Made money in bitcoin? Well done. Here’s what you must do now

Bitcoin © Getty Images
One day, the bitcoin bubble will burst

So there I was on Sunday afternoon, doing what it is one does on a Sunday – very little in my case – and a notification comes up on my phone:

“Bitcoin rises over 10% to $11,800”.

On a Sunday. When every other market is closed.

It’s bad enough that bitcoin is making every other market in the world look like a dirge when they’re open. But to carry on rising even when they’re closed!

What is happening is almost incredible…

I wrote the book on bitcoin – I understand why it’s a big deal. But…

I get all the bitcoin arguments.

It’s the money of the future. There’s a finite supply in the face of increasing demand, a demand which is global. The technology goes far beyond alternative cash systems. This is about the “S curve” adoption of a new tech – like TVs or mobile phones – a tech, which also happens to be money.

I get all of that. I wrote a book about it, the first by a recognised publisher.

All that stuff is true and more besides. The arguments for bitcoin get stronger and stronger as the narrative of the bull market evolves.

But this is now a mania. All the messages I’m getting about it – and having written that book a lot of people contact me with questions – are not from people who are interested in the new tech.

They’re from people who want in on what is proving to be the most epic bull market in history. They do not want to miss out. FOMO is rife.

One arrived just as I was writing this article. The title read “Urgent Advice Please!” Note the exclamation mark.

It was from an old school friend.

Want to go into Bitcoin big right now.  I have started small using Coinbase.  What are your views on this and what exchange(s) would you recommend?

Many thanks and hope to catch up properly before long!

This guy is intelligent, experienced financier with 20 years experience in the private banking department at HSBC in Zurich, now working freelance in other fields. Is now, with the mania this evolved, the time to be going big? He clearly thinks so. How much research has he done?

I’m not calling the top. There is a bubble of people calling bitcoin a bubble. Normally bubbles end when the shoe shine boy gets in. This one is the other way round. The shoe shine boys got in early. This one will pop when the institutions get in.

That’s the remarkable reversed psychology of this story. The idea of an alternative money system, a money without governments, appealed first to anyone on the outside. It was especially appealing to those for whom, perhaps, life hadn’t worked out quite as well as they hoped (which is, let’s face it, most of us). Anyone who feels even slightly overlooked, alienated, left out or discontent.

Playing this bull market, a bit like voting for Brexit or even Trump, is a bit like getting one back. There was a similar trait common amongst gold bugs in that bull market. “Haha! Screw you, establishment! Your money system’s going to die. We are the new millionaires!” The more bitcoin has risen, the more this narrative has taken hold.

The mania has caught the zeitgeist of dissatisfaction that is currently sweeping the world.

I’ve made the bullish case for bitcoin many times. I’ve shown how bitcoin could go to $100,000. But I’m no permabull either (although ultimately perma-bullish buy and hold, or HODL as it’s known in bitcoin circles, has been the best investment strategy so far – it always is in bull markets).

In my book back in 2014, I said get familiar with the tech, try it out with small amounts of money, but as an investment the timing is not quite right.

I was right with the call. Bitcoin was in a bear market. When I was writing the book, bitcoin was trading above $500, the bear market took it below $200 a coin. In spring 2016, with bitcoin around $450, I said it’s time to buy.

I’ve made both bullish and bearish cases at different times. But there is something about now – and maybe it’s that email from my friend that did it – that has made me start thinking about what happens when this mania ends.

Plan your exit strategy now. Don’t wait until the stampede starts

When manias end, what is currently euphoria turns to pain. Another person emailed yesterday happily saying they’ve made $2,000 in two weeks, smiley face. How will they feel when they start losing $2,000 in two weeks?

Such pain will be spread among the hordes – and I mean hordes – of inexperienced investors who have only recently got into bitcoin. Many of these people are kids who’ve never lived through bear markets before. The pain will turn to panic.

The Achilles heel in the whole crypto infrastructure is the point of transfer between fiat and crypto – getting your money in and getting it out. It’s got better, but it is still not easy. One reason so many people have not invested as much as they would have liked has been the simple practical difficulty of actually buying the coins in the first place.

Selling them for fiat, when everybody is trying to do the same thing, and getting your money out, will be harder.

