One of Australia’s most successful fund managers, Peter Morgan, recently tweeted: “Most underrated thing about being a fund manager = discipline.”
Discipline is the process of sticking to your strategy without wavering. Discipline is holding your emotions in check. When it comes to bitcoin, it’s hard not to be caught up in the hype and noise, whether it’s justified or not.
There are a lot of buzzwords used in tandem with bitcoin, one of which is blockchain. To be fair, blockchain is more than a buzzword as it’s a technology that appears here to stay (but there is still an element of uncertainty to it). Blockchain is a technology that, among other things, allows for faster and cheaper exchange of assets, whereas bitcoin is the traded asset class (a digital currency). Bitcoin is an asset class in potentially uncharted territory, and the uncharted territory looks set to only continue now that shorting has begun.
As of the beginning of this week, people can now invest or punt on the future value of bitcoin. You can go long (“bullish” that it will continue to go up) or short (“bearish” that the price will go down). As I mentioned earlier this brings further unknowns to an already unknown asset class, as previously you could only buy it to go “long”. If the bulls are right, it will become a legitimate asset class of the future, potentially rivalling gold as an asset class. However, if the bears are correct, it’s possible that bitcoin will go the way of the tulips – in 1636 a single tulip bulb cost 10 times the annual wage in the Netherlands; in 1637 the tulip bubble burst and “investors” lost a fortune.
Following on from the example of The Netherlands in the 1630s, in more recent times we’ve seen a bubble burst on the back of shorting. In The Big Short, before the US housing market bubble burst, the bears (or the people wanting to short the market) needed an instrument to allow them to take the other side of the market. The resulting instrument – known as collaterised debt obligations or CDOs – allowed the bears to finally have their claws and short the market. It still took a while for the bubble to burst despite the creation of CDOs, so we still don’t know what the short term of bitcoin looks like even if this theory proves to be correct. There are no guarantees that’s what we’re seeing now with bitcoin but, as Mark Twain once said, “History doesn't repeat itself but it often rhymes”.
When it comes to investing, the important thing isn’t always how big your circle of competence is, but having the discipline to know what is in that circle and what is not. At Six Park, we’re happy to sit on the sidelines with bitcoin. We know for sure that bitcoin has made many people rich but, more importantly, we know that it has the capacity to create catastrophic damage to investors’ portfolios that could take decades to recover, if they recover at all. This is a risk that we don’t think investors should take. At Six Park our investment philosophy is to stick to a proven approach of prudent asset allocation, risk management and keeping costs low to provide returns for our customers.
At a time when volatility is exceptionally low around the world in most asset classes, bitcoin is bucking that trend with jaw-dropping volatility. Volatility should never be ignored as it’s inextricably related to risk. On this note I’d like to finish with this joke that I saw about bitcoin highlighting its volatility. Who knows what one bitcoin will be worth tomorrow? We prefer to stay disciplined and stick to what we know best.
A boy asked his bitcoin-investing dad for one bitcoin for his birthday.
Dad: What? $15,554??? $14,354 is a lot of money! What do you need $16,782 for anyway?”