Why the "Talking Heads" Are Afraid of Bitcoin - Smart Contrarian by Equitymaster
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Why the "Talking Heads" Are Afraid of Bitcoin

Jan 3, 2018

Rahul Shah, Editor, Smart Contrarian

I don't know, dear reader, if you're happy to be receiving all these bitcoin-focussed letters or not. The truth is, this idea is so intriguing to me that I can't help but read all the interesting stuff that is coming out.

And some of Tama's ideas are so eloquent and, well, persuasive, that I can't help but share them with you. I really want to know what you think of all the bitcoin theatre - so do write in and tell us if these weightless 'coins' are making a lot of noise in your heads...

Keep reading,
Rahul Shah (Research Analyst)

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Tama Churchouse

It seems like every day another financial luminary declares the death of bitcoin...

For example, in just the past few months:

  • Former U.S. Federal Reserve Chair Alan Greenspan said bitcoin will ultimately "prove worthless."
  • Nobel Prize Winner Joseph Stiglitz said bitcoin "ought to be outlawed."
  • And billionaire investor Howard Marks said cryptocurrencies "aren't real".

These talking heads all have one thing in common...

They're victims of the default bias

Most people stick with what they know. They don't conduct experiments in their life... whether it's something small like trying a new brand of soda... or something bigger, like investing in an entirely new asset class.

Think about it... How often do you change the route you take to work? How often do you try a new dish at a restaurant? Or, when you buy the latest mobile phone, do you just accept the factory default settings and not even bother changing the ringtone?

This is default bias. Most people like to stick with what they know and shy away from making big changes or taking on new risks, even if the change would be a good one.

The default bias is the offspring of two other biases: status quo bias and loss aversion. Keeping things the same is convenient, and the pain of losing is greater than the joy that comes from winning.

Put these together, and our brains often tell us it's just easier to keep things the same and avoid any potential pain that might come from changing things.

For investors, this can stop us from making changes to our portfolio or strategy because it's too inconvenient or it makes us feel uncomfortable. We tend to cling to the way things are, even if it's not the best thing for us.

It happened with the Internet

In the early 1990s, the Internet was just starting to go mainstream. And many otherwise smart folks were convinced it was just a fad.

Here's a quote from U.S. astronomer Clifford Stroll in 1995:

  • "Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney."

Even the inventor of Ethernet, Robert Metcalfe, didn't believe in the Internet.

"I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.

And telecommunications expert Waring Partridge had this to say:

"Most things that succeed don't require retraining 250 million people."

These people fell for the default bias. They believed in what they knew and were anxious about making big changes or taking on new risks. Plenty of other investors fell for this bias too. And they missed out on big gains as the Nasdaq - which is home to many tech stocks - grew 400 percent from 1995 to 2000.

We're seeing the exact same thing happen with bitcoin and cryptocurrencies today...

People still don't get bitcoin

Anyone who claims bitcoin isn't real or just a fad doesn't understand the cryptocurrency at all.

As we've written before, bitcoin can be moved around (far more easily than traditional currencies), used to buy goods and services and it has scarcity. Only 21 million bitcoin will ever be mined. And over 16 million have already been mined.

Bitcoin is just a cryptographically secure medium of exchanging value. It's not "fraud" or not a "real currency".

And as for the concern that bitcoin is purely "digital", it's worth remembering that more than 90 percent of all money that exists today around the world is not physical (i.e., not notes or coins).

In short, every now and then something truly different and new comes along. And if you're willing to go against your default bias, you could make a fortune.

That doesn't mean bitcoin won't be volatile

I'm not saying bitcoin won't be volatile. Like any asset, cryptocurrencies will continue to experience rallies and corrections. Don't fall into the trap of thinking "this time is different" and that bitcoin will go up forever. The cryptocurrency could absolutely be in for a short-term price bubble. But over the long term, the upside is potentially far from over.

Even though there's plenty of hype around it, the level of general public participation is still extremely low. Buying bitcoin is still relatively cumbersome. Exchanges need to do know-your-customer (KYC) checks. Depending on where you live, funding a bitcoin account can require a trip to the bank and an expensive bank transfer. And you still need to familiarise yourself with a new asset class, which takes some effort.

But all that means is the opportunity is still there.

The most appropriate course of action for the majority of investors is simply to buy a little bitcoin - and forget about it. Buy, hold and ignore the volatility. It's not a one-way ride, it's a bumpy one. Be prepared to stomach big declines and sit tight. And don't invest more than you can afford to lose. For most people, crypto should be reserved for the small and speculative part of your portfolio.

Bitcoin is an asymmetric bet... if it falls or even goes to zero, your loss is small (assuming you've put in only what you can afford to lose). But if over the next few years it continues go up, then gains of 10 to 50 times are entirely possible... and even bigger gains lie outside of bitcoin in the cryptocurrency space.

