Thursday, February 27, 2014

Bitcoin & Mt.Gox Implosion

So Mt.Gox – only a few months ago the largest Bitcoin online exchange – imploded, and it may possibly bring down the entire Bitcoin world along with it.  People, naive investors who saw the meteoric rise in the bitcoin exchange rate, lost millions of real dollars worth of virtual assets investeddeposited in the exchange.  I guess it has been an quite a ride, an interesting social/economic/cryptological/cryptographical (is that an actual word?) experiment.

I can’t claim to know much about Bitcoin.  Just from the little I read in Ars Technica, the technology is absolutely brilliant  -- so advanced, I don't think any single person (“Satoshi Nakamoto”) could really come up with it.  Using distributed computing/peer-to-peer networking (like Bittorrent) to record and verify bitcoin transactions, incentivizing people ("miners") who donate computing power (like Bittorrent's seeders) with reward of newly-minted bitcoins.  The actual cryptic calculations are way beyond the grasp of my limited brain power (and to think I graduated with a masters in computer science 9 years ago) ....

The thing is, although technology may be brilliant, but the humans using them are flawed.

What people don’t seem to understand, even with a new “currency” or “investment class”, the fundamentals of investing remain the same.  You can read a whole lot from online classes about what these are, but I just want to highlight a few things that even professionals may forget or neglect entirely:

- If you don't understand the investment, don't just blindly put your faith (and money) on it.  Derivatives, structured products, Iraqi Dinars, bitcoins.  Come on, nobody really understands how these things work, except for people who sell them, insiders, financial analysts, and maybe institutional investors; hence, nobody should invest in these things.  If you want to speculate, then that's different, because speculation means you understand the risks and are willing to lose most (if not all) of your principal.  Myself, I'd prefer to miss out on (potential?) profits, rather than realizing actual losses.  Life is just too short, I don’t want to be that sad guy protesting outside of MtGox’s Tokyo office.

- If it's complicated, you'll probably lose money.  Similar examples as above: derivatives, structured products, bitcoins.  Heck, I'll add subordinate bonds, and stocks of energy trading companies.  Stick to simple things like stocks and bonds of companies that you know, at least we know what they are, how they are priced, and how the prices correlate to the general economic health.

- Don’t forget to diversify your portfolio.  Booooring, I know.  This means not putting all your retirement fund in Apple shares.  Also means, if your job (and therefore, your income) is in investment banking, it's probably not the best idea to put your savings in bank stocks (or stocks in general?) – imagine if 2008 happens again, you may find yourself out of a job and a valuable portion of your savings.  Also means if you have an option to receive your bonus in the form of cash or company stock, always take the cash -- pay down your debt, reinvest in other stocks, do whatever but always take the cash.  Yes, I'm saying this even if you're working for Facebook and it's 2005, because you don't have the benefit of 20/20 hindsight.  (Unless if you can predict the future, then you don’t need advice in anything.)


Going back to bitcoin, would it survive to see another day?  Maybe, maybe not – other than the ones who actually invested money, humanity is not losing much in the grand scheme.  I do believe that the underlying technology will reappear in another shape or form.  Just like Napster turned into Folding-at-home which turned into Bittorrent which turned into Bitcoin (gross generalizations, I know).  I don’t believe the legacy of bitcoin will end at drug dealings, murder for hires, and the spectacular collapse.  Perhaps Bitcoin wouldn't die with a thud, it'll just flatline while a derivative technology eclipses it and change the world.  Who knows.


BTC mining rig
Want to make money with bitcoins? Follow the 8 steps below (source:
1. Buy an Avalon or Butterfly Labs ASIC mining rig
2. Put it up on ebay selling for US$
3. If you can’t get the selling price you want, use the ASIC to mine more BTCs
4. Pray that the BTC price doesn’t completely and permanently tank
5. Stop mining when you have enough to buy a Tesla Roadster
6. Sell the Tesla Roadster and the mining rig for USD or keep the car because it’s a Tesla Roadster
7. Currency of the future????
8. Profit.

Tesla Roadster

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