Bitcoin: Tread Carefully

bigheaddinner-800px

Everybody wants Bitcoin Bragging Rights today. It appears that with the Currency passing USD 10,000 and the media being inundated with tales of people who have made fortunes because they bought bitcoins a few years ago, imaginations have been fired up. Be warned – much of the good news today is being put out by people who have a conflict of interest because they themselves own Bitcoin and other cryptocurrencies.

Make no mistake – the risks are very high. Bitcoin in itself suffers from a number of structural problems that do not make it an ideal asset. Though it is the cardinal cryptocurrency today and forms the basis of most trading in the asset class, these problems will hamper the market in the days to come.

First – Settlement times. It’s easy to be optimistic in light of the recent news of CBOE and CME offering Bitcoin Futures – but settlement times running into minutes or hours based on network traffic make this a cumbersome asset for the pricing algorithms that banks and hedge funds use. Unless the Bitcoin Foundation pushes through a MAJOR update to fix this, the currency is unlikely to gain much traction in the highly fluid and algo-driven futures market.

Second – Market cap. Even though much is being said about Bitcoin’s market cap exceeding well-known listed companies (USD 207 billion as of writing), it is still minuscule by standards of a ‘global’ currency. A leveraged options trader with a USD 1 billion book can easily trigger a major swing one way or the other. If banks and hedge funds take up the CBOE/CME gauntlet and allocate risk to this asset class, crypto traders will have to redefine ‘whale’.

So what is one to do?

Forget easy money. Do not tank your retirement fund and invest in bitcoin. If you do not have the stomach to see your portfolio down by 20 per cent when you return from a toilet break, Bitcoin – as it is today is NOT for you.

Once you get through the hype, there are other opportunities in the crypto space that will yield profits over the medium and long term. Initial Coin Offerings (ICOs) are issues of cryptocurrencies by businesses looking to raise funding from the market. Most of these today occur via Ether, and yield tokens compatible with the ERC20 standard. This makes these tokens easier to trade via smart contracts-based exchanges such as EtherDelta and HitBTC.

Another way to profit from the asset class as a whole, is to invest in Crypto-funds. The past few months have seen the launch of a variety of such funds that are both actively managed (TaaS and Smart IFT) and passively managed (Crypto20). For those looking for long-term exposure to the asset class, this is a great way to get some risk on.

For everybody out there who is mesmerised by the price graphs on TV and is looking to dive in, I would remind you of the old Wall Street adage:

“Bulls make money, Bears make money, Hogs get slaughtered.”

Disclosure: I have exposure to Bitcoin, Ether, Smart IFT and Crypto20.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s