I am a believer in the long-term value of blockchain technology. I also think that cryptocurrency is here to stay, though the value of it will continue to fluctuate. I do not think Bitcoin (OTCQX:GBTC) is comparable with tulip mania. I strongly suspect that the current banking system will be circumvented at an increasing rate in the future, thanks to cryptocurrency and the innovations being created thanks to it. But I just sold half of my investment in Bitcoin. In this article I will explain why.
Some background about myself
I have been an owner of a very small amount of Bitcoin since 2013. I bought them on a whim, after a sudden drop in price. In one of my previous articles about Bitcoin, I have stated that I was never comfortable with the volatility of cryptocurrencies. In my investing experience, I tend to focus on stable, dividend-growing companies. Bitcoin was truly an investment which was outside of my regular investing spectrum.
Still, I was committed for the long term. I wanted to hold Bitcoin because I thought (and still think) there is much future value in cryptocurrency. So let me explain why I recently changed my mind.
Reason #1: The forks are like stock splits of the 90s all over again
Crypto forks are a lot like stock splits. Instead of one share splitting in 2 or more of exactly the same shares, a cryptocurrency splits in 2 separate types of entities. Logically, the value of the pre-fork currency should be the same as the value of the two post-fork currencies. But recently, forks are said to be boosting the price of Bitcoin; some people even call the forks a type of dividend. This is ridiculous.
During the fully-fledged stock market bubble in the 90s, companies were often not hesitant in using stock splits. During this bubble, many people were stock picking, and companies viewed stock splits as a way to keep shares affordable for small investors. Though they did not change underlying value, these stock splits often generated excitement and a short-term price surge for the companies involved.
Cryptocurrency forks have a drawback which stock splits do not have: they complicate everything. One year ago, a Bitcoin investor would just own their Bitcoin. If he continued to hold this Bitcoin, he currently would also have Bitcoin Cash and Bitcoin Gold, not to mention all the potential forks which could happen in the future. Not all of these forked-off cryptocurrency is supported by the same wallets, and though they all have a quoted value on exchanges, it is sometimes not easy to trade them.
Reason #2: Bitcoin is technologically inferior compared to other cryptos
I always argued that Bitcoin is so popular compared to other cryptos because it is still profiting from its first mover advantage on the cryptocurrency market. This could be valid at the moment, and it might also still be the case in a few years. Maybe even in a few decades if Bitcoin can consolidate its position as the gold standard of crypto. I am far from sure about this, though. Many other cryptocurrencies are much better in a technological sense, and it would need many Bitcoin forks or innovations to make up for that difference. One of the most glaring problems of Bitcoin is that its mining process unnecessarily consumes an extreme amount of electricity.
A brief overview of some cryptocurrencies which are better than Bitcoin in their niches:
– Litecoin is basically a more efficient version of Bitcoin with regard to financial transactions
– Ethereum is suitable for smart contract or distributed applications
– Zcash is more secure than Bitcoin
– Ripple is a quick and efficient way of payment, which does not need mining and consumes little computing power
– Monero is a secure, private and untraceable way of transferring money
Bitcoin only has their first mover advantage to compete with these and many other cryptocurrencies. Though Bitcoin becoming the gold standard of cryptocurrency looks like an attractive future for it, I am getting more and more doubtful that this will be enough to thrive in the future. I simply feel I have too much trouble picking winners in the cryptocurrency world.
Reason #3: The late majority starts becoming enthusiastic
This is not a very straightforward argument, albeit my most important one and the reason which finally tipped the balance and made me sell half of my Bitcoin. It also seems counterintuitive: if a part of the population becomes enthusiastic, this would rather be reason for optimism, right?
Let me first explain what I mean with late majority. The adoption of almost every technology happens in phases, which are characterized by specific types of people which start using a technology. After the birth of a specific technology, people who start using it quickly are called innovators. They have a higher risk tolerance than other parts of the population and are not afraid to try new things. After the innovators, the early adopters start using a technology. Early adopters generally have a high degree of opinion leadership, which means that their opinion is held in high esteem by other parts of the population. Though they are more discrete with their adoption choices than innovators, they generally have a larger influence on the general population. The early majority and late majority are by far the biggest part of the population. These people generally start adopting a new technology if it has proven their worth to people before them, and are less likely to try new things straight away. A difference between the early and the late majority is that the latter is usually more skeptic about an innovation. Last to adopt are the laggards, which are usually characterized by a big aversion to change and focus on traditions. They are least likely to adopt a new innovation quickly.
In the graph below, you can see a depiction of the market share and the proportions of the population with regard to technological adoption.
Source: Rogers: Diffusion of innovations
When applying this theory to Bitcoin, we should adopt it a bit: I do not think that Bitcoin ever will achieve a 100% adoption rate among the population; but instead, a 100% adoption rate means everyone who is willing to adopt it did it. I would use a notion of awareness here: only a part of the population will start using Bitcoin or cryptocurrency, so I will consider ‘adoption’ to be an active decision to use it or not.
Innovators in the Bitcoin adoption process are for instance the early miners and developers which have invested in it from the beginning. Early adopters are people who started investing in it shortly after the innovators. I believe the early majority started to get interested in Bitcoin during the last year. Public knowledge and media coverage of Bitcoin reached a much higher gear since then: the late majority might be joining in right now.
But this is good news, right? Well, history often proves otherwise. Many a stock market crash was preceded by relatively inexperienced investors joining in. Though tulip mania is in many ways not comparable at all with Bitcoin, here the market crash also happened after regular folks started getting involved in the tulip trade. Therefore, I usually get nervous when I see all sheep are moving in the same direction.
There are definitely signs that we are reaching the late majority at this moment:
– I don’t know about you, but in my surroundings more and more people are starting to talk about Bitcoin or cryptocurrency. These include people who admit themselves that they know very little about it. I always get suspicious when these things happen: these are not the early adopters, this might be the late majority joining in.
– Big media start focusing ever more attention on Bitcoin: The Big Bang Theory will air an episode named ‘The Bitcoin Entanglement’ in which Bitcoin will play a major role. It will air on the 30th of November. Also, a family from my home country The Netherlands which sold all their possessions and invested all their money in Bitcoin has been getting quite some attention in the media lately.
– The hype cycle of innovation also shows that we are likely at or around the peak of inflated expectations with regard to cryptocurrency.
Reason #4: I am happy with my returns
Wait, let me rephrase this: I am extremely happy with my returns. This has been an extraordinary journey, one which has resulted in a profit of more than 1200% over the course of 4 years, or 90% annually. I’m fully aware that I will likely never achieve such returns again. I started out with Bitcoin being a very insignificant part of my investments, which eventually grew to a part which was too large to be insignificant. Let me just say that as a buy and hold investor, if your crypto holdings grow to be larger than your largest stock position, it is probably wise to re-balance. I am happy with my returns and sold half of it.
I am not renouncing ever adding to my Bitcoin position or any other cryptocurrency altogether. If there is going to be a big correction, I will be ready to step in again. I am fully aware that this big correction could never happen and I might slap myself in my face in a couple of years for selling now. So be it. I will still profit from the other half which I have left.
I’m not calling the top of the Bitcoin price. I am neither saying it is certainly a bubble, though it might very well be. Still I sold half, and I am considering to sell the rest of my Bitcoin holdings as well if I get more signs that the late majority of the people have joined the party. But it would be a goodbye, not a farewell.
Thank you for reading, please tell me what you think about my reasons for selling Bitcoin below! If you have any opinion about the other half of my holdings, please let me know as well. If you liked this article please click the “Follow” button next to my name.
Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.