Jun 20, 2022
I’m going to rely quite heavily on external sources for this one, as I did the last one, but it has been some time since I talked about Bitcoin here. With that, let’s get into some of the events over the years since this 2017 article.
Let’s see where we were back in May of 2017, from the article:
Currently, Bitcoin is at an all-time high having cleared a valuation of slightly over $2,000 (US) for every one Bitcoin. In the meantime, additional Bitcoins are being, “Mined,” every day, though at a decreasing rate by design. It has been estimated that the last Bitcoin will be mined in the mid-early 2100’s, sometime around 2036-2040 and that will represent the full total sum of the cryptocurrency. At that point, there will be a stability in the Bitcoin valuation and it may arguably be an even more consistent currency than the currencies of various countries.
At the time, BTC holding a value over $2,000 was pretty big news. As of the time of this writing, Bitcoin is valued at $19,608 (USD) which represents a gain of more than 9.8x since the previous article, but for those who don’t follow the cryptocurrency, you may find yourself surprised to realize that this number represents a precipitous drop from BTC’s all-time high.
In November of 2021, this cryptocurrency peaked at a valuation of around $64,400 per BTC, which would have represented an increase of 32.2x, so if you bought BTC at the time the last article was published and sold it right around that date, needless to say, you did pretty awesome in terms of net profits.
On the other hand, if, like so many, you bought at or close to that peak (or any other), then you would be down substantially if still holding and were to sell right now. In fact, your current holding would be worth not even 30.5% of what it was at the time that you obtained your BTC or fraction of a BTC.
With that, the time has come to look at what has happened over the years.
A BRIEF LOOK AT THE LAST SEVERAL YEARS
The first thing that happened regarding Bitcoin is that it started to expand into various markets and industries with those industries accepting them as payment. For those who follow this site, and perhaps, had gambled at offshore online casinos (prior to so many states legalizing U.S. online casinos), you might be aware that a major event for such players is that those casinos increasingly allowed BTC for deposits and would sometimes payout withdrawals in BTC. In fact, there were, and probably still are, a handful of online casinos that deal exclusively in BTC.
Additionally, Bitcoin would begin (as well as a few other cryptos) to be recognized as legal currency in a few countries. As much as I hate to borrow from Wikipedia, I should assume that the information contained is reliable enough as this is a pretty objective yes/no issue.
NIgeria officially legalized Bitcoin transactions (not that they can really be stopped, most of the time) in January of 2017, which is actually prior to the other article being published. However, NIgeria had a banking ban on BTC, which they have recently reiterated, stating that cryptocurrencies are not to be used for transactions conducted by financial institutions.
The Central African Republic, again, according to Wikipedia, officially recognized BTC as a legal tender in the country as of just a few months ago. The timing on that is pretty interesting because, if they were doing it because they perceived BTC as being more stable than it had previously been, then it’s ironic that they passed that legislation just before the significant drop in price had begun. As of the time of this writing, BTC is worth just under half of its value at the time that this legislation would have gone into effect.
Anyway, I’m not going to go through and list every country in which the mere use of BTC (by individuals) is legal as that would be too many countries to list. Instead, we are going to look at the attitudes of some major countries toward Bitcoin and see if there are any interesting legislations worth taking a deeper dive into.
Canada is a major player in world economics and has legalized BTC, though it does have a banking ban such that it cannot be used by financial institutions. The banks in Canada are also not permitted to do business with countries dealing in virtual; currencies unless those companies are registered with FINTRAC.
FINTRAC stands for the Financial Transactions and Reports Analysis Center of Canada. I don’t know what would prohibit FINTRAC from ending in two, ‘C’s,’ as the acronym would still be pronounced the same way, but it doesn’t. In any event, banks are evidently prohibited from doing business with companies who engage in virtual currency transactions unless they are registered with, and presumably, report those transactions to this agency.
