Hey everyone, it’s Finance Fridays again. The last few weeks we’ve talked about Gambling and Bitcoin and stuff. Today I’m going to a short post about Cryptocurrency Volatility.
In my previous posts I highlighted that cryptocurrency is at its core, the highest stakes of gambling.
By buying cryptocurrency you are part of a group trying to assign value to something that currently has an unknown value and nothing to back it. Now, I’ve also explained that currently the US Dollar technically has nothing to back it either. However, it does have a long history and there is an assumed stability from just how big it is.
If the US Dollar was to suddenly become worthless, the United States is such a huge power that it would most likely throw the world into chaos.
So what happened?
Currently the regulations on Bitcoin by any government have been pretty lax, with the exception of a few states (including mine). This lack of regulation has no doubt helped Bitcoin’s meteoric rise to nearly $5000 a unit. However, just last week some news came up:
China banned ICOs (Initial Coin Offerings)
China shuts down domestic Bitcoin exchanges
China is a hugeeeeeeeeeeee market for Bitcoin. As you would expect from this news, Bitcoin value took a nose dive:
You can actually see what happened.
China Banned ICOs on September 4th then announced on September 11th that they would shut down domestic exchanges by October 31st.
There was a slight blip on September 4th and then a nose dive that began on September 11th, dropping all the way down to $3k.
Then it crept upward again toward $4k again… but then dropped down again amidst concerns that this China Bitcoin ban is permanent:
China orders Bitcoin exchanges in capital city to close – bbc.com
Whoa, that’s crazy.
Cryptocurrency trading is not for the faint of heart. Swings of 10% or so are relatively common, swings of 20-30% are not uncommon.
All it takes is a little bit of excitement or panic and there is a feeding frenzy of trading.
Did you buy anything?
I still don’t have any money in any cryptocurrency. However, if I was going to buy anything I’ve already told you of my long bet. Rather than buying Bitcoin, I’d take a huge risk on Waves or Ripple. A good friend and I may actually do a true longbet on longbets.org, over 10 years, over like $100 or something. Then whoever won would have the loser donate $100 to their charity of choice.
I mean, it’s not as exciting as Warren Buffet’s Long Bet, but hey, it’s all in good fun and goes to charity.
Well, what do you think about all this?
Remember, this is straight up gambling. However, gambling and speculation can be fun.
When I saw China ban ICOs and then announce they were going to shut down domestic exchanges, well everyone pretty much knew that Bitcoin was going to take a dive. The question was… how far? $4k? $3.5k? $3k? …2k!?!? The real question is, what do you think Bitcoin is actually worth. $5k? $4k? $3k? According to those who were trading, it seems to be that the floor is $3k. However, its actual worth is still very much in the air.
I guess the other questions are, with China being forced out of domestic trading, will there be long term effects on Bitcoin?
Why did China force Bitcoin out? Is China going to make its own cryptocurrency? If it does, how will that effect Bitcoin?
Lots of questions… and no answers.
So, what do you think will happen?
I don’t like to make predictions. So please remember, none of this is financial advice. This is just for fun.
My friend’s assessment of the situation is “We just have to decide what we believe is the floor, and ride the bronco.” (By “we”, I think he means anyone currently with any money in Bitcoin.)
As for me I think that Bitcoin isn’t going anywhere. If I had to guess at its actual value, I’d probably put it around $4k.
What am I basing that judgement on?
It’s really just “$3k is too low”, “$5k is too high”, and “$4k is just right”. I’ll call it the “Goldilocks Method™” of calculating Bitcoin value. Like I said, for right now, I think “the floor” is $3k. It doesn’t make sense to me for Bitcoin to drop below that amount.
So then, what? Buy low, Sell high?
Well, yea, I guess. Or maybe just buy low and don’t sell.
I think that Bitcoin will eventually peak and then continue to increase in price, kind of like gold.
The reason for this is because Bitcoins are not infinite. There are a finite number of Bitcoins, which are estimated to be all “mined” by 2140 which is a total of 21 million Bitcoins. Once all the Bitcoin currency is mined, that’s it. There are no more Bitcoins to be made or had.
But 2140 is a long ways away… isn’t it?
Agreed. However, the effects will occur long before 2140.
It’s somewhat confusing, but the reward for mining halves every 200,000 coins. Many miners will probably feel the effects of non profitability sometime in 2020. The pool of miners will probably decrease. Unless of course, we see a huge increase in processing/computing power available to the general public. How this will effect Bitcoin’s value is uncertain.
However, I believe that while there will be short term effects, I don’t think any huge long term effects will occur.
So what happens in 2140 then?
Of course this is wayyyyyyyyyyyy in the future. And now we’re in the realm of crazy speculation.
However, I think that once the last Bitcoin is mined and the supply is gone, then we’ll see the normal effects of a limited supply. Additionally, Bitcoin is setup to handle transaction fees.
While currently not really worth mentioning, you can imagine if the supply became limited, then transaction fees would probably increase. In this sense, another sub-economy would be created amongst those with Bitcoin.
So… here’s the crazy idea:
I plan to retire at 60 or so, which is around 2040. At this time my kids will be finishing college, around 22 years old.
Let’s say my wife and I die at 90 or so in 2070, and I leave Bitcoin to my kids (who are ~50 years old). Let’s say I give them 10 Bitcoin each or something.
So Kylie has 10 Bitcoin and Lucas has 10 Bitcoin.
Kylie has two kids (A and B) and Lucas has two kids (C and D).
They each give their children 5 Bitcoin when they die at 90 in 2110.
The last Bitcoin is mined 30 years later in 2140, with the their Bitcoin divided amongst my great-grand kids.
If you really want a long bet. Buy Bitcoin and it’ll help your great grand kids have passive income.
LOL. That is just crazy.
Yup. Speculation is fun huh?
By the way, all this volatility in Bitcoin also caused a lot of changes to Ethereum too, which also saw a drop:
It almost parallels Bitcoin. I would place its floor around $200 and its “actual value” at about $300, using my “Goldilocks Method™”.
Bitcoin is not for the faint of heart.
Volatility is its middle name.
20-30% swings are not uncommon.
“We just have to decide what we believe is the floor, and ride the bronco.”
Bitcoin is finite. The last Bitcoin is estimated to be mined in 2140.
Buy Bitcoin for your great grand kids’ sake. (LOL)
Author’s Note: The Goldilock’s Method™ isn’t real of course. It’s just meant to be funny.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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