Topic: Another reason bitcoin will succeed: US to target Putin's $40 billion stash - page 3. (Read 5814 times)

The word hedge can be used more loosely (i.e. hedge your bets).

From Investopedia:

Definition of 'Hedge'

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

Gold isn't used as a hedge against USD.  You are thinking of rotation.  When investors rotate or re-allocate their funds on the belief of rising or falling prices amongst different asset classes.  A lot of investors rotate from equities to gold & vice versa. 

"Taking other side of trade" is literal.  Its being both long & short on a trade simultaneously.  Normally your initial position is long term and your hedge is short term.

The analysis was hugely simplified to illustrate the benefit of hedging using simple math.  I explained that in the post.  

I also showed that even if you assign a 95% probability to the value of bitcoin going to zero, it can still be useful as part of a wealth-preservation strategy. 

I would argue that buying BTC is in fact a hedge against USD.  Many people have used Gold as a hedge in the same way.
Since BTC (and Gold) are priced in USD, you are in effect "taking the other side of the trade".  On the one hand,
you hope your USD holds its value.  But if it doesn't, your BTC increase. 

I'm enjoying vodka on my last day off and I'm lacking in the ability to really articulate what I mean. Better to concede.


This is a bit more what I was leaning towards.

@ Peter R

That analysis has so many flaws

(1) You assume that Bob has only 2 choices (BTC yes or no) when he could diversify his portfolio in many asset classes

(2) Standard deviation is determined by using historical data not random numbers projected into the future

(3) Probability isn't randomly calculated like that.  5% lose all money vs 95% not lose all money?  Say what?  

(4) I think someone else defined "store of value" = low volatility.   I'm not sure how you are defining "store of value".  Sounds like you are saying BTC is a store of value because it could go to x20 or not.  This sounds like a "speculative" bet not a "store of value" bet.  You are speculating that demise of USD will drive up BTC price.  

(5) Buying BTC is not a hedge against USD.  That's not how hedges work.  A hedge is when you take trade AND you also take the opposite of that trade to mitigate your risk.  The easiest way to hedge is using options.  But there is no options market on BTC so the point is moot

"but I have never found a rational case where it is not wise to store at least a small portion of your wealth in bit coin"  

How about in the case the price crashes and you lose your money?  If you have the assumption BTC will forever go up in price then by all means invest.  But don't claim that the price can't crash or even go to zero.  

Nice argument sir. You're correct.

If you invested a lot in gold before the price collapsed, is that a store of value?
Stop looking at bitcoin the wrong way, this can happen with just about anything.

there is still PLENTY of time to be a bitcoin winner.  The price can increase many multiples from where it is now.

I concede and I see your point. I'll file what I've learned away for the next time.

The US dollar lost 40% of its value too against the Euro from 2002 to 2005...and 50% by 2008.  Gold fluctuates wildly too over the years.  

Yes bitcoin fluctuates more cause it is younger with smaller market.   That doesn't necessarily mean there's a problem.

Incorrect. Other recognized stores of value are real estate, stocks, and gold. Those have all suffered 50% draw downs at times.

The definition of store of value you are using is not the generally accepted one. If you pick your own definitions you can support almost any argument.

http://en.wikipedia.org/wiki/Store_of_value

That is so not true.  Russia would not have ever bailed out for more than
what was already done.  Russia is known for writing off uncollectable debt but not for actual giving out billions to overseas private banks.  

This is the sunk-cost fallacy: http://en.wikipedia.org/wiki/Sunk_costs

Billionaire Bob moved a portion of his wealth into bitcoin as a hedge to reduce the variance of his wealth moving forward in time.  He could have had his assets siezed and the dollar-collapse event could have happened.  The fact that it didn't doesn't mean that the hedge was unwise.  In fact, if he reanalyses the situation from today moving forward, he may conclude that he should actually now move more wealth into bitcoin.  

If you buy fire insurance on your house and it never burns down did you waste your money?

What I've noticed through my work, and more so now through bitcoin, is that a subset of the population has trouble thinking in terms of probabilities.  These people want to classify everything in boxes: "yes it will work," and "no it won't work."  But thinking in terms of probabilities is powerful.  For example, I showed above how Bob could still use bitcoin as a store of value even if he assigns a 95% chance to it that its value goes to zero.  

