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Bitcoin Breakdown: Should You ‘Invest’

Courtesy of ZeroHedge. View original post here.

Second Part of a Series. Orignally posted on the aurthors site HedgeAccordingly.Com

By Evan McDaniel, @sellputs

Hey guys.  Remember the giddy Internet bubble and what it spawned—the Tech Wreck of 2000?  I was somewhat aware of the destruction, despite my distractions as a teenager with raging hormones at the time.  A decade later I was trading hard, scared of losing it all in the aftermath of the real estate bubble and the Great Meltdown of 2009. 

And now, as the Bitcoin Bubble inflates to ever more epic proportions, I get a creeping feeling of dread. There’s this way old sequel to “Alien,” and this one character, Hudson, is played with scary, panicky intensity by the late actor Bill Paxton.  He keeps warning his shipmates: “Game over, man, game over! We’re fucked!”

He was right about that, he got ripped apart moments later.

So, will you get ripped apart if you invest in bitcoin, much less the lesser copycat cryptocurrencies it has inspired: Litecoin, Ethereum, Zcash et al?  No doubt a lot of speculators will meet a monstrous end by chasing the Bitcoin Bubble, while others get in early enough and get out early enough to pocket profits in fantastical proportions. 

It’s more about gambling than investing.  In fact, I’ve heard that some professional poker players in the legal card rooms of Los Angeles are investing in bitcoin’s fly-by-night rivals, targeting what they believe to be Ponzi-like scams and using them as “escalators” (my term)—you board at the bottom, ride it upward for as long as you dare and bail before everything topples. 

Elsewhere, I have a friend whose gal pal—she’s this artsy Burning Man type, and sometimes she is so tight on funds she has trouble paying her phone bill—has just put $400 into a new Coinbase account to trade in bitcoin, Litecoin and Ethereum.

Bad idea, right?

Yet this Burner sees bitcoin as the struggling non-investor’s ticket to riches.  Federal regulations aimed at “protecting” the poor block them from many investment options because they aren’t “qualified investors”—read: with a net worth of $1 million. Whereas, the feds haven’t yet tried to grab control over bitcoin exchanges.  This is unregulated turf where newcomers can freely roam.

And she’s right—she could make a windfall if she watches closely and sells early. (That old saying comes to mind about bulls and bears getting rich, while pigs get slaughtered.  A lot of Johnny-come-lately cryptos will be “makin’ bacon” a year or two from now.)

Bitcoin Bubblers revel in dreams of a DRW windfall.  Do you know that story?

Donald R. Wilson runs a large, aggressive high-speed-trading firm in Chicago known by his initials: DRW Global Holdings.  In 2014 he formed a cryptocurrency-trading subsidiary and named it Cumberland Mining (for the Grateful Dead song, “Cumberland Blues”).  A year later, Cumberland bid $5.5 million at a federal government auction.  The prize: 27,000 bitcoins, of a total 44,341 digital coins seized by the feds in the shutdown of the notorious Silk Road drug-dealer site on the dark web. 

Silk Road had racked up $200 million in illegal-narcotics transactions in a few years, all of it in bitcoin.  The cache of 44,000+ coins was found in the laptop hard drive of Silk Road’s creator, the infamous Ross Ulbricht, who was 32 years old at the time.  In federal court in New York, he later was convicted on seven counts related to drug-kingpin offenses, after which he lost on appeal and now serves a life sentence, with no parole.

DRW’s investment of $5.5 million, at roughly $200 per coin on auction day, has soared upward to more than four hundred million dollars.  Some $405 million at recent prices of almost $15,000 per bitcoin, up 72-fold in two years, if prices hold.

Ahhhhh, there’s the problem: If prices hold.  More on that, coming up.

Next up: Should you buy into the bitcoin bubble?

Evan McDaniel, aka @sellputs, is a derivatives trader, algorithm wizard and advisor to hedge funds. You can reach him at evan@hedgeaccording.ly.


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