Interestingly enough, this set of FINTRAC regulations reads similarly to the CTR (Currency Transaction Report) standards in the U.S.A.. Specifically:
When you receive virtual currency in an amount equivalent to $10,000 or more in a single transaction, you must submit an LVCTR to FINTRAC.Footnote4
You must also submit an LVCTR to FINTRAC in accordance with the 24-hour rule when you receive two or more amounts of virtual currency, that total $10,000 or more within a consecutive 24-hour window, and you know that the transactions meet one of the following:
*Were conducted by the same person or entity;
*Were conducted on behalf of the same person or entity (third party); or
*Are for the same beneficiary.
(Please note that small edits were made to the above italicized section that did not change the meaning.)
Essentially, this is the same standard as a currency transaction report in the UNited States and follows, more or less, the same standards. I should assume that Canada, and specifically, FINTRAC, also has a CTR equivalent that relates back to physical currency and would not be surprised if the terms mirror this.
Of course, the company line (as it always is) is that this is for the purposes of preventing money laundering, discovering fraudulent sources of money and, I imagine, shares these reports with the Canada Revenue Agency (the equivalent of the IRS in the United States) to ensure that individual and business entities are properly reporting their income for taxation purposes.
In addition to those regulations, some individual Canadian banks have also determined that it is necessary for them to disallow their debit and credit card products from being used for anything related to cryptocurrencies. These banks include Toronto Dominion and the Bank of Montreal, though there may be others.
The United States is all over Bitcoin; they were early to the game in classifying it as a decentralized virtual currency (2013, U.S. Treasury), a commodity (2015, Commodity Futures Trading Commission) and taxable as a property pursuant to the Internal Revenue Service.
In other words, legally speaking, you should be paying taxes on your BTC holdings until such time as you convert them to cash (if you do) which would then become income and should be taxed accordingly. I don’t know how closely they are paying attention now (I don’t use BTC), but I imagine that a great many BTC transactions have flown under the radar in the years since 2017.
If money services businesses, including cryptocurrency exchanges, money transmitters, and anonymizing services (known as "mixers" or "tumblers") do a substantial amount of business in the U.S., according to FinCEN director Kenneth Blanco in 2018, they are required to:
*register with the U.S.FinCEN as a money services business
*design and enforce an anti-money laundering (AML) program, and
*keep appropriate records and make reports to FinCEN, including Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs)
*As of August 2018, U.S. FinCEN had been receiving more than 1,500 SARs per month involving cryptocurrencies. Seventeen other countries have similar AML requirements.
In September 2016, a federal judge ruled that "Bitcoins are funds within the plain meaning of that term".
In short, FinCEN is evidently keeping an eye on BTC (and, presumably, other cryptocurrencies) much to the same extent that Canada attempts to and with the same end goals. These end goals, I assume, are to prevent money laundering and to ensure that the BTC itself is properly taxed, or if converted to cash, that the cash is reported to the IRS as income.
Naturally, I would suspect that doesn’t happen all the time and also that there is so much Bitcoin floating around (and so many transactions) that they couldn’t possibly catch everything. Even some people who deal in BTC without reporting their BTC earnings to the IRS are probably not of any great interest to the agency as they may not be dealing in high enough volume to be worth pursuing. I’m sure that any such people hope not, anyway.
We can round out North America by saying that the use of Bitcoin is also legal in Mexico and they plan to use FinCEN laws to regulate such conduct.
Okay, that’s enough dealing with countries and regulations for the time being. However, we will note from my 2017 article:
Furthermore, there is no central governing agency that tracks Bitcoin which, for better or worse, means that the form of currency is not subject to certain regulations or transaction reporting requirements from country to country. In other words, moving large amounts of Bitcoin tends not to raise any flags as there are no flags to raise.
I should imagine that was largely true at the time, especially as relates to the United States. Of course, we now see that there are multiple agencies that address BTC in different ways now, depending on what country you are in. There is more reporting than what used to be the case, though I imagine it can still be used from one person to another generally without anyone noticing, especially if using an offshore wallet.