Good investing,
Tama

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12 Responses to "Why the "Talking Heads" Are Afraid of Bitcoin"

Raghavan sathyan

Jan 5, 2018

From the comments already made by our friends, It's clear for any observation or the view of public is different. There is around 17 Crypto-coins mainly trading now.We have to understand the limits on the number of coins, Market cap,the control on transactions through the Admins,the way of Admins INDIVIDUAL Authority on any activity. Please try to learn. Any stock stock market guaranteed against a volatility?????

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AK

Jan 4, 2018

Reminds me of the tulip- bubble and how even Newton lost money miserably.. also reminds me that when everyone is buying it's time to sell.. even paanwalas are speaking of internet-coin !! Secondly, this article spoke of biases.. how does EM know that the Talking Heads are afraid due to biases. They probably don't want gullible public to be sucked into this bubble.. I think eqitymaster is selectively feeding the public frenzy.. Everyone knows that it may succeed or fail splendidly. Reminds me that Tulips don't bloom forever

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HOSHANG B. DEHNUGARA

Jan 3, 2018

I AM INTERESTED IN PURCHASING BITCOIN OR ANY OTHER ENCRYPT CURRENCY ON YOUR RECOMENDATION, PREFERABLY BASE IN INDIA, METHOD OF PURCHASE , STORE , SALE , SALE PURCHASE OF GOODS/ COMMODITY OR FOREIGN CURRENCY AND WHAT ARE THE INCOME TAX RULES IF ANY AT THIS STAGE, SINCE I HAD READ THAT THERE WERE I TAX RAIDS. THANKS REGARDING THE SAME, WHAT IS THE MINIMUM AMOUNT INVOLVED FOR PURCHASE AND MULTIPLIES THEREOF

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RK Jha

Jan 3, 2018

What is the guarantee that NOT more than 21million bitcoins will be mined? Who will be responsible for ensuring that the limit is NOT breached. In real world ,with all controls in place- with law enforcing agencies , we still have instances like Satyam and GlobalTrust bank; to name a few. In this world of virtual currency Bitcoin things can easily go down as fast as it has gone up.
Happy investing for those who have stomach for Bitcoin.

Like (1)

Bharat

Jan 3, 2018

It's great to see you and team digging dipper into this subject. Please continue great work

Like (1)

Rajeev

Jan 3, 2018

We are very much interested to know more about bitcoins and other cryptocurrencies.
We demand more acts at Bitcoin theatre and its keeping us very much edu-tined and we anxiously look forward to more acts.
I would also suggest if there is more information offered on the ideal manner in which we could purchase them in India and how can we bridge the gap of premium charged by local exchanges when compared to International cryptocurrency exchanges to have a fair deal.
Thank you for all the information so far.
Rajeev

Like (1)

Maheep Kapur

Jan 3, 2018

Every asset has a multiple values associated with it, such as utility value, esteem value etc. The utility value of the asset known as currency is depreciating all the time on account of inflation. Within a country, there is no esteem value of currency as most countries only permit one currency. Both utility value and esteem value of currency become relevant in multiple-currency financial systems. Even here different participants could be driven by different value considerations. Assets like diamonds, art, old and ancient coins, gold jewellery and coins, even real estate, are all valued more for esteem value than utility value.
Esteem value of any asset is itself dependent upon perceived large-scale acceptance of that asset as something valuable. It is quite clear that acceptance of Bitcoin has reached a critical mass that will ensure some reasonable value for it, even though it may go thru gut-wrenching volatility.
It may be unpopular with the establishment agents like governments, central banks and established investors. However, it does seem attractive to many others. These may fail only if these are declared as illegal assets. And yet, these might survive even then as some governments have already given their blessings to such Cryptocurrency. The future of all such crypto currencies will be anything but uninteresting.



Like (1)

gnana

Jan 3, 2018

all these letters about bitcoin is pointing to only one thing... Equitymaster is launching another product based on bitcoin...another system...another subscription service...I think Equitymaster is competing with the roadside dosa shops which make 99 different dosas...it is the same batter...only few tweaks in the presentation and a fancy name!

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Chandrashekhar Vaidya

Jan 3, 2018

I beg to differ. Bitcoin is not just a medium of exchange but also a store of value. Anyone who uses bitcoin only as a medium of exchange can not profit from rise in price of bitcoin. Only if you use it as a store of value, can you get Returns from increase in its price.
While I am not sure if it can be called as a fraud, it certainly seems ideally suited for conducting criminal activities.
You have srlectively quoted examples of predictions which went wrong. I am sure there will be a host of examples when predictions turned out to be correct.

Like (1)

Merzi Patel

Jan 3, 2018

Fully agree with the default bias mentioned in your article.
Bitcoins or any other crypto currency have a long way to go , a small amount invested in any crypto will not hurt your portfolio if you check its value after 5 years from now.

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