The deeper you’re into crypto – perhaps you’re into monero or dash or some other altcoin – the harder it will be to get out into fiat. The diehards will tell you you never need to leave crypto. That may be so, but many will not feel the same way in a bear market. If there is a rush into the arms of fiat, the point of transfer from crypto to fiat is where the issues are going to be.

At present there is a plethora of buyers. There won’t be when sentiment changes. When bitcoin comes down, they will all come down. The sector moves as one. The very liquidity issues that have driven the bitcoin price so high so quickly could work in reverse.

So if you are long bitcoin or any other crypto, my first bit of advice is this: sell a small amount now. Practise selling. Identify the obstacles in moving your money from crypto to fiat, and learn how to deal with them.

Have your escape strategy clearly mapped out so that, when there is a rush for the exit – and there will be one day – you know exactly what you’re doing and you won’t get caught out.

When liquidity dries up and the tide goes out, that’s the point at which you realise who has been swimming naked. That’s when the scams emerge, the frauds, the excessive debt and margin.

Do the exchanges you use have the wherewithal to deal with an 80% crash (there have been five of these in bitcoin’s history) and the overwhelming traffic that accompanies a stampede for the exit? Which of these ICOs and altcoins are the genuine article and which are just hype and BS? Which are the ones people will hold onto and which will they drop?

These are the questions you need to be asking now, during the euphoria stage of a bull market. Like I say, I’m not calling the top. I’m saying prepare for the top.

What happens in the aftermath of a bubble such as this bursting? A lot of pain, a lot of recrimination, a lot of new demands for new laws and regulations to make it impossible for such a thing to happen again.

And maybe that forgotten asset will start to look shiny and attractive once again: gold.

  • Safesam

    https://www.armstrongeconomics.com/world-news/cryptocurrency/bitcoin-being-declared-a-financial-institution-beware/
    The Judiciary Committee of the United States Senate is currently working on Bill S.1241 that aims to criminalize deliberate concealment of property or the control of a financial account. The bill was submitted in June, and the law would change the definition of “financial account” and “financial institution,” and thus also cover digital currencies and digital exchanges.

    This means that the miners of Bitcoin will become a “bank”

    The IRS will now “presume” tax evasion

    They can shut down Bitcoin in the blink of an eye by simply defining anyone who is a miner to be a financial institution.

    The bill will change the definition of “financial institution” in Section 53412 (a) of Title 31 , United States Code. The text will read:

    “An exhibitor, a redeemer or a cashier of prepaid access
    devices, digital currency or a digital exchanger or a digital currency.”

    The regulation will remove the anonymity of Bitcoin and other
    cryptocurrencies defeating this idea that there is an
    alternative-financial-universe separate from government.

    • These are actually very sensible “vectors of attack”. There are still some laws in the society. Certain cryptocurrency people already seem to assume that they stand “above the law” and that by saying several cryptocurrency buzzwords, they become immune or invisible to the law enforcement.

      And so far, the law enforcement and governments have partly helped to sustain this illusion.

      But it’s clear that above a certain size, the problem can’t be ignored because the amount of illegal activity that is being hidden by the cryptofog is simply too high. When the governments want to ban it, they may ban it. Everyone who is caught trading BTC may be treated on par with drug traffickers.

      The “miners are a bank” are actually a defensible interpretation that doesn’t need new laws. It’s really a self-described claim of the Bitcoin system that the miners mint new coins. So they are a would-be central bank that mints a new currency, one that isn’t allowed in most countries that declare some monopoly over the currencies that are legal. To say the least, the miners have to be treated on par with a candidate “central bank” minting new, not quite legal, currency, and the Bitcoin exchanges are obviously a counterpart of the regular banks.

      There exists no reason not to impose at least the same laws and regulations that apply to regular fiat-currency commercial banks on the Bitcoin exchanges, too. It really should be done. On top of that, people may have their wallets at home as well but starting from the largest ones, the FBI should unmask the owners and I think that it’s been actually working on that task for quite some time.

