Asset management, Behavioral finance, Bitcoin, Commodity price, Market psychology, Market trends, Psychology, Risk management, trading, trend following

Of Bitcoins and bubbles

In my book, “Mastering Uncertainty in Commodities Trading” I argued that security prices “are driven by human psychology and its self-stoking collective action that can sustain major trends spanning many years.” Tat’s because in speculative decision making, our views about the actions of others can entirely override our rational appraisal of the underlying asset value.

The most recent example of this is the price of Bitcoin that has surged from below $400 in January last year to $4,300 this week. When we set up the Altana Digital Currency Fund several years ago, many people thought that digital currencies were just a strange fad and investors continued to show little interest in them – until very recently.

Had most investors made their decisions rationally, many more of them would have considered digital currencies as a strategic investment when their prices were 1/10th of what they are now. As it turns out, it is only when prices double, triple and quadruple that most investors start to take an asset class seriously.

As I have discussed it at length in my book, this is simply human nature and even the most sophisticated professionals are susceptible to following with the crowd. This is not necessarily wrong: major trends tend to unfold over several years’ time. Recall, the price of Gold rose from $250/oz. in 2001 to $1,900 in 2011 – a ten year trend. Oil price trended from below $10/bbl in 1998 to $140 in 2008, again a ten year trend.

So what might we expect from digital currencies in the near future? Some think Bitcoin could rise to $100,000 – a prediction that’s impossible to back up or to dismiss. The digital currency bubble will likely continue to inflate, but investors had better prepare to handle this without losing composure. As one of the first recorded bubbles illustrates, even the most intelligent of people can get swept up in the emotion of events and ruin themselves:

SoSeaBubble&NewtonsRuin

There’s a good chance that we are still in the early stages of the crypto-currency bubble and that $100,000 Bitcoin can’t be ruled out. But as investors, please stay vigilant. Importantly, avoid impulsive “regret” trades of trying to jump on the boat that’s already sailed too far from the shore, as Isaac Newton and many others have done.

For strategic thinkers, investment management is a marathon and for every boat that sailed, another one will call on your port in time for an orderly boarding. In the near future, we might see new trends in silver and gold prices, copper, crude oil and likely a range of other commodities. The important part is to try to judge investments on their merits, accept uncertainty and make decisions rationally and strategically.

 

Alex Krainer is an author and hedge fund manager based in Monaco. In 2016 he published the book “Mastering Uncertainty in Commodities Trading.” Most recently he also published “The Killing of William Browder: Deconstructing Bill Browder’s Dangerous Deception.”

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