I have a loose set of rules that I always try to keep in mind while evaluating investments. This is an easy one! Rule 2 is that I always look for red flags first. Why spend countless hours of research when I can find problems with an investment right away and save myself the time?
For example, a while back a friend wanted my opinion about a company named Mcig. They make vaporizers for marijuana and the idea was to cash in on legalization in Colorado as well as upcoming legislation in other places. It took maybe 15 minutes for me to decide that I didn't like the company. A brief look at their balance sheet revealed 80-90% of their assets listed as goodwill. In a nutshell goodwill is anything intangible such as a brand name. These things may have incredible value in some cases, but a company with pretty much all of their value listed as goodwill seems unusual.
Next, even though I already didn't like the company, I looked up some product reviews. Although they didn't have a ton of reviews on retailer websites, a quick search showed that the average customer was either not impressed or disliked the product.
They are still in business so maybe Mcig will become a killer. However at the time I did not see any reason to invest. I don't remember the exact date but it was in 2014 or so. It had caught my friend's attention because the price had shot up recently. There didn't seem to be anything special about the company. Why waste the time to contact investor relations and do all the other things needed before an investment can be properly evaluated? The current price is still below the 2014 spike. It might go up, it might not, I have no idea. But I do know that there are better investments out there. I can't predict the future but I can say that at the time there were other manufacturers of vaporizers that looked much more attractive.
There are so many opportunities out there. One way to success is spending more time finding them and less time on companies easily eliminated from consideration.
Tuesday, December 26, 2017
Friday, December 22, 2017
The Bitcoin Bubble Will Burst Soon!?!
I have been seeing many articles the last few days asserting that bitcoin is in a bubble and will burst soon. On the plus side a handful of journalists writing for mainstream outlets are finally starting to use facts in stead of just making things up (a topic I want to write about soon). On the other hand these articles about a bubble tend not to rely on facts, instead basing the idea purely on price movement. Bitcoin has gone from X to Y, and only bubbles create this kind of price movement, right? Maybe not.
Bitcoin is incredibly volatile. Last I wrote about it, the price swung between 1800 and 4000! Not as many people were paying attention way back then (July and August 2017), but had they been the press would certainly have published many articles titled "Bitcoin is Dead" or similar on the down swings.
The problem with ignorant journalists is that they are making stuff up AND PEOPLE BELIEVE THEM! They have no idea why the price is moving like this. The inevitable comparison is the tulip bubble, which like Hitler always seems to show no matter how absurd the comparison. Its an easy (and lazy) way to write an "engaging" article. I bet if I published an article titled "AltcoinX, The Hitler Of Crypto Currencies," it would get a fair number of clicks.
And people listen to this sort of nonsense. I used to as well, however a lesson or two when I was younger taught me to never believe anything, ever, no matter how reputable the source (when it comes to investing). Maybe I will get the chance to write about that in the future.
Before declaring a bubble, or believing one, take a look at market volume during 2017. See anything different, maybe starting in May? How about again in December? Is this volume exuberant and irrational? Or have people been predicting this for years? Is it a coincidence that if bitcoin was worth one million dollars, its smallest unit, the satoshi, would be worth one cent?
The thing is, even people who are normally investing geniuses don't understand bitcoin. In case you don't click on that link, it is Carl Icahn saying both that he doesn't understand bitcoin and that it is in a bubble. How can he possibly make any assessment of bitcoin if he doesn't know anything about it? It is like investing in Microsoft and not knowing what a computer does. And yet his word carries weight even though he readily admits ignorance. People like Icahn see a certain price movement and think the only possible cause is a bubble.
Unlike any other asset I know, Bitcoin is strictly finite. The maximum to be created is 21 million, about 17 million of which already exist. Compare that to stocks. XOM, to pick a stock with a market cap similar to but higher than bitcoin, has over 4 BILLION shares outstanding. Another, INTC, also has well over 4 billion shares. More are printed all the time. So many shares are printed that stock buybacks are commonplace to prevent too much dilution. Stocks are printed to raise money, to pay executives, or if the price goes high enough (if the company believes the stock is overvalued they may print more because it is basically free money). Not every company abuses this, and I am not trying to make a case that the above two issue too many shares. The point is that the number of outstanding shares is not only vast, but theoretically infinite.
But there are no extra bitcoins. No one can print more to capitalize on a price increase or to raise more money. New entrants to the market must purchase from a diminishing supply. And many early adopters, who bought some for reasons other than price appreciation or speculation, don't want to sell. The supply of available bitcoins is extremely limited compared to the availability of most assets. This by itself does not dismiss the idea of a bubble. But as I wrote last time, we are seeing the effects of institutional investors entering the markets. Markets that used to move when $10k entered are now rocketing to unimaginable heights as billions of dollars chase a diminishing supply of coins.
So how do we know if it is a bubble? How do we know what the price should be? It pays no dividend, has no earnings, and no way to easily determine value. It is actually simple. Is it in any way useful, and do people want to own it?
Utility is a monumental topic beyond the scope of this article. Some say there is none but I suspect they don't have any idea what bitcoin is. But it is a totally new innovation offering utility that has never before been seen in an asset.
Do people want to own it? Clearly they do. If every household in the USA wanted a bitcoin, they would not be able to get one. But this isn't a stock that may or may not attract foreign investors. This is a global currency that can not be seized, controlled, or devalued by a corrupt government (which is why most governments don't like it). Most people living in relatively stable nations do not understand the significance of this innovation. This isn't the next pet rock, it is a real game changer. In places where the economy is in a state of collapse it is not unusual to see the price of bitcoin double compared to exchanges as locals scramble to offload their nation's worthless money.
