Saturday, October 14, 2017

14/10/17: Bitcoin's Rise: Bentleys in Vancouver?


Two charts highlight the recent dynamics of #Bitcoin rise back to the top of the newsflow:


and decomposing the above:


As a fan of blockchain technology (but not a fan of Bitcoin as an asset), here are some notes of worry:

  • The rise has been exponential to-date, while
  • The volatility has been absolutely atrocious (albeit weaker than volatility in Ehterium and Ripple, two other top-3 cryptos); and
  • The periods from peak to next peak are getting more and more compressed
All of which should make you pause and wonder: what fundamentals, if any, can account for the rise of Bitcoin - a question that many tried to answer and few succeeded. As a disclaimer, I have a couple of papers forthcoming on this in the next month or so. And as a taster for the disclaimer, both papers show absolutely no fundamental drivers capable of explaining the rise of Bitcoin from its first day of trading through the end of 1H 2017. The dynamics of Bitcoin are pure memory (Hurst process) and as such contain no bearing with any real asset in the Universe. 

Put differently, Bitcoin is a hedge against things that cannot be hedged in the markets, most notably, the risk of state-administered expropriation / capital controls in... err... China. So if you want an asset that can (at a staggering risk-premium and transaction cost) hedge your Shanghai property yields against Beijing's reluctance to allow you offshore your cash into a Bentley parked in Vancouver, be my guest. If you have no such need, why, sit back and enjoy the wild ride and gyrations of the crypto to USD/BTC 6,000 and beyond... you can do the latter by playing some Russian roulette speculating on BTC, but do avoid becoming a hostage to St. Petersburg Paradox, should a correction pop the frothy top here and there. In other words, should you want to speculate on Bitcoin, by all means - do. But mind the tremendous risks.

Stay tuned for the aforementioned research papers coming soon.

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