Part 1: Let’s make a bet!
In December 2017, some of us received a spot-on group mail, as we routinely do, from our colleague Viktor Zsiday. He used the results of Ron Paul’s Twitter poll to demonstrate the completion of the bitcoin mania at the time. The American politician asked people about which asset would perform best on a 10-year time horizon. Bitcoin won with a landslide. Only gold got a noteworthy amount of votes from the rest of the options.
Indeed, by that time bitcoin had been receiving increasing attention for months, and by December it blew up in the media. It was covered in the Financial Times, The Economist and even in Marie Claire. Meanwhile, a classical bubble was forming on its market. The price that started to rise modestly earlier that year captured the attention of a growing audience, generating further purchases and an ever sharper rally. This lead to further escalation in publicity and price. The real upheaval in the positive feedback loop occurred toward the end of the year: traditional exchanges launched the trading of bitcoin futures, leading economic news portals put the price ticker of bitcoin on their home pages and American politicians ran Twitter polls about the long-term store of value aspect of bitcoin. The price went 20x within a year. A thorough decline was well due.
However, there was something peculiar about the Twitter poll. Although I completely agreed with my colleagues that the results were unmistakably signaling the last phase of the mania, I also thought that the crowd — who voiced its opinion without any special consideration, as a gut reaction to the recent events and fresh experiences — was, for a change, right this time. Despite the looming downside potential, I too would have favored bitcoin the most if I had to choose for the long term.
So I posed the ingenuous question to my colleagues: How would they vote? All of them went with gold. Everything was set for offering them a bet. Whoever gains more by holding their preferred asset for 10 years, wins.
But it was exactly Viktor who nitpickingly reasoned that 10 years was too long, by that time we would not even remember our bet. He offered three. However, that was something that I did not agree to. That is because it was clear to me that the global extent of the cryptocurrency bubble was so great that it warranted an enormous crash in the near future, one which the market would not recover from in three years.
Although Viktor did not concede, so I did not strike a deal with him, the rest of my colleagues agreed to make the bet on a five-year time frame (now I think I could have risked even four, but not three by any means). Three of my colleagues voted in support of gold, with only me on the opposite side of the bet vouching for bitcoin. The price of gold at the time was $1,240, bitcoin floated around $16,500.
A few days later the bitcoin mania reached its peak, the price touched $20,000 and then collapsed. It has not been even near that since then. But to this day I have not come to regret the bet.
And why not? Why do I think as of now, 1.5 years later, while standing to lose badly, that everything will turn out as I expected — and even a bit better? Why am I of the opinion that I have good chances of winning even from this losing position? What edge does bitcoin have over gold that my colleagues did not take into account? And what are the major risk factors threatening bitcoin, which may also checkmate my victory? These are the questions I will attempt to answer in this new article series.