If every household in the world, not just the USA wanted to own some, then the price would far exceed anything we have seen. If every household in just the ten largest nations wanted bitcoin today, and we assume that all 21 million have been created (they won't be until 2140 or so), then each household would get .018 of a coin. But this does not include people living in certain places like hotels and camps, who may also want some bitcoins. In addition there is the fact that many bitcoins have been lost. I just read a heartbreaking article about an early adopter who lost 7500 bitcoins by accidentally throwing away his old hard drive. Estimates are as high as 4 million lost coins. Subtract that from the nearly 17 million currently mined, and each household can only get .011. This may be an oversimplified estimation since not every coin is for sale, not every household wants one, and not every household would spend the same money to buy some. None the less it illustrates the scarcity of bitcoins.
A bubble can not be declared by looking at the price movement. Price alone is completely irrelevant. What needs to be determined is whether the price is reasonable and what direction it will go in the future. Predicting future price is not easy: it requires a deep understanding of the asset. Is bitcoin going up in price because it is achieving wide spread adoption, or is it going up because it is in a bubble? I have not yet found specific data regarding bitcoin, but the most important element of a bubble is usually leverage. I still know almost no one who owns bitcoins, and the leverage used to buy, if any, is likely nothing compared to the leverage used to buy other assets like stocks or houses. Debt levels are not something I want to get in to here, but they are very high and the stock market has achieved valuation levels only seen twice before. For me the question is whether this is the new normal caused by decades of interest rate manipulation, or if we are fast headed towards another crash. Either way the stock market looks more like a bubble than bitcoin. What we are seeing with bitcoin is a result of many more people (and dollars) entering the markets.
Even just a few months ago barely anybody owned bitcoins. But now that the wall street stamp of approval has been granted, everyone is paying attention. Now many people want to buy and they are competing with wall street institutions to get some.
Basically I do not believe bitcoin is in a bubble because more people want some every day.
All of this being said, bitcoin is still very new. Anything can happen. Governments could regulate it out of existence. Newer and better alternatives could replace it. Just because it is revolutionary does not mean it is a good investment. While I believe it is here to stay and price will increase in the long run, it is currently a dangerous and incredibly volatile investment. No one should bet the farm on any investment, especially one with so much uncertainty. Only buy what you are willing to lose.
But if there is no bubble, shouldn't it be safe to buy a ton of it? No. Not at all.
I suspect there is a bubble, just not in bitcoins. The recent torrent of ICO's has me worried. There have been alt coins as long as I have owned bitcoin, and the vast majority of them have failed. But they never got the influx of capital that they enjoy today. ICO's are being regulated or outright banned in many countries. But governments need not worry: when enough people lose enough money, the ICO's will collapse under their own weight. I need to research more, but I suspect that ICO's will collapse in a year or two and bring bitcoin down as they die. Eventually this would only bolster bitcoin as a safe and stable crypto, but in the process many will lose fortunes.
So why does anyone but these ICO's and alt coins? Because they think that bitcoin is too expensive at its current price, whatever it may be, and they want to enjoy the same rewards that early adopters attained. But expectations must be reasonable. Would anyone buy stock in Amazon and expect to cash in like early investors did? Even if bitcoin is adopted by the world it is too late in the game to expect exceptional rewards. Then again, if someone told me a year ago that bitcoin would reach its current price, I would have assumed they were delusional. I expected these prices eventually as the world increasingly adopted the new technology, I just didn't expect to see it so soon. I am certain of only one thing: whatever happens it will be an exciting ride.
UPDATE: As I was revising this to post it, bitcoin went from 17-19k, all the way down to 12k. This illustrates the extreme volatility that needs to be understood before buying. Perhaps a dollar cost averaging strategy is best, but caution is advised. This is not a burst bubble, it is normal fluctuations for bitcoin. I am still in disbelief that the price is as high as this, I was not expecting it for years. In any case the price of bitcoin can and does change very fast. Perhaps it is because only a small number of the total coins are available to be bought and sold, amplifying movements.
Bitcoin is incredibly volatile. Last I wrote about it, the price swung between 1800 and 4000! Not as many people were paying attention way back then (July and August 2017), but had they been the press would certainly have published many articles titled "Bitcoin is Dead" or similar on the down swings.
The problem with ignorant journalists is that they are making stuff up AND PEOPLE BELIEVE THEM! They have no idea why the price is moving like this. The inevitable comparison is the tulip bubble, which like Hitler always seems to show no matter how absurd the comparison. Its an easy (and lazy) way to write an "engaging" article. I bet if I published an article titled "AltcoinX, The Hitler Of Crypto Currencies," it would get a fair number of clicks.
And people listen to this sort of nonsense. I used to as well, however a lesson or two when I was younger taught me to never believe anything, ever, no matter how reputable the source (when it comes to investing). Maybe I will get the chance to write about that in the future.
Before declaring a bubble, or believing one, take a look at market volume during 2017. See anything different, maybe starting in May? How about again in December? Is this volume exuberant and irrational? Or have people been predicting this for years? Is it a coincidence that if bitcoin was worth one million dollars, its smallest unit, the satoshi, would be worth one cent?
The thing is, even people who are normally investing geniuses don't understand bitcoin. In case you don't click on that link, it is Carl Icahn saying both that he doesn't understand bitcoin and that it is in a bubble. How can he possibly make any assessment of bitcoin if he doesn't know anything about it? It is like investing in Microsoft and not knowing what a computer does. And yet his word carries weight even though he readily admits ignorance. People like Icahn see a certain price movement and think the only possible cause is a bubble.