At the time of the 2017 writing, I took note of the fact that BTC was subject to drastic short-term price fluctuations:
That’s not to say that Bitcoin is currently without short-term fluctuations, in fact, nothing could be further from the truth. Prior to its seeming increased legitimization, Bitcoin prices were under $1,000 (US) as recently as two months ago. Specifically, the three month low on March 24th of this year was $935.35. As recently as January 11th, Bitcoin fell to $775.98, which was almost $200 off of last year’s closing price.
There are currently 16.3M Bitcoins in existence as of the time of this writing (approximately) which results in a market cap of roughly 33.6B at the current price, which again, is at a near all-time high in excess of $2,000 USD per Bitcoin.
Given that the value of the Cryptocurrency has plummeted by just over 50% in roughly the last two months, and by almost 70% since November 2021, I think that my warning was pretty well-founded.
At the time of that writing, there were evidently 16.3M BTCs in existence. As of the time of this writing, there are 19.07M BTCs, which is just over 90% of the 21M that there ever will be by the time that all of them have been mined. Market cap is a weird term to use to describe BTC, so let’s instead say that the USD value of all BTC currently in existence is 379,664,630,000, which is more than 379 BILLION dollars! If it had held its all time high price, it would be worth more than triple that and would come in at just over a trillion USD, isn’t that wild?
Of course, it’s not looking like BTC will ever return to that high point, with many BTC market watchers speculating that BTC is going to continue to fall over the next several years. On the other hand, there were people saying the same thing when I wrote the previous article:
For those of you who think that, long-term, the Bitcoin bubble will inevitably burst, maybe it’s time to think again. That same suggestion was made at the beginning of this year by several investors while Investopedia seemed to hint at the idea of Bitcoin maybe doubling the year end values of last year and hitting $2,100 by the end of this year.
As we can see, it’s only May and those values have already essentially been seen. Maybe not $2,100, per se, but we are already pretty damn close.
But, then, it could be back down to $1,700 day after tomorrow, who the Hell knows?
In the meantime, the number of Bitcoins being mined, per day, and entering the market is declining. For those of you unfamiliar with how the cryptocurrency works, that is by design.
I mean, I suppose those people were eventually right, but the bubble sure as hell got MUCH bigger (twice, actually) before it finally did burst. In fact, Bitcoin ended the year 2017 with a valuation of nearly $13,000 USD per unit, which is interesting because, if you bought and held since then, it is not worth roughly $19,900, so you would sell now for a roughly 53% gain, which would only be gains of roughly 11% per year. Of course, you’d still be doing better than a DOW Jones Index fund.
Naturally, a great many people have made fortunes off of Bitcoin (and other cryptocurrencies), but I would imagine the people who have done the best are basically traders who understand how to buy and sell based on the trends of other traders and popular opinion. In my opinion, I still conclude that the value of BTC is nothing more than a confidence game. There are really no fundamentals behind it whatsoever; it is worth whatever the buyer and the seller agree upon.
In other words, any value that it does have is nothing more than implied value. Other than that fundamental truth, let’s get into why Bitcoin crashed.
WHAT THE HELL HAPPENED!?
The first thing that we have to do is reiterate, from the 2017 article, exactly how one comes into possession of a BTC other than buying it directly or selling some item or service for it:
The best comparison that I can make is how a player might gain levels in some sort of RPG or phone app game. The game starts you off gaining levels for completing simple tasks or getting through easy levels, but as the game goes on, levels become substantially more difficult to gain. In the meantime, the gain to HP and other stats as one does gain levels, in raw numbers, is more appreciable per level gained.
Bitcoin is following the same pattern, and again, that pattern is by design. As the potential uses for Bitcoin grows and more and more outlets begin accepting the cryptocurrency as a form of payment, the demand for it goes up and the prices (as related to other currencies) as a result. In the meantime, the Bitcoins themselves become harder to mine, but also become more valuable when you do successfully mine one. These new Bitcoins are eventually added to the market, but for the time being, the demand for Bitcoin (price) is growing faster than the supply being mined.
In a nutshell, BTC is extremely difficult to mine and is approaching its absolute value in terms of total units on the market. Anything is going to fluctuate, but BTC has fluctuated pretty wildly in the recent years, and even with that, the cost to mine BTC has increased.
