I am starting to get annoyed by all those “Gurus” that say “Sell” Bitcoin or “Buy” this, without minimum Financial Knowledge and Rational Analysis.
I Love to Be Useful to People, this is also why I shared my Book (that I Wrote 3 Years ago) for free online and why I write on this Blog how I do what I do (to open your mind and understand that to realize something is necessary to work hard and be grateful to people).
Being useful it is also the Best way to do Business, to build a Personal Brand and to Build a True Competitive Advantage.
So I hope that explaining and rationalize what should you do about Bitcoin will be useful to you (and if yes, please share my article!).
Bitcoin returned at 10K $ Level, and this movement could be linked to the recent spread of news about the Libra Cryptocurrency.
In fact, the Libra is the new Facebook Cryptocurrency (technically it is not owned directly only by Facebook for Legal Reasons but in practice it is), and the development of this project by this Tech Giant increased the perceived “Authority” of the Cryptocurrencies World.
Take some Minutes to Think about the concept of “Authority”.
It is unconsciously associated with “Trust”, “Reliability” and “Certainty”.
Those are all emotions that incentive someone to buy something (or put money in some project), also in uncertainty conditions.
So, People started to “Invest” in Cryptocurrencies because “Facebook is doing that”, it is just a “Copycat” Strategy.
But, analyzing deeply how Libra is conceived, one is able to understand that the way it works is completely different than the classical cryptocurrency’s one.
Libra is a Stable Coin, and have some stable assets as underlying (like Treasury Bonds for example) and it is not inflatory.
This Means it is not possible to Invest/Speculate in Libra because is not conceived to change value among time.
Now, focusing on Bitcoin, we can simply understand that Facebook is not “Investing in Cryptocurrencies”, so it is not reasonable to “Buy” only basing on that: simply because Bitcoin Ecosystem and Libra one are not linked, we aren’t talking about similar things, they are completely different (also if they are built on a Blockchain Database, that is Just a Way to Store Information – and sometimes to Build DApps and Smart Contracts).
Frequently News and “Analysts” write about some “Bitcoin’s Target Price”, and now I will explain why they don’t know what they are talking about.
If we analyze it from the point of view of financial assets, the price is nothing more than a discounting of future cash flows.
Since Bitcoin (and generally other cryptocurrencies) does not involve cash flows, we can define it as a function of the real demand, which is distinguished from the short-term demand.
The real demand is systemic, that means that it is composed of all the market that is disposed to hold the Bitcoin to the price X and to use it like effective currency.
If, on the other hand, we want to understand the movements of who is only speculating, the question we need to ask ourselves is: what is the average horizon of the speculator and when will he close his position?
The critical point will be when prices go down to a figure where many will start to sell for fear of losing earnings, creating a cascading effect with falling prices.
The key question is, how many will really want to use Bitcoin? From that, you can try to Estimate the real value and the expected price.
The point is that the individual time horizon of the speculator and the X price of the legitimate users are, on average, unknown variables.
Consequently, from these premises, we can try to do an analysis that makes sense:
- I Assumption: There are 2 types of buyers – Users and Speculators.
- II Assumption: On Average, you are not able to evaluate and determine how many and in what proportion are the types of buyers.
- Assumption III: The announcements of “Target Price” are market manipulations, attempts to “Prophecy that comes true”, so they are not credible to make estimates.
From this assumption we can generate a Logical Model, where a sensible financial suggestion would be:
- Buy Bitcoin if you believe in the project, regardless of their price.
- Do Not Buy Bitcoin if you want to invest, or at least do it only if you want to bet for fun, because currently the market does not “price” in a reasonable way (by force of cause) the asset and consequently in trying to estimate the trend, on average, you would get a seemingly random result.
Clearly these choices depend on the model you use, but I don’t think that on average it is possible to make advanced and sensible evaluations, especially because Bitcoin purchases tend not to be managed by professional intermediaries, who buy and sell around a range of reasonable and sensible target prices, but by unskilled individuals whose model is “I buy because I hope it will grow so I become a millionaire”, and hope it is never a strategy.
One Possible reasonable model could be to apply my Thesis’ Algorithm (Experimental Thesis, awarded with Honours by my University) to try to estimate the Bitcoin’s Community Size and define the Bitcoin Fundamental Value as a Linear Transformation of this Variable.
This will not be certainly a perfect model, because it doesn’t distinguish between Real Users and Speculators, but if there is a good and robust correlation you can use it to protect against adverse market bubbles.
Hope is not a Strategy – If you don’t Know don’t Buy it
2 Replies to “Buy or Sell Bitcoin? Stop and Read This Right Now.”
Definitely one of the most brilliant and accurate article I’ve read, about the topic, this week.
Would you like to share an estimation of the Bitcoin’s Community size, nowadays, and how it could, in your opinion, change in the next future?
Anyway, just something I don’t think it’s 100% precise in the article.
I believe that, today, the main part of Bitcoin Holders/Users/Speculators are not unskilled individuals, lead by FOMO and millions’ dream, anymore.
The great part of the unjustified dreamers was burnt in january 2018.
Thank you for the article and work hard this way, I appreciate your blog.
Sure, my methodology is explained in my thesis (I used it with Tesla stock Prices, finding a correlation approximately equal to 94% Between Tesla’s stock prices and Its Daily Community Sentiment).
I agreed with my University to share my work for free to everyone, so you can download it here:
Happy to be Usefu.