Unlike any other asset I know, Bitcoin is strictly finite. The maximum to be created is 21 million, about 17 million of which already exist. Compare that to stocks. XOM, to pick a stock with a market cap similar to but higher than bitcoin, has over 4 BILLION shares outstanding. Another, INTC, also has well over 4 billion shares. More are printed all the time. So many shares are printed that stock buybacks are commonplace to prevent too much dilution. Stocks are printed to raise money, to pay executives, or if the price goes high enough (if the company believes the stock is overvalued they may print more because it is basically free money). Not every company abuses this, and I am not trying to make a case that the above two issue too many shares. The point is that the number of outstanding shares is not only vast, but theoretically infinite.
But there are no extra bitcoins. No one can print more to capitalize on a price increase or to raise more money. New entrants to the market must purchase from a diminishing supply. And many early adopters, who bought some for reasons other than price appreciation or speculation, don't want to sell. The supply of available bitcoins is extremely limited compared to the availability of most assets. This by itself does not dismiss the idea of a bubble. But as I wrote last time, we are seeing the effects of institutional investors entering the markets. Markets that used to move when $10k entered are now rocketing to unimaginable heights as billions of dollars chase a diminishing supply of coins.
So how do we know if it is a bubble? How do we know what the price should be? It pays no dividend, has no earnings, and no way to easily determine value. It is actually simple. Is it in any way useful, and do people want to own it?
Utility is a monumental topic beyond the scope of this article. Some say there is none but I suspect they don't have any idea what bitcoin is. But it is a totally new innovation offering utility that has never before been seen in an asset.
Do people want to own it? Clearly they do. If every household in the USA wanted a bitcoin, they would not be able to get one. But this isn't a stock that may or may not attract foreign investors. This is a global currency that can not be seized, controlled, or devalued by a corrupt government (which is why most governments don't like it). Most people living in relatively stable nations do not understand the significance of this innovation. This isn't the next pet rock, it is a real game changer. In places where the economy is in a state of collapse it is not unusual to see the price of bitcoin double compared to exchanges as locals scramble to offload their nation's worthless money.
If every household in the world, not just the USA wanted to own some, then the price would far exceed anything we have seen. If every household in just the ten largest nations wanted bitcoin today, and we assume that all 21 million have been created (they won't be until 2140 or so), then each household would get .018 of a coin. But this does not include people living in certain places like hotels and camps, who may also want some bitcoins. In addition there is the fact that many bitcoins have been lost. I just read a heartbreaking article about an early adopter who lost 7500 bitcoins by accidentally throwing away his old hard drive. Estimates are as high as 4 million lost coins. Subtract that from the nearly 17 million currently mined, and each household can only get .011. This may be an oversimplified estimation since not every coin is for sale, not every household wants one, and not every household would spend the same money to buy some. None the less it illustrates the scarcity of bitcoins.
A bubble can not be declared by looking at the price movement. Price alone is completely irrelevant. What needs to be determined is whether the price is reasonable and what direction it will go in the future. Predicting future price is not easy: it requires a deep understanding of the asset. Is bitcoin going up in price because it is achieving wide spread adoption, or is it going up because it is in a bubble? I have not yet found specific data regarding bitcoin, but the most important element of a bubble is usually leverage. I still know almost no one who owns bitcoins, and the leverage used to buy, if any, is likely nothing compared to the leverage used to buy other assets like stocks or houses. Debt levels are not something I want to get in to here, but they are very high and the stock market has achieved valuation levels only seen twice before. For me the question is whether this is the new normal caused by decades of interest rate manipulation, or if we are fast headed towards another crash. Either way the stock market looks more like a bubble than bitcoin. What we are seeing with bitcoin is a result of many more people (and dollars) entering the markets.
Even just a few months ago barely anybody owned bitcoins. But now that the wall street stamp of approval has been granted, everyone is paying attention. Now many people want to buy and they are competing with wall street institutions to get some.
Basically I do not believe bitcoin is in a bubble because more people want some every day.
All of this being said, bitcoin is still very new. Anything can happen. Governments could regulate it out of existence. Newer and better alternatives could replace it. Just because it is revolutionary does not mean it is a good investment. While I believe it is here to stay and price will increase in the long run, it is currently a dangerous and incredibly volatile investment. No one should bet the farm on any investment, especially one with so much uncertainty. Only buy what you are willing to lose.
But if there is no bubble, shouldn't it be safe to buy a ton of it? No. Not at all.
I suspect there is a bubble, just not in bitcoins. The recent torrent of ICO's has me worried. There have been alt coins as long as I have owned bitcoin, and the vast majority of them have failed. But they never got the influx of capital that they enjoy today. ICO's are being regulated or outright banned in many countries. But governments need not worry: when enough people lose enough money, the ICO's will collapse under their own weight. I need to research more, but I suspect that ICO's will collapse in a year or two and bring bitcoin down as they die. Eventually this would only bolster bitcoin as a safe and stable crypto, but in the process many will lose fortunes.
So why does anyone but these ICO's and alt coins? Because they think that bitcoin is too expensive at its current price, whatever it may be, and they want to enjoy the same rewards that early adopters attained. But expectations must be reasonable. Would anyone buy stock in Amazon and expect to cash in like early investors did? Even if bitcoin is adopted by the world it is too late in the game to expect exceptional rewards. Then again, if someone told me a year ago that bitcoin would reach its current price, I would have assumed they were delusional. I expected these prices eventually as the world increasingly adopted the new technology, I just didn't expect to see it so soon. I am certain of only one thing: whatever happens it will be an exciting ride.
UPDATE: As I was revising this to post it, bitcoin went from 17-19k, all the way down to 12k. This illustrates the extreme volatility that needs to be understood before buying. Perhaps a dollar cost averaging strategy is best, but caution is advised. This is not a burst bubble, it is normal fluctuations for bitcoin. I am still in disbelief that the price is as high as this, I was not expecting it for years. In any case the price of bitcoin can and does change very fast. Perhaps it is because only a small number of the total coins are available to be bought and sold, amplifying movements.