The first thing that you have to do is buy your hard hat and protective equipment, and then, you have to get your dynamite so that you can explode…
Oh, wait…that’s not what that means?
For those who were so quick to detract from Bitcoin’s potential all those years ago, which I mentioned in the article:
There is obviously no correlation between the bitcoin price and the dollar or any other regular asset. Large investors simply don't pull money out of currencies, stocks (NYSEARCA:SPY) or gold in order to buy bitcoins.
The first part seems reasonable enough, but I strongly disagree with the second. What large investors do is put money into positions in which they believe they have positive value. In fact, that’s what any advantage gambler (which investors with a lengthy history of success certainly are) will do. Thus, the notion that people are not investing in Bitcoin as a holding interest is somewhat misguided. It’s like saying that investors don’t sell large quantities of one stock to buy large quantities of another. Investors change their position anytime they see another position they think will be more profitable.
Both of the two paragraphs immediately above were from the article, with the first being a quote from a source cited in that article. Interestingly, we are going to be citing the website Investopedia for more information on Bitcoin mining, so, I tend to think Seeking Alpha (the source in the previous article) whiffed on that one. That said, nobody bats 100% and, in my experience, Seeking Alpha gets it right indubitably more often than they get it wrong.
The paradigm, of course, was that Bitcoin (if seen as an investment or instrument of trade at all) would be shunned by legitimate investors as they would have no interest in anything other than traditional means of investing and trading. Of course, the primary goal of traders and investors is to make money, so I’m not as confident that they care about how that money is made, and with that, I think some of them saw an opportunity.
Besides, BTC is, in effect, a digital currency. If investors/traders were to pull money out of the currency market (if that’s what they play), then they’re simply replacing one form of currency dealing vis-a-vis speculation with another.
Anyway, getting to the Investopedia article linked above, the first paragraph gives a description of the mining process:
Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger's maintenance and development. "Mining" is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.
Okay, so you basically have a bunch of computers all going to work to try to solve the same, “Complex computational math problem,” and the winning computer gets the BTC. These aren’t, “Complex math problems,” in the sense that you and I would use the term, but rather, are problems that require a computer’s full attention and more than the memory capacity of most computers.
For that reason, BTC miners would have to buy something known as a, “Graphics Card,” or some high-powered computer, but a graphics card with at least 6GB of RAM (random access memory) is required, at an absolute minimum. The cost of the cheapest graphics card that might be enough to pull it off is more than $300. Of course, the BTC goes to the first computer that figures out the problem. Of course, your ONE computer will represent but a small fraction of the total computational power being actively used to mine BTC, so, most likely, you’ll just be wasting your money.
Your electric bill will also go up because computers obviously require electricity and yours will be using a ton of juice as it tries to solve these problems around the clock. According to The Balance, Bitcoin consumed more electricity in 2019 than did the Cezch Republic (yes, meaning the actual country).
That makes BTC less than environmentally friendly, of course. That article by The Balance would later go on to state that the carbon footprint of mining a single block of BTC is equivalent to that of conducting more than 1.8 million VISA card transactions. I can assure you, VISA made a bunch more off of those processing fees than the mined block of BTC ended up being worth. More than that, a bunch of people mining generated nothing for themselves aside from a higher electric bill.
For most individuals, the return-on-investment just isn’t going to be there.
WHAT WILL HAPPEN?
The question now is more along the lines of whether Bitcoin is going to hold, gain slightly, or perhaps even drop below $10,000. With credit to Forbes’, Rob Isbitts, it would seem that some people saw this coming. From that article:
That’s a sign that cryptocurrency is not some kind of alternate currency or life preserver for investors. It is more like a commodity. Its price is determined by supply and demand. But demand is dropping. And that leaves crypto extremely vulnerable, in the way that dot-com stocks were vulnerable in the year 2000.
