ratio. I do not buy into any methodology and have no idea of short term price action. I simply take comfort in holding based on “strong hands”. Look at who holds bitcoin today:

  • people who bought early and never sold aka whales.
  • rich investors who allocated 1% during 2020.

Neither will sell easily. They are “strong hands”. They might sell to shake out any weak hands so they can buy more at a cheaper price. Which means that a fall to zero, while possible, is more and more unlikely. Supply is limited by math and these strong hands. Demand is from lots of rich people allocating 1%.  It is basic supply and demand which is one thing that does NOT change.

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