Sunday, December 17, 2017
Skyworks: Buy The Dip
Skyworks Solutions (SWKS), a company that makes components for cell phones among other things, is one of my favorite stocks. There is a lot to like about the company such as their track record of meeting or beating earning expectations or their lack of long term debt.
Recently the price has fallen to the mid 90's from a high of $116 in November. Such a drop might scare off many investors but it is typical of Skyworks. Even though they beat Q4 earnings expectations, the stock price has dropped. I believe this is due to high institutional ownership: when the whales exit the pool the water must sink. It is not unusual for the stock to drop earnings. This doesn't necessarily mean that any particular fund manager has lost faith in the stock as funds may sell for a variety of reasons.
I believe that the stock is under priced and a good buy. I added to my position on Friday. I want to stress that the stock is volatile and should not be bought by the faint of heart. This is a stock that rewards patience! My price target for this stock is around $120.
Recently the price has fallen to the mid 90's from a high of $116 in November. Such a drop might scare off many investors but it is typical of Skyworks. Even though they beat Q4 earnings expectations, the stock price has dropped. I believe this is due to high institutional ownership: when the whales exit the pool the water must sink. It is not unusual for the stock to drop earnings. This doesn't necessarily mean that any particular fund manager has lost faith in the stock as funds may sell for a variety of reasons.
I believe that the stock is under priced and a good buy. I added to my position on Friday. I want to stress that the stock is volatile and should not be bought by the faint of heart. This is a stock that rewards patience! My price target for this stock is around $120.
Friday, November 24, 2017
Rule 1: There Are No Missed Opportunities
I have a loose set of rules that I use to guide my investment strategies. First and foremost is the idea that I should not worry about missed opportunities.
Many people I have spoken with regret not buying this or that sooner because they would be rich had they done so. This is more or less the idea of opportunity cost. While this may be useful in an academic setting, it is disastrous for me as an investor. The fact is that no matter what choice I make, there is nearly always a better one. I don't waste energy stressing about this kind of thing.
I don't worry about opportunities that I missed. I take as much time as needed to find and vet an investment. If it takes two weeks to read all of the annual reports, find the scuttlebutt, and get the information I need, then that is how long I spend. If the price changes in that time and makes the investment less attractive, I simply move along. There is a great investment opportunity every day of the week, I just have to find it. For example NYSE: PPDF, whatever that is, went up 15% today. I had no way to predict this so I won't feel bad about missing it. So many people stress about selling too soon or not buying sooner.
Predicting the future is impossible. Obviously we would all be filthy stinking rich if it was. My perspective is that I make the best decision I can based on the information I have. Usually I make money, sometimes I don't. But I never second guess my decisions. I learn from them. Otherwise I will never have any level of confidence in investment choices. In stead I would watch the ticker all day and agonize every time the price moves against me. Occasional swing opportunities aside, I invest for the long term. I don't care what the price is doing today, I care if the company or other asset is performing as expected. If yes I hold, if no I sell.
When GE announced the Alstrom deal, and I had time to look at the details, I sold. It didn't matter that I only made a measly 2%. What mattered was the deal clearly stank and further revealed poor company leadership. The price of GE went up at some point after I sold, but that is irrelevant. What mattered to me was the fact that GE's business was getting worse not better. So I sold and never looked back. Except the other day when I saw a news article about GE's decline which cited the Alstrom deal as one of the factors leading to the company's current situation. Immelt is leaving (and made out like a bandit) so things may improve. Note to the GE board: I guarantee, 100%, that I can do at least as good of a job running shareholder value in to the ground as Immelt did. I will even do it for a few million less!
Another example: I previously owned shares in a company called Windstream (WIN). They were not a rock solid company, but they had a tremendous dividend of around 12% when I bought them. One day I noticed the stock price had shot up something like 30%. It turns out that the company spun off its physical assets (phone lines and such) in to a REIT which was held by the parent company. I wanted to sell right away but I didn't understand the details of the restructure. After reading for a few hours I came to the conclusion that the new structure was just a sneaky way to lower the dividend without spooking investors. When I sold the massive gain following the REIT announcement had dropped down to something like 15%.
I don't regret waiting to sell, and I don't consider the extra 15% to be lost money. I didn't know anything about REITs at the time or the details of the restructure. There was a very real possibility that it would lead to better performance for WIN in some way. Turns out selling was a good move; the stock has dropped quite a lot since then. But making decisions on information is better than simply reacting, even if it does cost me 15% once in a while. Had the restructure made any sort of sense I would have likely held and ignored short term fluctuations.
Second guessing every decision only leads to stress and emotional investing. It is best avoided at all costs.
Many people I have spoken with regret not buying this or that sooner because they would be rich had they done so. This is more or less the idea of opportunity cost. While this may be useful in an academic setting, it is disastrous for me as an investor. The fact is that no matter what choice I make, there is nearly always a better one. I don't waste energy stressing about this kind of thing.
I don't worry about opportunities that I missed. I take as much time as needed to find and vet an investment. If it takes two weeks to read all of the annual reports, find the scuttlebutt, and get the information I need, then that is how long I spend. If the price changes in that time and makes the investment less attractive, I simply move along. There is a great investment opportunity every day of the week, I just have to find it. For example NYSE: PPDF, whatever that is, went up 15% today. I had no way to predict this so I won't feel bad about missing it. So many people stress about selling too soon or not buying sooner.
Predicting the future is impossible. Obviously we would all be filthy stinking rich if it was. My perspective is that I make the best decision I can based on the information I have. Usually I make money, sometimes I don't. But I never second guess my decisions. I learn from them. Otherwise I will never have any level of confidence in investment choices. In stead I would watch the ticker all day and agonize every time the price moves against me. Occasional swing opportunities aside, I invest for the long term. I don't care what the price is doing today, I care if the company or other asset is performing as expected. If yes I hold, if no I sell.