I wouldn’t have called it a, ‘Commodity,’ back in 2017 (or now), but what I have always maintained is that it is worth whatever someone is willing to give you for it. In the most fundamental of terms, it doesn’t have any real-world value whatsoever, is not tied to anything of value, and therefore, there is no absolute minimum that you can put on its price. In other words, the theoretical bottom for BTC will always be a cash value of $0.00 because there’s nothing about it you can point to and say, “Hey, look, what if…” No. What if nothing. There is no, ‘What if,’ beyond what if someone decides it’s worth something again?
Before we quote a little bit more from that article, as you will have noticed, we’ve already hit upon the drop in demand. The main reason that demand has dropped is because there are other cryptocurrencies out there that people are getting into, so BTC is hardly a novel concept these days.
Other reasons for the drop in demand are the fact that it’s getting increasingly difficult (and expensive) to actually mine new BTC, thereby making the return-on-investment not worth it, even at high price points. Energy prices are substantially higher now. In the United States, for example, a kilowatt hour of electricity was, give-or-take, 13.5 cents per KWh, whereas the May 2022 price is roughly 15.5 cents per KWh–an increase of nearly 15%.
For that reason, for BTC to continue to be worth mining, especially as it becomes more difficult and computationally time-consuming, BTC has to continue to increase in value. Unfortunately, for BTC holders (I have no reason to care) BTC has not held its value recently, so mining more BTC makes less financial sense than it did before the prices dropped.
The Forbes article points out that the BTC prices have correlated with a drop in the stock market prices, but I don’t think that fully explains anything. In fact, I think it MIGHT be a negative that Bitcoin is presently moving with the broader stock market and more dramatically, at that.
The reason that I see it as a negative is because, if BTC really is a commodity, then it should increase in value when the stock market isn’t doing well. Historically, we have seen that happen all the time with gold. Looking at the 20-year chart for gold, take notice of a few different major market events:
- Looking in the timeframe of 2008, when the Great Recession kicked off, gold initially dipped slightly with the market (we will compare to DOW), but then it shot through the roof as the commodity was seen as a safe investment. For most people, the idea was to kind of sit on the sidelines and wait the Recession out, but eventually, it got to the point that so many people were doing it that it itself became something invested and even traded (meaning buying with a short-term plan).
- During Covid-19, the same exact thing happened. Gold initially had a very small drop at the same time that the DOW plunged, then it soared, but as the DOW improved, gold prices began to come down again. We’re in an interesting cycle now as the DOW seems to have declined from its peaks slightly, but gold is presently following it. Of course, gold might arguably still be overvalued from the last spike and you’re going to see another spike in gold prices if we get this recession that some economists are predicting in the next few years.
Okay, so why is that bad for BTC?
Simply put, if BTC is supposed to be a commodity in the sense that gold is a commodity and is supposed to fulfill its primary stated purpose of being, ‘Safe,’ then when money comes out of the stock market, you should expect some of it to go into BTC, as it does gold.
However, we are not seeing that, or there would be a greater demand for BTC, right? However, we did see that during the Covid-19 pandemic.
Leading into the pandemic and looking at the BTC chart, it seemed that BTC dropped with the market and lost perhaps over 40% of the value of its 02/2020 high by March 13, 2020, but then (unlike the stock market) BTC would make a complete recovery in just two months.
Obviously, one would expect BTC fluctuations to be more extreme than the broader stock market since BTC has no fundamental value whatsoever and any implied value relates back only to investor/trader sentiment towards the cryptocurrency. However, even with these wild fluctuations, if I possessed any BTC…the fact that the drops are well outpacing those of the DOW would be of great concern to me. There might not be a reason to believe that BTC will not recover some of the value lost since 11/2021, but if there is any reason to believe that it WILL recover, I certainly don’t see it. What purpose does it serve? What is it an alternative to, at this point, and if to anything, then why is that alternative needed?
The Forbes article also sees a burst bubble, quoting from the source:
The bubble may have already burst. When emotional asset bubbles burst, they tend to do so with relentless persistence. The environment quickly goes from “I can’t lose” to “I thought I couldn’t lose!” Think about it. Crypto has become one of those investment vehicles that has made people...many people...feel like if they didn’t own it, they were foolish. That’s what bubbles do. And, there is still debate about what exactly crypto is within the vast array of financial vehicles. Currency, commodity, revolutionary asset, gold replacement, speculative toy, learning tool for younger investors, world-changing blockchain enabler...or just a fad that will be remembered in history alongside Pets.com, pet rocks, and tulip bulbs?
