Friday, March 21, 2014

My Analysis on Bitcoin

Every so often someone comes around with a new and brilliant idea (that is really nothing more than an old idea revisited); to attempt to create money out of nothing.  Bitcoin is the latest version of this.  Now for those of you who still don't know what bitcoin is I will explain it in very simplistic terms, because if you haven't heard of it by now, it might be a bit over your head anyway.  Bitcoin is an attempt at a digital currency that can be spent the same as you use your credit card on or when you use Paypal.  It can be transferred to different accounts, Physical form paper certificates can be delivered to you much like stock.  It is able to do everything you can essentially do with cash and credit.  The added bonus is, it is an alternative to the printed into oblivion US dollar, and it also has no user information attached to the accounts, so you can hold bitcoins in an account without anyone knowing who you are.  The currency increases in quantity at a set rate for a few years where it then will not have anymore ever existing so there is never a risk of hyper inflation.

Sounds pretty cool right?  Just about everything one could ask for in a alternative to the declining USD right?  Except there is still one unanswered question...What is it?  Tangibly?  What is this thing and what about it makes it money?  The answer is, it's computer code.  A complicated algorithm.  The code makes up the program which is in essence what bitcoin is.  For those who don't know what computer code is, here is an example-

And there you have it.  That is money.  Not buying into that theory?  Yeah, me neither.   ("Get your tulip bulbs here, Come one, come all!")  And that's all it is, tulip bulbs.  At the height of the tulip bulb bubble, you could buy some nice real estate for a few choice bulbs or a handful of less than choice bulbs.  Right when a Ferrari dealership announced it has accepted bitcoin as payment for a Ferrari, that was about the highest it ever went, to about $1,200 a bitcoin.  From a technical standpoint, the chart of bitcoin has followed to a "T" the pattern of every bubble in history.  Below is a very well done chart that specifies the steps that make up the psychology of a bubble from the time it begins to the time it collapses.
 The first stage is when the smart money identifies a good buy and begins to get in.  The next stage is when the hedge funds begin to make it there hot new thing and pile in.  Then, those said hedge fund managers go on CNBC and talk their book on how great this company they bought is.  Then, after hearing about it so much, you begin to buy it.  Then your cousin said he's buying some.  Then your neighbor.  Next thing you know, your taxi driver who knows nothing about investing is checking the quotes on a min by min basis.  Then the smart money bails, and things begin to crack.  But don't fear, this sharp move down is a great buying opportunity!  And it will be, for a day or two, but then it fails to get as high as it previously did.  Then it begins to slip.  And then it slips faster.  Now people start panicking, but most still don't sell, because price is already below what they paid for it and they want to wait till it goes back to even.  Now the smart money has started a waterfall because there is no one left who hasn't bought to purchase the shares they are selling.  The hedge funds, are at least smart enough to know a waterfall when they see one and to know that this is not how an asset acts when it is in a bull mode, so clearly it is not anymore and they get out too.  Again, with no one to sell to, causing utter capitulation.  When you've lost 80% of your money and your absolutely freaking out, that's when you will sell, vowing to never touch that asset ever again... (And that's when it will rally strongly)  Just as markets go higher than they should at times, they over compensate as well but will ultimately find its mean.

Now the next chart is the Nasdaq bubble.  Notice every move is exactly like the text book model, from the first bear trap, to the failure to re-reach the old high, to the collapse, and then the doubling of price from the bottom. 
Now look at the chart of bitcoin...
This 50% whack it's had from the high of $1200 to the current price near $600 is far from over. You can see 2 spike lows to $400 that occurred that bounced up and are holding so far. Now look back up at the Nasdaq chart. It did the same thing at $3,000 then broke below and went to $1000. As these two Moving Avgs cross over, I believe we will see this thing start to break wide open. Ultimately I expect price to settle somewhere back at $100.

Now, in conclusion, I want to be clear about my thoughts here on bitcoin:

1. Bitcoin is not the new Gold, or the new dollar. It is based on nothing tangible whatsoever, and it has absolutely no fundamentals.
2. Bitcoin is not a buying opportunity here, or probably anytime in the near future.
3. Whether it be bitcoin or something else, the CONCEPT of a digital currency is not going to go away. Why? The banks LOVE it! Think about it, if there is no paper dollars that exist, there is no need in times of panic to parade the armored trucks around bringing piles of money into the vaults to calm depositors fears that they won't be able to get there money out. In short, in a digital currency world, with no paper to withdraw, there can NEVER be a bank run. Therefore, the ONLY major threat a bank can ever have (Lack of liquidity) essentially will never happen.  

When it's all said and done I believe the future of currency MUST be a return to gold in some way shape or form. But I also believe, given the overall weakness of the Western world's fiscal and monetary status, we will in some way shape or form tie ourselves to the hip with the rest of the western world, knowing that the demise of one equals the demise of all. And I also believe every effort will be made to make a digital currency, so all transactions can be tracked, all wealth and assets can be accounted for and have taxes paid on, and so there will never be a need for the banks to have to panic over capital. These 3 things together would mean a world currency balanced by various western currencies, some gold for stability, possibly real estate as well or other commodity assets, and to make it digital so it is not exchangeable in any other form, or able to be withdrawn from the system. This leads into the final thought...
4. Bitcoin will be a buy if and when it reaches near $100. Buying the Nasdaq after the collapse allowed you to double your money from 1,250 at the bottom to 2,500 in less than 2 years.

"King Dollar" is dead. It was from the first second it was no longer exchangeable for gold. Gold wears the crown, simple as that. You can try and call money jelly beans, or tulip bulbs, or computer code if you'd like, and maybe you'll find some fools who will join you for a fleeting moment, but at the end of the day, and since the beginning of time, "Money is Gold and Silver, everything else is credit". And that's not my opinion, that's Mr. J.P. Morgan himself's.

-Jonathan M Mergott


  1. I thought bitcoin was a joke when I first heard of it. Then I heard people were making money. Then they all lost their money (no surprise). Bitcoin was at about $100 before it went up to the sky. I agree it should drop back to about $100 as well. Is there a way to do a short play on the this? Jay

    1. Hi Jay. The most interesting thing about bitcoin has been the speed in which this move has occured. The psychology behind how a bubble works, as depicted in the chart I posted, happened in the case of bitcoin in a little over 1year, where as comparatively the same style move in the NASDAQ took nearly a decade. This just goes to show you the effects technology advancements have had on how we invest. And when I say that I don't just mean the speed of executions and the high frequency trading systems, although they have had a significant impact, but how we learn about New things. Thanks to things like Facebook and Twitter and everyone having the ability to Google anything from them cell phones, people who would have never known what bitcoin is have been able to learn about it and invest in it. The result of the speed of this has been the the wall st hacks who need to be able to trade everything, have not had time to develop a bitcoin ETF. (Or an inverse ETF, it a triple exposure ETF etc...) So as far as I know there is no way to short it that i know about. But im sure they're already working on one. At the end of the day, shorting bitcoin will probably be a profitable trade, but there are better opportunities out there.

  2. From your previous post I'm watching GDXJ. It hit $37.50 today. I'll probably but at $35. Jay