When GE announced the Alstrom deal, and I had time to look at the details, I sold. It didn't matter that I only made a measly 2%. What mattered was the deal clearly stank and further revealed poor company leadership. The price of GE went up at some point after I sold, but that is irrelevant. What mattered to me was the fact that GE's business was getting worse not better. So I sold and never looked back. Except the other day when I saw a news article about GE's decline which cited the Alstrom deal as one of the factors leading to the company's current situation. Immelt is leaving (and made out like a bandit) so things may improve. Note to the GE board: I guarantee, 100%, that I can do at least as good of a job running shareholder value in to the ground as Immelt did. I will even do it for a few million less!
Another example: I previously owned shares in a company called Windstream (WIN). They were not a rock solid company, but they had a tremendous dividend of around 12% when I bought them. One day I noticed the stock price had shot up something like 30%. It turns out that the company spun off its physical assets (phone lines and such) in to a REIT which was held by the parent company. I wanted to sell right away but I didn't understand the details of the restructure. After reading for a few hours I came to the conclusion that the new structure was just a sneaky way to lower the dividend without spooking investors. When I sold the massive gain following the REIT announcement had dropped down to something like 15%.
I don't regret waiting to sell, and I don't consider the extra 15% to be lost money. I didn't know anything about REITs at the time or the details of the restructure. There was a very real possibility that it would lead to better performance for WIN in some way. Turns out selling was a good move; the stock has dropped quite a lot since then. But making decisions on information is better than simply reacting, even if it does cost me 15% once in a while. Had the restructure made any sort of sense I would have likely held and ignored short term fluctuations.
Second guessing every decision only leads to stress and emotional investing. It is best avoided at all costs.
Tuesday, August 1, 2017
Bitcoin For The Beginner
Every investor knows of Bitcoin (BTC) by now but many do not understand what it is, how it works, or whether it is a good asset to own. The technical aspects of BTC are difficult to understand, however one doesn't need advanced math to know how it works and make an investment decision.
While it was once an internet novelty, major retailers such as Microsoft and Dell are beginning to accept Bitcoin. Even a few small businesses accept the digital currency as payment.
What Is It?
Is it a pyramid scheme? Magic internet money? Something only criminals use for laundering? All these and more are real questions people have asked me about Bitcoin. Some of these people are savvy investors but have no experience with digital currency. Many descriptions of BTC use incomprehensible jargon such as SHA-256 and network difficulty. While it won't hurt to understand these things before buying it isn't necessary.
Bitcoin, in a nutshell, is a decentralized digital asset run on a peer to peer network. Anyone with a computer can participate in this network. There is no central bank or government to issue coins or regulate the network. Bitcoins are stored on a unique address 26-35 characters long that looks like this: 1J8VdQ2HcqXXHE3JiRthy6DMaes4er6DrJ (from the Mozilla Foundation). An address is generated using a secret code and is intended for only a single use. Bitcoins stored on an address can not be accessed without the secret code. Transactions sent from one address to another are computed by the P2P network.
Fractions of a Bitcoin can be spent, otherwise it would be impossible to use it for anything. The smallest fraction of a Bitcoin is 0.00000001, called a Satoshi after the currency's mysterious inventor. One Satoshi is currently worth about 0.00002 USD. This impractically small value isn't really used for anything yet aside from faucet payouts. It only exists so that if Bitcoin becomes extremely valuable one could still send transactions accurate to a penny. Bitcoin can be updated to allow even smaller divisions if such a thing is ever needed.
Providing computer power to the global network is known as mining. This term is used because new coins are generated by the network and given to the miners. Miners are also rewarded with transaction fees. Transactions are computed approximately every 10 minutes. This 10 minute group is called a block and is recorded in a sequential record called the blockchain. The history of any Bitcoin can be traced through the blockchain back to its creation. This is why Bitcoin is considered only semi-anonymous. Personal data is not recorded but BTC addresses used in transactions are recorded.
Block timing isn't exact because the network adapts to computing power. New Bitcoins are rewarded to a single miner every block, not divided between them. Basically the network is presented with a mathematical puzzle. The first computer to solve the puzzle receives newly minted Bitcoins as a reward. The difficulty of the puzzle is adjusted up or down so that no matter how much computing power is available its solution takes 10 minutes on average. A network participant can get lucky and solve the puzzle in 30 seconds, or if nobody finds a solution it could theoretically take 30 hours or more. The goal is 10 minutes but the actual time varies. At first glance this is an odd way to run a network. However it ensures that anyone who wants can participate and still have a chance to receive rewards no matter how many computers are involved. Also the network is stable and predictable with any amount of computing power. In practice small contributors usually join a mining pool. They team up for a better chance to solve the puzzle and split the reward when it is won.
Most people wait 3 blocks or 30 minutes to confirm a transaction. The transaction will appear quickly but will be unconfirmed. In other words if you deposit Bitcoin to the Coinbase exchange or buy a computer from Newegg you will have to wait 30 minutes on average to verify the transfer. This ensures the network didn't make any mistakes calculating the transaction. Unlike other types of payment such as credit cards or Paypal, Bitcoin transactions are irreversible.
Why Is It Worth Anything?
This is the big question for most people. If it doesn't exist in the physical world like gold or oil how can it possibly have any value? Why can’t a computer geek simply make more of them by writing some software? A common answer is "it has value for the same reason any currency has value." However I believe two characteristics bestow value: usefulness and scarcity.
Counterfeit coins will not have any record on the blockchain and thus will be rejected by the network. There is no way to make fake coins without compromising the entire network. The effort required is impractical and unlikely. Instead thieves steal bitcoins through usual methods such as viruses and social engineering.