“Emotional asset bubble,” is perhaps a little more harsh than I would have put it, but I don’t think it’s an improper description.
Personally, I look at Bitcoin more like a handful of dirt. I remember something along the lines of the following conversation in a marketing class:
Instructor: What’s in my hand?
Student: Is that…dirt?
Instructor: Yes. I have a handful of dirt. What is it worth?
Instructor: To you. What if someone needed a handful of dirt, for some reason, and offered me five dollars for it?
Student: I guess it would be worth five dollars?
Instructor: Unless I thought I could get ten out of them, or someone else wanted to make a competing bid. Do you get the idea?
Student: Yes, it’s worth what the person is willing to pay.
Instructor: It’s usually worth MORE than that. I know my handful of dirt is worth nothing, but that’s because it is worth nothing to me. If someone offers me $5 for my handful of dirt, then I know it’s probably worth more than that to them. We try not to make lateral transactions as humans, which means that we want to perceive positive value, not equivalent value, so my goal would be to find a higher price where they still feel like they are getting the good end of the deal.
Anyway, that’s how I see Bitcoin. I imagine that a great many of the people who have made the most on BTC would agree with me that it is fundamentally worthless, but at the same time, anything is worth whatever someone is willing to pay for it.
THE ‘HOUSE MONEY’ MENTALITY
When I look at the lifetime price chart for Bitcoin, the one thing that I notice is that we’ve only had three relatively brief periods during which a BTC was valued at more than $40,000 for a BTC.
The reason that I find that interesting is that, if BTC is trading at right around $20,000 now, then I don’t imagine that there are very many people who purchased (and are still holding) BTC at a price greater than $40,000. In fact, the vast majority of Bitcoins that WILL ever exist did exist back when we were talking about the $2,000 price point in 2017. For anyone who had BTC then and does now (assuming no other moves made with it), those people could sell right now at roughly a 10x profit.
However, those same people might instead choose to wait for another uptrend thinking, “Hey, even if it drops again, I’m still ahead, right?” which is why I would call that the House Money Mentality. It’s the usual gambler thing, right, “Okay, I can keep playing, but I’m not going to lose more than half of what I am ahead.” The next thing the gambler says, “Okay, I bet I can get back to where I was, but I’m absolutely leaving with at least the amount I brought.” Followed by, “Okay, but if I lose this original stake, then I am definitely done.” And, finally, “How did I lose everything I brought with me!!?? I had double what I brought!!!”
In the meantime, I’m sure there are some bagholders who got into Bitcoin at one of the highest points, and unfortunately for a select few, probably a few who got in at a price point of over $60,000/BTC.
In fact, Cryptocurrencies have borrowed the, “Bag Holder,” term from stocks, with some specific criteria that make one a cryptocurrency bag holder:
Much like within traditional markets the term bag holder is fairly popular, however more so within cryptocurrency. Following the ICO craze that was experienced last year, combined with exuberant optimism there are still to this day many bag holders that exist. These people are holding “bags” of crypto that have dropped significantly in value, many greater than 90%. Rather than taking profit when times were good, these people ignored all signs and indicators around them and clung to a single crypto asset other than bitcoin.
I like how this 2018 article says, “Other than Bitcoin,” as if Bitcoin would remain forever immune from sharp declines. In fairness, he couldn’t have known, which is why I have never taken a hard position against Bitcoin. The only two things that I say against Bitcoin are:
A.) It has no fundamental value and is worth only what people think it is worth.
B.) Because (A.), Bitcoin is going to be highly volatile as the only value it will ever have is whatever value it is perceived to have.
Okay, so there are two types of bagholding, but any bagholding requires refusing to sell when it would clearly be the optimal decision to do so…such as when BTC is trading at an all-time high, such as $60,000 USD/ 1 BTC.
