Are We Heading for a Bitcoin Bloodbath?

Before the speculative bubbles in housing in the mid-2000’s and .com stocks in the late 1990’s, there was an emu craze around here. If you're not familiar with the national bird of Australia, they are five-foot-tall flightless birds, weighing as much as 100 pounds. Billed as the “next red meat”, emus were high fliers in the Lone Star State before many had even heard of things like the internet or sub-prime mortgages.

How high did they fly? According to this 1997 LA Times Article, eggs were going for thousands of dollars and breeding pairs for up to $50,000! Also detailed in the article, the literal bloodbath that resulted from investors that didn’t understand what they were buying. WARNING: The description of how two Colleyville, TX doctors tried to cut their losses may be disturbing.

Lately, headlines about bitcoin have echoed back to some of those frenzies. Bitcoin, the most popular blockchain technology, got a further boost this week when Fidelity Investments announced that they are adding the ability to track your holdings on their website, right beside your 401(k) and IRA.

The hype has reached a fever pitch recently as the price has doubled in the past month. One example this week was a news story discussing the anniversary of Bitcoin Pizza Day, where a programmer bought a couple of pizzas with 10,000 Bitcoins on May 22, 2010. Today, that amount of bitcoin would be worth about $25,000,000.

Eye popping stuff, to be sure. Perhaps, though, we should remember advice from a former Fidelity fund manager. Among his many famous quips, Peter Lynch offered, “Never buy anything that you can’t illustrate on the back of a napkin”.

Do you understand what bitcoin is? If not, you’re probably not alone. Below is a “napkin like” one page description of the underlying blockchain technology from Autonomous Research.

Simple, right?

A longer (about 6 minute read) explanation that made a little more sense to me was in this article by Nik Custodio, “Explain Bitcoin Like I’m Five”. His use of an apple analogy demystifies some elements of the cryptocurrency, but it still leaves a lot of unanswered questions.

It is potentially revolutionary technology that could change the way we do business in the not too distant future. But is bitcoin going to be the ultimate winner? Or will it be the next Betamax or MySpace?

Risks include careless folks inadvertently losing them, bad guys figuring out how to steal them, or the market preferring an emerging alternative, such as Ether (up 2300% this year).

Some have even touted bitcoin as being “better at being gold than gold”. I’m not sure what that means, but I do know that if the lights all go out, an inert hard drive probably won’t pay the tolls to cross many of the bridges heading out of town. On the other hand, an ounce of gold will likely still buy a lot of emus.

Updates from Dimensional

ATX Portfolio Advisors utilizes Dimensional Funds in most of our portfolios. Any time there is significant change at Dimensional, I pay close attention to try and insure that your interests are being met first and foremost. As you may have heard earlier this year, Dimensional Founder and Executive Chairman, David Booth, stepped away from his Co-CEO role.

Longtime Dimensional executive, David Butler, was promoted to take on the role vacated by Booth. Earlier this month, he sat down for a Q&A session that was initially meant for an internal audience, but has now been made available for broader consumption.

Even though Booth has stepped away from some of his day to day management duties, he is still involved in strategic initiatives and leadership of the firm. In his Letter From The Chairman, 2017, he shares lessons from his 35 years in the industry, as well as compelling evidence that the Dimensional approach works.

As always, if you have questions or would like to discuss if your plan is working, get in touch.