Bitcoins are scarce: the network produces only 12 per block. The number minted each block halves every four years with the next halving scheduled for 2020. Halving continues until 2140 when the last of the 21 million possible coins are issued. It may seem that coins will be produced for the foreseeable future, however 16.4 million or 78% of all Bitcoins have already been created. Demand far outpaces the creation of new coins. They will only become more scarce in 2020 when 6 are issued every block, in 2024 when 3 are created each block, etc.
Contrary to popular belief Bitcoin is not magic internet money. It offers real innovation over existing currency. Useful features are numerous but most prominent are speed, cost, and safety. Transacting with Bitcoin is much faster than sending a bank transfer or writing a check. Checks need to clear and ACH transfers take days at best. It is also cheaper compared to alternatives like Western Union or bank wires. In fact when sending Bitcoin the sender can raise or lower the transaction fee as they see fit. The network will send transactions with higher fees first so a lower fee will result in a longer confirmation time. The cost is the same whether $1 or $1,000,000 is sent through the network. The savings on international transfers can be significant because the fee is not based on the amount sent.
Bitcoin also offers more safety than other types of payment. You will not have your personal information stolen by using Bitcoin because you don’t have to use any. Credit card companies sell your data to third parties, Bitcoin wallets do not. You will not have a transaction reversed months later like you might with Paypal because transactions are irreversible. You don't have to worry as much about account security because you don't have to rely on the weakest link storing your account data on public servers. And best of all people can use it to store wealth during an economic crises such as the one in Venezuela.
Where Will It Go From Here?
Bitcoin is by far the most volatile asset I have ever owned. The short term price is impossible to predict. In July alone the price has swung between $1800 and $2800. These price swings may keep most investors from pulling the trigger. However the long term has significant upside potential.
The market cap of Bitcoin has rocketed from $10 billion to $45 billion in the last 12 months alone, and institutional investors have only just begun to dip their toes in the market. Two ETF applications were recently denied by the SEC. However the insane premium enjoyed by the Bitcoin Investment Trust (GBTC) indicates significant demand for a derivative fund. Each share of GBTC is worth .1 Bitcoin, or approximately $270, but currently trades over $400! They also charge a 2% annual fee, far above what one might expect from an ETF. The largest gold ETF, GLD, charges only .4% by comparison. Bitcoin is so easy to buy that paying almost double for a derivative fund is sheer lunacy. The advantage of a fund is convenience and if an OTC ETF commands this premium there must be significant demand. The SEC is beginning to learn more about digital currencies and will have to deal with Bitcoin eventually. It's only a matter of time until a derivative fund is approved to trade on a major exchange. The killer app that brings Bitcoin to the masses will be investment funds, not flashy software for cell phones.
Are There Any Risks?
Bitcoin is still young and faces many challenges such as regulation, threats to the network, and newer digital currencies. While Japan recently adopted favorable regulation, other places like New York have unfavorable laws. New regulations are impossible to predict and may be enacted any time. For example if China outlawed Bitcoin it would likely have a significant impact on the market. Even laws unrelated to digital currencies might have an effect. The recent change in asset forfeiture by Jeff Sessions means that your money can be seized for mere suspicion. A police officer could confiscate Bitcoins on a traffic stop. After all only a drug dealer would carry thousands of dollars in digital currency. No evidence needs to be found and charges do not need to be filed. Sound a little far fetched? Think again.
Threats to the Bitcoin network also pose a danger. For example the network can be compromised if someone gets 51% or more of total computing power. The current network computing power is 7 million terahash per second, and one terahash is a trillion calculations per second. It would take billions of desktop computers to match the computing power of the network. It would be impossible or at least implausible to get 51% of the power. More likely an attacker would compromise existing network computers.
A few network participants possess staggering resources. Antpool, run by the Chinese company Bitmain, has the most computing power at 23% of the network. Bitmain manufactures dedicated Bitcoin mining computers and could theoretically gain 51% of the network. Bitmain would never compromise the network, but an outside party could try to compromise their Antpool. While a network attack is unlikely, the possibility does exist.
New digital currencies known as alt coins could eventually replace Bitcoin. There are many alt coins available, some of which are superior to Bitcoin. For example Litecoin (LTC) is similar to Bitcoin but blocks only take 2 minutes. Other coins offer total anonymity or better scaling solutions. Despite its disadvantages Bitcoin will remain king because it has name brand recognition. Retailers don't accept alt coins and most people don't know much about them. However alt coins may steal some market share, and as digital currency becomes common Bitcoin could die out if it does not improve. Remember the Walkman? That could be Bitcoin some day.
Just a note, many alt coins (and ICO's) are scams and should be avoided by the novice. Good alt coins exist but their discussion is beyond the scope of this article.
How Do I Get Some?
Bitcoin is easy to get. Popular exchanges such as Coinbase or Kraken accept bank transfers. One can also purchase them in person through websites such as LocalBitcoins where the price is usually higher compared to exchanges. Exchanges are not always safe so most people prefer a software or hardware wallet. Software wallets like Electrum and Mycelium are free and available for major operating systems. Hardware wallets such as Ledger and Trezor offer additional security at a premium cost. No one should pay a significant premium through funds like GBTC because BTC are so easy to buy.
A note for trading on LocalBitcoins: laws vary between jurisdictions so be sure to check your locality. Also when trading in person if the other party mentions the money/BTC will be used for anything illegal and you go ahead with the trade, you are now a criminal. Walk away and do not complete the transaction.
Final Thoughts
Bitcoin, still in its infancy, may be the next evolution of currency. Risks are significant but so is the potential upside. The majority of coins have been minted. As a result price increases directly with each new influx of money. Market cap will expand significantly when institutions join the party. However because significant dangers exist one should only buy what they are willing to lose. The market is incredibly volatile and price will likely fluctuate all over the place. Hold for the long run and ignore short term price swings.
