By SA For FAs :
Not out of character, Roger Nusbaum assaults bitcoin with his weapon of choice - common sense. In response to hype - I mean a whitepaper - positioning the digital currency as "a new market paradigm" that aims to stand in as a "necessary alternative to government-monopolized fiat monetary regimes in the post-financial crisis world," Nussbaum first of all reminds readers that new paradigms tend to go belly up.
Next, he cautions would-be bitcoin speculators that knowledge is a precondition to making an investment:
A forward-looking investor should want to take the time to understand whether something new, like Bitcoin, could actually do what its proponents say it can do. That is not saying go buy it. It is saying go learn about it. This will sound harsh, but if you're unwilling to learn about new things, you are decreasing your odds of long-term financial success."
The common-sense barrage continues when he notes the inherent difficulty of sizing up something new:
It is very difficult for me to draw any confident conclusions based on such a small window of time. The short window is complicated even further by the possibility raised by the New York Times that price has been manipulated."
To those who must own the cryptocurrency, he offers a sensible (though hardly common) asymmetric strategy:
If you allocate 1% of your assets to Bitcoin, or one of the others, you have low exposure in terms of value at risk but could have a monstrous return if the price goes to $400,000 as some believe."
That's an intelligent and modest approach, to be sure. But I thought it interesting and intriguing that Nusbaum compares bitcoin to - of all things - managed futures, at the start of his article . I think of bitcoin as an aggressive, momentum-based means of getting in on the ground floor of the next big thing, whereas in my mind managed futures are a dull, plodding strategy to hold an asset that might go up when all else is going down.
And yet I like the comparison because it could be that what they fundamentally have in common is they are the investments that each had their 15 minutes of fame and never went anywhere afterwards, which Nusbaum himself hints at when he recalls managed futures' "ride from greatness to underperformance."
For those who don't recall, the commodities trading strategy was about the only thing that held up in 2008, when all else fell in terrifying unison. The investment world's cognoscenti talked up managed futures in the aftermath of that crisis, from which point they displayed a knack for slowly and painfully reaching new lows. What the cause of their underperformance is has been a matter of debate. One simple explanation would seem to be that they benefit from either inflationary or deflationary instability in prices, and the post-financial-crisis world has been one of extreme stability . Regardless, I think Nusbaum's unexpected ace-in-the-hole in his attempt to walk bitcoin speculators off the ledge is this reminder that some exciting new investments are ultimately remembered as big duds.
Bitcoin could become what its promoters expect of it, but most things don't become the next big thing, and it is not prudent to be looking for the next big thing if your purpose is investing rather than speculating. Investing should mainly be about saving money, then dividing your wealth into tried and true risk-based assets together with an appropriate degree of liquidity. If you're willing to speculate a bit in hopes of goosing up your portfolio, Nusbaum's asymmetric strategy seems a good one.
But I've got another asymmetric strategy for you. Take a dollar out of your wallet and buy a lottery ticket. Seen in that light, you might not be so eager to allocate a sizable portion of said wallet for something as speculative as bitcoin.
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See also Avid Reconsidered; Firmer Debt And Flaccid Equity on seekingalpha.com