I've had customers ask me "Peter, is this gonna work?" To which when I was younger I would reply with my honest assessment of the probabilities: "I give it a 70% chance."  But what I noticed is when that 70% bet fails, I would often hear back "Peter, you said it would work."  

So now, when someone asks me the chance of success, I say "oh about 30%."  And if they ask me the chance of failure, I say "oh about 30%"  If the customer sees the problem, then I tell him what I really think.  Otherwise it is better for both of us if he thinks that P + !P < 1.  

Ok if I bought in a few months ago at 800 - 900 USD I would now be at a 50% loss. Is that a store of value? No, it's not. So if Putin had invested his 40 million, or whatever number because it really doesn't matter, he would have lost half his personal assets. This is not the first time it has happened. If you look at historical data, if you came in when BTC was the most popular you're getting destroyed. Now if you were in from the beginning, like the gold owners back in the 90s, then yes you're up.

The only winners right now are the original players. They have a store of value, the rest of us have a volatile investment tool.

Now I guess we could take all that and fudge it and say "If you look at BTC since it's inception" then yes, BTC is the smart choice. I will admit that I'm going off of early Decemberish time frame when I feel that BTC was truly beginning to become popular.


Days? Maybe a few weeks at most. Short term is a bad word for what I'm trying to explain. I apologize.

Deadbit, what do you mean by "short term" in this context?  I want to be clear what you mean exactly. What time frame are you referring to?

And this shows you never even took the time to read my post.  I said the results appear to hold for all sets of rational assumptions I've come up with to date.  In the example above, Bob implicitly assumed that the chances that bitcoin goes to zero was 95%.  Even with these conservative assumptions, bitcoin was still a useful store-of-value tool for Bob that helped him to reduce risk. 

Please, find a set of reasonable assumptions where it wouldn't be wise for Bob to move at least a small portion of his wealth into bitcoin.  Argue your case mathematically.  

The only point we appear to be in agreement on is that no one can predict the future with certainty.  But I think you do believe you can predict the future, otherwise you would also agree that bitcoin is useful as a store of value.  

Consider Billionaire Bob.  For simplicity sake, Bob has exactly $1 billion in US treasury bills and no other assets.  He is vocal in his support for small governments, is concerned about US unfunded entitlements and its effect on the dollar's reserve status, and was recently an innocent victim of a politically-targeted IRS probe.  He knows skeletons can be found in any closet.

Bob wants to maintain his wealth 10 years into the future.  He analyzes the situation and concludes the following probabilities:

P(lose all money) = 5%
P(not lose all money) = 95%

To simplify the math, assume the treasuries pay zero interest and inflation is zero (unless the dollar-collapse event occurs).  10 years out, Bob's wealth has expectation value and standard deviation:

= 0.05 x (0) + 0.95 x (1000) = $950 million
stdev = sqrt(0.05 x (0 - 950)^2 + 0.95 x (1000 - 950)^2) = $218 million

Now Bob discovers bitcoin.  He sees that bicoin's success is more likely if either of his two fears come true (the USD collapses or confiscations of private wealth increase in frequency).  He calculates that if the event he fears happens, that bitcoin is likely to be 20X as valuable.  If the event doesn't happen then he doesn't care about the price of bitcoin as he was just using it for a hedge anyways.  

He moves 5% of his wealth into bitcoin.  10 years out, Bob's wealth has expectation value and standard deviation:

= 0.05 x (20 x 50) x + 0.95 x (950) = $953 million
stdev = sqrt(0.05 x (20 x 50 - 953)^2 + 0.95 x (950 - 953)^2) = $11 million

In other words, Bob can decrease the variance of his wealth 10 years out with little change to its expectation value by employing bitcoin as a store of value.  

You can repeat similar analyses using all sorts of probabilities and assumptions and add all sorts of complexities, but I have never found a rational case where it is not wise to store at least a small portion of your wealth in bitcoin.  If you can think of one and mathematically argue your case, please let me know.  

I believe this simple analysis illustrates my point.  Bitcoin is useful as a store of value.  

Gold is not safe. The smart money is being very careful about whether gold may be vulnerable to severe disruption of 90% of its value.


Also, leaders often want their money outside their own country (or at least portable) in case they decide to relocate. Bitcoin provides extreme portability, especially if you want to move it on short notice. Gold does not. A billion dollars in gold is weighs roughly a ton.