Recent disagreement between miners caused a perception that Bitcoin could fail. Basically the block size needs to increase from 1 MB to accommodate more transactions, but not everyone agrees on the solution. This created a potential network split because large mining pools threatened to use different software to address block size. A compromise was reached and will go into effect next month. This compromise is temporary so expect more wild price swings in the upcoming months.
Investors new to Bitcoin should understand that the sky is always falling. The recent crisis will be followed by many more until the currency reaches adulthood. Don’t buy in to the fear. Instead buy the dips. I have owned Bitcoin for a few years and there has always been some Armageddon or other brewing. Somehow conflicted parties who all stand to benefit find a solution. If the current climate seems too dangerous then one could wait a few months for things to settle down.
While it was once an internet novelty, major retailers such as Microsoft and Dell are beginning to accept Bitcoin. Even a few small businesses accept the digital currency as payment.
What Is It?
Is it a pyramid scheme? Magic internet money? Something only criminals use for laundering? All these and more are real questions people have asked me about Bitcoin. Some of these people are savvy investors but have no experience with digital currency. Many descriptions of BTC use incomprehensible jargon such as SHA-256 and network difficulty. While it won't hurt to understand these things before buying it isn't necessary.
Bitcoin, in a nutshell, is a decentralized digital asset run on a peer to peer network. Anyone with a computer can participate in this network. There is no central bank or government to issue coins or regulate the network. Bitcoins are stored on a unique address 26-35 characters long that looks like this: 1J8VdQ2HcqXXHE3JiRthy6DMaes4er6DrJ (from the Mozilla Foundation). An address is generated using a secret code and is intended for only a single use. Bitcoins stored on an address can not be accessed without the secret code. Transactions sent from one address to another are computed by the P2P network.
Fractions of a Bitcoin can be spent, otherwise it would be impossible to use it for anything. The smallest fraction of a Bitcoin is 0.00000001, called a Satoshi after the currency's mysterious inventor. One Satoshi is currently worth about 0.00002 USD. This impractically small value isn't really used for anything yet aside from faucet payouts. It only exists so that if Bitcoin becomes extremely valuable one could still send transactions accurate to a penny. Bitcoin can be updated to allow even smaller divisions if such a thing is ever needed.
Providing computer power to the global network is known as mining. This term is used because new coins are generated by the network and given to the miners. Miners are also rewarded with transaction fees. Transactions are computed approximately every 10 minutes. This 10 minute group is called a block and is recorded in a sequential record called the blockchain. The history of any Bitcoin can be traced through the blockchain back to its creation. This is why Bitcoin is considered only semi-anonymous. Personal data is not recorded but BTC addresses used in transactions are recorded.
Block timing isn't exact because the network adapts to computing power. New Bitcoins are rewarded to a single miner every block, not divided between them. Basically the network is presented with a mathematical puzzle. The first computer to solve the puzzle receives newly minted Bitcoins as a reward. The difficulty of the puzzle is adjusted up or down so that no matter how much computing power is available its solution takes 10 minutes on average. A network participant can get lucky and solve the puzzle in 30 seconds, or if nobody finds a solution it could theoretically take 30 hours or more. The goal is 10 minutes but the actual time varies. At first glance this is an odd way to run a network. However it ensures that anyone who wants can participate and still have a chance to receive rewards no matter how many computers are involved. Also the network is stable and predictable with any amount of computing power. In practice small contributors usually join a mining pool. They team up for a better chance to solve the puzzle and split the reward when it is won.
Most people wait 3 blocks or 30 minutes to confirm a transaction. The transaction will appear quickly but will be unconfirmed. In other words if you deposit Bitcoin to the Coinbase exchange or buy a computer from Newegg you will have to wait 30 minutes on average to verify the transfer. This ensures the network didn't make any mistakes calculating the transaction. Unlike other types of payment such as credit cards or Paypal, Bitcoin transactions are irreversible.
Why Is It Worth Anything?
This is the big question for most people. If it doesn't exist in the physical world like gold or oil how can it possibly have any value? Why can’t a computer geek simply make more of them by writing some software? A common answer is "it has value for the same reason any currency has value." However I believe two characteristics bestow value: usefulness and scarcity.
Counterfeit coins will not have any record on the blockchain and thus will be rejected by the network. There is no way to make fake coins without compromising the entire network. The effort required is impractical and unlikely. Instead thieves steal bitcoins through usual methods such as viruses and social engineering.
Bitcoins are scarce: the network produces only 12 per block. The number minted each block halves every four years with the next halving scheduled for 2020. Halving continues until 2140 when the last of the 21 million possible coins are issued. It may seem that coins will be produced for the foreseeable future, however 16.4 million or 78% of all Bitcoins have already been created. Demand far outpaces the creation of new coins. They will only become more scarce in 2020 when 6 are issued every block, in 2024 when 3 are created each block, etc.
Contrary to popular belief Bitcoin is not magic internet money. It offers real innovation over existing currency. Useful features are numerous but most prominent are speed, cost, and safety. Transacting with Bitcoin is much faster than sending a bank transfer or writing a check. Checks need to clear and ACH transfers take days at best. It is also cheaper compared to alternatives like Western Union or bank wires. In fact when sending Bitcoin the sender can raise or lower the transaction fee as they see fit. The network will send transactions with higher fees first so a lower fee will result in a longer confirmation time. The cost is the same whether $1 or $1,000,000 is sent through the network. The savings on international transfers can be significant because the fee is not based on the amount sent.