The first type of bag holding is the, “House Money,” mentality that I was talking about a few paragraphs up. The notion is that the sky is always the limit which, technically, it kind of always is, but even if the value of the crypto were to fall by (insert person’s arbitrary amount here) the person would still be up by whatever amount, and therefore, did not lose anything.
Gambling, investing and trading are all the same thing in this sense. Even if you realize a net gain at the end of the day, you still LOST something by eventually selling at a lower price than the one you could have had, because it’s all relative. People have a tendency to mentally oversimplify these things, of course.
For example, if you go to the Craps Table and buy in for $1,000 and end up with $2,000, then you can cash out and be $1,000 ahead. If you continue to play, but lose $500 (of the $2,000) and then decide to cash out with $1,500, then you might say, “I won $500.”
For colloquial purposes, the statement is accurate enough. A more accurate statement might be, “My net profit from playing Craps today was $500.” The reason that the second statement is more accurate is because, despite the net profit of $500, the player still LOST $500 relative to the amount that the player could have left the table with.
Again, that’s the sort of house money mentality that many people get themselves into. When it comes to investing and trading, many people have this same sort of mentality in that they will look at a situation as a “Pure profit,” or, “Breakeven,” and, in the moment, will worry less about what it is that they could have had if they had got out at the high point.
The other type of bag holder, which is the sort of type very common when it comes to trading penny stocks, is the one who refuses to minimize their losses. This sort of bag holder will continue to hold when, against all evidence to the contrary, getting out at the present time would permit them to minimize their losses. In many of these cases, the goal will be to, “Wait for it to recover enough just so I can get my money back,” but often, they’ll hold beyond that and turn into the first type of bag holder before often turning into the second type once again.
When it comes to investing, trading or crypto, it’s about buying AND eventually selling. The goal is always to eventually sell, or should be, otherwise, what was the purpose of ever buying the thing in question in the first place? You can’t eat it. It exists only for the purpose of eventually being sold for some amount over that at which you bought it.
If there’s one very general piece of advice that I would give anyone it is this: Always reanalyze your position.
When I say to always reanalyze your position, what I mean is that you should take a look at your current holding and completely ignore the amount of money that you spent investing to get that holding, when you do, ask yourself, “Would I buy this at the present price as an investment if I didn’t already have any of it?” If the answer to that question is no, then you should really consider selling. If the answer to that question is yes, then you should probably hold and perhaps consider buying more of it.
The key is to play with your head and not with your heart. Separate the two and give them jobs:
Heart: It is your heart’s job to care about the amount of money that you have already invested into something and to, perhaps, lead you to making less aggressive or more aggressive decisions in the future. Of course, those decisions will be made with your head, but you should listen to your heart just so that you can come to understand where your flawed tendencies come from and do the headwork to minimize those in the future.
Head: The job of your head is to be analytical and your heart should not be allowed to interfere in this process. The most analytical position absolutely does not care about, “Playing with house money,” and does not care what your net loss will be if you sell or what your net gains COULD HAVE BEEN had you sold at some other point—which people usually relate back to the highest possible point, even though almost nobody actually manages to sell at the absolute apex price. That’s true of anything.
Thus, you must use your head to ask a simple question, “Is this commodity overvalued or undervalued? Do I expect that it will go up relative to the current price, or do I think that it will continue to go down?” When you ask those questions, realize that there will be crests and valleys that will inevitably run contrary to whatever you decide, ignore those, you’re just trying to decide on a general trajectory.
If you think the general trajectory is downward, then get rid of it. It doesn’t matter what you have made (or lost) or that you could have made more in some theoretical Universe where you sold at the highest possible point. What’s relevant is whether or not you think the price will improve relative to where it is right now.
Some people don’t like a phrase that I tend to use, but what I always say is, “Holding is the same thing as buying.” If you wouldn’t buy new, then you shouldn’t hold old. Just in my opinion, of course. The only exception is if you can’t put a trajectory on where you think it might go and can’t decide whether or not you think it will gain or lose value, but even in that case, getting out is always a safe play.
