Bitcoin (professional/resume article

Two-bit Thieves

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**Disclosure -- This was written circa November, 2017;  While I do think Long-Short strategies in BTC or other Crypto markets can be done, I still find it deplorable as a Long Term investment or store of value, regardless of Paul Tudor Jones's thoughts on Inflation. Enjoy.

Bitcoin seems to be the topic of every conversation in financial news these days. CEO’s of major financial institutions have all weighed in, mostly against it, but it seems to be gaining some legitimacy. Whether or not you agree with it, at it’s recent milestone of $15k per Bitcoin, it demands to be at the very least considered. While I don’t have a bitcoin today, I did find some from a few years back and was all too happy to cash them in around the 6k mark. While some would consider this to be leaving money on the table, let me explain my rationale behind my decision to sell, and why if I found another bitcoin I would likely exit the market again. In Short; I simply don’t feel my money is secure in the hands of any bitcoin institution.

While I am in no way a self proclaimed crypto-currency expert, I do have some experience mining it, and I think in relative bitcoin terms that gives me at the very least an undergraduate degree in Bitcoin—And no, there isn’t a ‘Bitcoin College’ yet, at least not that I’m aware of.

First off, let me explain what it means to ‘mine’ for a cryptocurrency, and even more basic what a cryptocurrency is. If you ask 10 people you may get 10 answers, but I consider them tech based- currency, used to complete transactions in a secure and anonymous market that are otherwise not associated with the ‘Corrupt banking institutions’. Anyone with the opinion that crypto’s are more secure than say a conventional savings account, because they aren’t in the hands of white collar criminals, should familiarize themselves with the FDIC, and Glass Steagall—but that’s another point entirely.

Initially, they were used to buy things illegally (illegal drugs, firearms, etc) from dark-web sites like Silk Road, but now there are many cryptocurrencies for many purposes. Some people are even using private/exclusive cryptocurrencies as a way of raising money, I.e. buy one puppy t-shirt coin, and when our company is up and running that puppy t-shirt coin is valid for...you guessed it, 1x puppy t-shirt. Another theory commonly used to legitimize crypto’s is that people in countries with severe inflation concern are using them to save money and purchase everyday items in order to maintain a standard of living. I really doubt that to be the case, but I’ve been wrong in the past.

In my personal opinion, crypto’s are closest to a precious metal security... There is an unknown amount of bitcoins, uncapped, however there is a cost to producing them—or mining them. In order to mine for a bitcoin, you must have a GPU that can solve complex rounding equations, and you are then rewarded a small decimal of a crypto coin for completing each equation. The issue is there is a very fixed cost associated with the GPU’s, the mining pools, and the electricity, however there is an ever-changing conversion rate—therefore you are rewarded a fraction of something that is undefined; anyone with any calculus or finite experience knows that anything multiplied by an undefined variable is technically 0. Another concern is that you can’t simply convert your bitcoin number on a screen into a 15k poker chip. It’s not a 2.5 Carat diamond or 2 gold bricks, it’s simply a number on one site of many—none of which feel ’safe’ to me as I’m always hearing of a new breach. There’s just no way to go to ground (cash) here.

Another issue, is that while more and more people begin mining, I.e. working to complete these equations, the equations become more difficult, thus take longer to complete. So you are fighting the law of constantly diminishing returns, and negative economies of scale to boot!

So let’s continue with the precious metals theory of mine; if there were diminishing returns, and negative economies of scale, do you think anyone would be interested in mining for gold, silver, etc? Take a look at what happened to the coal market in the early 20th century; or as JPM’s Jamie Dimon loves to insinuate—Tulip Bulbs in the 1800’s. I just don’t see this ending well.

In my opinion, the next obstacle to overcome—one that I simply don’t think crypto’s are capable of doing—is maintaining their inflated price once CME Group opens up the trading of Bitcoin Futures, Options, and ETF’s. Being a full time equities and options trader, I think once experienced traders have the ability to open short positions on bitcoin, it will simply be popped once and for all. ETF’s are already having difficulty maintaining consistency, and those have much more regulation than futures or options would provide. A case could be made that when there are options, people will be able to hedge their crypto holdings, but I simply don’t think that’s what people will choose to do. I think people will use options to further leverage an already bloated security, and reach beyond their means and skills. It’s the American way!

My final point, is one that Jim Cramer recently discussed on the air, and honestly was a big part of my decision to get out of the market—taxes. Now that Bitcoin’s are at the 15k milestone, if someone is to pull cash out of a savings account to buy a bitcoin, or sell a bitcoin and return to cash holdings, this will be above the 9.9k IRS flag mark. At the very least, these Bitcoin overnight millionaires are in for a rude awakening when they suddenly owe 150k in taxes, and likely closer to 225k. Even a strong security with good fundamentals would have a tough go of a 15-25% slice off the top of their share price instantly, without warning. I think this will be another devastating hurdle, and I don’t picture the IRS losing this battle.

While I am into way the worlds foremost authority on bitcoin, or other cryptocurrencies, I just think there’s better places to invest your money. The truth of the matter is it’s a currency only in the sense of cyberterrorist bribes when they steal your info or ruin your device. I think best case you find yourself owing significant and immediate money to the IRS at an unknown later date, and worst case you find yourself losing ever penny held in it. Investors should keep in mind the ‘subject to loss of principal’ disclosure used for legitimate blue-chip stock offerings, and multiply the font by 15x and maybe bold it.

Just my .00000122 BTC’s (2 cents)

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ZO

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