Bitcoin , the Big Inevitable Disappointment

Bitcoin continues to fall since it made a new high at around 69,000 last week; it now trades at $64,000. It’s evident that Bitcoin is struggling to break the $60-70k barrier in spite of endless hype online, by major pundits, and even Apple CEO Tim Cook being the latest notable public convert to the digital cult. This suggests the supply of new suckers to prop up the price in order to negate the selling from early buyers, is shrinking.

If the spokesperson for your investment looks like this, then it’s probably a good time to sell:

When I said that no one has gotten rich with Bitcoin I was wrong. I found one individual on Reddit, from New Zealand, who purportedly made $30 million, and a second individual, a ‘digital nomad’, on Reddit who made almost $100 million (the bulk of it he says from Bitcoin). But then again, some people win the lottery, so this is not saying much. By ‘made’ this assumes they sell now, or are even capable of selling. They both said they are not selling.

My main thesis is that Bitcoin is a poor investment relative to index funds, tech stocks, 3x ETFs. Personally, being that I have no position in Bitcoin either way, I am agnostic to what the price does. I have not yet made a bet against it. Most people who buy Bitcoin are not intending to do anything anything illegal in which Bitcoin’s purported privacy is of any use. In this case, stocks are clearly better.

Despite large gains pre-2018, Bitcoin’s recent performance is underwhelming. If someone truncated Bitcoin’s chart from January 2018 onward, the performance would be pretty mediocre, outdone by many stocks and ETFs, such as GME, MSFT, AMZN, and TECL. If Bitcoin’s post-2017 performance was used as a prospectus by a hedge fund trying to raise money, it would be among the worst in the industry in terms of Sharpe ratio (meaning a lot of volatility/risk relative to returns).

People get mad when you tell them that Bitcoin’s risk-adjusted performance metrics are worse than the Nasdaq 100 or the S&P 500. Yes, since January 2018 Bitcoin went up more than the S&P 500, but also with considerably more volatility, falling 75% in 2018 and at one point 50% in 2020 and 50% 2021.

Bitcoin also performs poorly as a hedge against geopolitical uncertainty or market declines, being highly correlated with the S&P 500 to the downside and with no correlation to the upside. During the Covid market crash in March when the S&P 500 fell 20%, Bitcoin fell in half. Gold does not do much better either in this regard. Same for being a hedge against inflation. Short of treasury bonds and cash, there are no proven good hedges against crisis. Regarding inflation, the only good, consistent hedges have proven to be stocks and real estate. Gold’s track record is mixed in this regard; during high inflation of the 80s and 90s, gold did poorly.

The higher Bitcoin rises, the more volatile and crash-prone it becomes. This is the opposite pattern as observed in the stock market. For example, Bitcoin also has a tendency of randomly crashing, like in May 2021 when it fell in half for seemingly no reason. The S&P 500 however kept chugging higher.

Bitcoin can be re-balanced annually as part of a diversified portfolio, but this incurs transaction fees and taxes, and also requires timing when to re-balance. Any strategy that requires re-balancing is vulnerable to data mining, timing effects, and other biases when trying to access and predict performance.

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