Bitcoin also offers more safety than other types of payment. You will not have your personal information stolen by using Bitcoin because you don’t have to use any. Credit card companies sell your data to third parties, Bitcoin wallets do not. You will not have a transaction reversed months later like you might with Paypal because transactions are irreversible. You don't have to worry as much about account security because you don't have to rely on the weakest link storing your account data on public servers. And best of all people can use it to store wealth during an economic crises such as the one in Venezuela.
Where Will It Go From Here?
Bitcoin is by far the most volatile asset I have ever owned. The short term price is impossible to predict. In July alone the price has swung between $1800 and $2800. These price swings may keep most investors from pulling the trigger. However the long term has significant upside potential.
The market cap of Bitcoin has rocketed from $10 billion to $45 billion in the last 12 months alone, and institutional investors have only just begun to dip their toes in the market. Two ETF applications were recently denied by the SEC. However the insane premium enjoyed by the Bitcoin Investment Trust (GBTC) indicates significant demand for a derivative fund. Each share of GBTC is worth .1 Bitcoin, or approximately $270, but currently trades over $400! They also charge a 2% annual fee, far above what one might expect from an ETF. The largest gold ETF, GLD, charges only .4% by comparison. Bitcoin is so easy to buy that paying almost double for a derivative fund is sheer lunacy. The advantage of a fund is convenience and if an OTC ETF commands this premium there must be significant demand. The SEC is beginning to learn more about digital currencies and will have to deal with Bitcoin eventually. It's only a matter of time until a derivative fund is approved to trade on a major exchange. The killer app that brings Bitcoin to the masses will be investment funds, not flashy software for cell phones.
Are There Any Risks?
Bitcoin is still young and faces many challenges such as regulation, threats to the network, and newer digital currencies. While Japan recently adopted favorable regulation, other places like New York have unfavorable laws. New regulations are impossible to predict and may be enacted any time. For example if China outlawed Bitcoin it would likely have a significant impact on the market. Even laws unrelated to digital currencies might have an effect. The recent change in asset forfeiture by Jeff Sessions means that your money can be seized for mere suspicion. A police officer could confiscate Bitcoins on a traffic stop. After all only a drug dealer would carry thousands of dollars in digital currency. No evidence needs to be found and charges do not need to be filed. Sound a little far fetched? Think again.
Threats to the Bitcoin network also pose a danger. For example the network can be compromised if someone gets 51% or more of total computing power. The current network computing power is 7 million terahash per second, and one terahash is a trillion calculations per second. It would take billions of desktop computers to match the computing power of the network. It would be impossible or at least implausible to get 51% of the power. More likely an attacker would compromise existing network computers.
A few network participants possess staggering resources. Antpool, run by the Chinese company Bitmain, has the most computing power at 23% of the network. Bitmain manufactures dedicated Bitcoin mining computers and could theoretically gain 51% of the network. Bitmain would never compromise the network, but an outside party could try to compromise their Antpool. While a network attack is unlikely, the possibility does exist.
New digital currencies known as alt coins could eventually replace Bitcoin. There are many alt coins available, some of which are superior to Bitcoin. For example Litecoin (LTC) is similar to Bitcoin but blocks only take 2 minutes. Other coins offer total anonymity or better scaling solutions. Despite its disadvantages Bitcoin will remain king because it has name brand recognition. Retailers don't accept alt coins and most people don't know much about them. However alt coins may steal some market share, and as digital currency becomes common Bitcoin could die out if it does not improve. Remember the Walkman? That could be Bitcoin some day.
Just a note, many alt coins (and ICO's) are scams and should be avoided by the novice. Good alt coins exist but their discussion is beyond the scope of this article.
How Do I Get Some?
Bitcoin is easy to get. Popular exchanges such as Coinbase or Kraken accept bank transfers. One can also purchase them in person through websites such as LocalBitcoins where the price is usually higher compared to exchanges. Exchanges are not always safe so most people prefer a software or hardware wallet. Software wallets like Electrum and Mycelium are free and available for major operating systems. Hardware wallets such as Ledger and Trezor offer additional security at a premium cost. No one should pay a significant premium through funds like GBTC because BTC are so easy to buy.
A note for trading on LocalBitcoins: laws vary between jurisdictions so be sure to check your locality. Also when trading in person if the other party mentions the money/BTC will be used for anything illegal and you go ahead with the trade, you are now a criminal. Walk away and do not complete the transaction.
Final Thoughts
Bitcoin, still in its infancy, may be the next evolution of currency. Risks are significant but so is the potential upside. The majority of coins have been minted. As a result price increases directly with each new influx of money. Market cap will expand significantly when institutions join the party. However because significant dangers exist one should only buy what they are willing to lose. The market is incredibly volatile and price will likely fluctuate all over the place. Hold for the long run and ignore short term price swings.
Recent disagreement between miners caused a perception that Bitcoin could fail. Basically the block size needs to increase from 1 MB to accommodate more transactions, but not everyone agrees on the solution. This created a potential network split because large mining pools threatened to use different software to address block size. A compromise was reached and will go into effect next month. This compromise is temporary so expect more wild price swings in the upcoming months.
Investors new to Bitcoin should understand that the sky is always falling. The recent crisis will be followed by many more until the currency reaches adulthood. Don’t buy in to the fear. Instead buy the dips. I have owned Bitcoin for a few years and there has always been some Armageddon or other brewing. Somehow conflicted parties who all stand to benefit find a solution. If the current climate seems too dangerous then one could wait a few months for things to settle down.
Welcome to my Blog
This blog is for random thoughts, musings, and investment ideas. I am a contributor on Seeking Alpha but not all of my ideas are appropriate for that website, so those go here.
I don't have any formal degree however I have been very successful investing my own money. Organizing and writing my ideas is a new challenge that I enjoy.
I don't have any formal degree however I have been very successful investing my own money. Organizing and writing my ideas is a new challenge that I enjoy.
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