Be aware of risk with BTC


Jan 09

Because of the record run up, there are now many small investors who have a majority of their savings in Bitcoin. These are people who by good accident, fortune, or belief managed to capture a little of the bull market. One of my concerns when talking to some of these investors is they believe that Bitcoin is somehow like the stock market and that it is destined to recover from any dip and eventually rally higher. They might be right. I hope they are. So far, it has more or less did that.

However, I would like to point out some of the important distinctions: the stock markets, i.e. the DOW and S&P 500, have (1) a much longer history, (2) has had 10 year bear or flat market periods (much longer then most people realize), (3) consist of the best profit generating companies who are routinely replaced if they under-perform and some of which pay a dividend, and (4) the resilience of the U.S. markets might be dependent on externalities, like winning World War 2.

My primary concern with Bitcoin is that if you look at the charts, you’ll see around the beginning of 2017 the prices started to really jump. Because of the rate of growth, Bitcoin hasn’t “maintained” these sorts of high prices for very long. One can argue that for any bull market and that’s true. At the same time, I do not see any reason that Bitcoin couldn’t go much higher. But, if prices aren’t going up then holding Bitcoin exposes one to a lot of risk with no dividend to recover from potentially severe losses.

And, while I do not think Bitcoin will go to zero, the real risk for those who think it must always recover is the possibility that speculative mania pushed it beyond its all-time natural demand/value. Instead of thinking of it as a bubble, think of it as shifting the future too far forward. Another concern is the volatility is still very high, this is great for traders, provided it doesn’t get too crazy, but is not a good sign for it to be a store of value.

On the other hand, I still think there are valid arguments for investing a small amount as a hedge and to perhaps capture additional alpha, possibly from 2% to 5% for large investors whereas some have mentioned from 5% to 20% for small investors. I mention it not because the exact amount matters and not because I am making any recommendation. But, rather because I think there is still going to be a non speculative demand for it. What is not as clear at all now, is what price one would want to get.

A good trader listens to everyone’s arguments and then listens to the market. Right now, BTC is looking a little more risky then normal.

Disclaimer: These are my personal sentiments on the matter. I am not a financial adviser and do not provide financial advise. No recommendations.


About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at