The worst trait that a trader or investor can have is to hate losing. If you’re afraid of losing on an individual position, then you should never take any positions on anything. The goal should be to win more often than you lose and to be right more often than you are wrong.
There are those who will ride something all the way to $0.00 just to put off losing as long as possible and cling to the hope that there will be some kind of miraculous rebound. That happens all the time, not only in penny stocks, but with any number of major stocks that eventually went kaput. Trust me, some people held companies such as Circuit City, Kmart and Radio Shack to the bitter end—and eventually lost 100% of those investments.
In fact, on the most recent source linked above, you can find a chart that adjusts for subjective value. Again, the most ideal subjective value would be to put zero value on anything, because then, you are making analytical decisions using only your head. If you absolutely would not invest more into a position given the current price, then the only reasonable thing to do would be to sell it. Here are a few definitions from that article:
Loss aversion — the different shape of the curves as we make gains or losses represents how a loss of $500 annoys us much more than a gain of $500 gives us pleasure.
Diminishing sensitivity — the leveling off of the curves represents that we’ll enjoy winning $500, if we only have $500, much more than we’d enjoy winning $100 if we had $1000.
Adaptation level — We don’t evaluate from some absolute level, rather we evaluate whether something is good or bad from a neutral reference point that we adapt to. So, by the end of a movie the movie theater doesn’t feel dark, yet walking out feels blinding. One’s reaction to the $500 example above was probably affected by whether they think $500 is a lot of money or a little, which is all to do with ones adaptation level.
As we have already established, if you are strictly averse to losing, then you should not dapple in any form of investing (on your own) to begin with. If you’re going to invest (in anything) as an individual person, then you WILL lose sometimes. There’s no if. Some of your positions (if you take enough of them) WILL be losers. Embrace it. If you accept that you will sometimes lose, then you can instead focus on something much more important: How much will you lose when you do lose? If one is being objective about a position, then there are almost zero instances (probably zero) where one would ride it all the way down to $0. In the stock world, if a company is at the point of liquidating, then common shareholders can be presumed to get nothing, so you should sell for whatever you can get.
Diminishing sensitivity is hard to avoid, but the best investors and traders do it all the time. Of course, they tend to be well-bankrolled and are ultimately playing a long-term game, so these folks would have very little of their wealth invested in any one particular thing at any given time, even if they think the position kicks ass. Even if you only have $500, you really shouldn’t be risking it all on any one position.
Only you can make your decision as to what to do with your Bitcoin, or whether or not you want to get into the cryptocurrency. I’m hesitant to offer any of my own predictions as to the future of Bitcoin as I have no friggin’ clue what it’s going to do.
Fundamentally, I maintain the position that I have always held that Bitcoin has no fundamental, or intrinsic value. None whatsoever. In terms of absolute value, I consider BTC to be completely worthless. In fact, since BTC costs money (for various reasons) to get in the first place and does not have any intrinsic value, I consider the absolute value (negative) whatever it cost to mine it.
Of course, something of this nature is highly speculative, which isn’t at all in my wheelhouse. When I made some kick ass stock picks back in 2020, I based all of my decisions on the fact that the stocks had practically become worth less in implied value than they were actually worth in absolute value, or if not less, something very close to it. I saw the reaction to the Covid-19 pandemic (vis-a-vis the markets) as a massive overreaction that would have only been appropriate if it turned out we would collectively be on lockdown forever. Of course, in that event, nothing would have mattered anyway.
It’s for that reason that I can’t make any predictions here because I consider BTC to have a fundamental value of $0.00, absolute value of some negative amount and think of Bitcoin (and other crypto) as nothing more or less than a confidence game in its purest form.
In reality, you shouldn’t even buy or sell Bitcoin based on what you think it will eventually be worth. You should buy or sell based on whether or not you think you can accurately predict what OTHER PEOPLE will think Bitcoin will eventually be worth. It’s really just a big game of chicken, from where I stand...just a high-end form of playing penny stocks on a bigger version of what is, at best, nothing more than an overgrown shell company.