      When the U.S. government etc. says that it’s illegal to sell BTC for dollars, people will try to get their last dollars as soon as possible, to get rid of the “illegal status”, and the value of the Bitcoin and altcoins drops almost to zero, surely to a tiny fraction of the current price. Much of the insane current price is justified by the deliberately spread delusion that it’s realistically possible for millions of BTC people to live outside any government supervision etc. It is not possible in the real world and once this point is assertively made, the game is over, 90+ percent of the cryptocoin capitalizations evaporate, and the remaining amount will be so tiny again that it may be ignored.

      • Goldfrat

        Very interesting thoughts. Do you feel that all cryptocurrencies would be covered by the legislative attack? I can see that Bitcoin is touted as a digital currency but some of the others, e.g. ethereum, although actively traded in the same way, are not intended to be that.

        • It’s hard to predict the other people’s behavior but I believe that when the status of these crypto-things is being decided by lawmakers, regulators, or anyone of this kind, they won’t care “what the founders of the crypto-things say about their products”. Quite generally, all these unbacked crypto-things are basically the same type of entity, so they will have the same status in each country. I realize the special things that are included in Ethereum but I have trouble to believe that politicians etc. may understand them or that these specifics will matter.

    • Mr T

      “[The IRS] can shut down Bitcoin in the blink of an eye”. Sorry, but you clearly have no idea how Bitcoin mining works. Bitcoin miners (and nodes) are distributed all over the world. OK, if there were a worldwide, co-ordinated attempt by all governments to ban Bitcoin mining in their respective countries simultaneously, then Yes, it might be stopped. But how likely is that type of worldwide, co-ordinated effort, when any countries who allow Bitcoin mining stand to benefit substantially? Not very.

  • The original comment by Jean disappeared. He said to be a Bitcoin cultist and asked what happened since he read Dominic’s book years ago. Let me post my answer, anyway.

    Jean, what happened was that Dominic had some brains underneath the excitement, while you don’t.

    There is zero use for the Bitcoin and similar coins, except for some criminal transactions in illegal businesses where the profit margin is close to 100% so they don’t care that the “currency” changes by 10+ percent every day. No real-world legal business with limited profit margins may ever be based on such a volatile non-currency, and the non-currency will remain volatile exactly because people don’t make any commitments with fixed amounts in BTC that would last to the future. And because of the scarcity – which is a lethal flaw that directly makes stability impossible.

    But the bulk of the purchases and sales – and it’s been overwhelmingly purchases – are a pure bubble. They’re speculative trades by greedy folks. Those who are more greedy are still buying. We don’t know where it ends but it is clearly unsustainable. It has to end. Dominic could have been a fan of some ideas or technologies but he’s still financially sane.

    The progress towards a Bitcoin-based real economy has been negative. In 2014, some people could have bought coffees for that. All these shops etc. are virtually non-existent today. One pint of beer was sold for cryptocurrencies in all of London since September. It’s just absolutely ludicrously hopeless. There is nothing rational or fundamental to justify the insane valuation of the Bitcoin.

    The economy can’t be built from scratch, from the losers who accidentally get rich. The last people won’t switch because it would be self-harming for them to do so – the losers who are early adopters would have a huge advantage in this redistribution of wealth and those in disadvantage obviously don’t want to allow it. The late adopters would prefer to wait for the bubble to crash so that they become richer than their BTC-early-adopters again. They know that they would be too late to the party which is why they won’t join the party.

    A functioning society has wealth correlated with contributions, with work. The losers who defend the Bitcoin economy want to break it completely. (It’s not a coincidence that the first BTC billionaires – by the hot air wealth – are two twin parasites who acted as bullies and wanted to intimidate Zuckerberg so that he builds a big company for them. Similarly useless parasites are the bulk of the Bitcoin wealthy pseudo-elite.) They want random early adopters – which is basically themselves – to become the new wealthy men. It can’t work. Also, there’s tax evasion and complications for law enforcement. Governments and central banks have tons of reasons to ban the cryptocurrencies and place them on par with hard drugs. You can try it but you’re likely to spend years in jail. Most people will avoid it just like they avoid hashish.

    Dominic just sees what it is. It is a highly volatile market run by increasingly mindless and irresponsible greed and such games just can’t run indefinitely. This time is no different. The claims about the currency of the future are just a ludicrous trick or lie to attract the most stupid and gullible people to this pyramid game. There is no Bitcoin economy in the future. There can’t be one. It’s only when, not if, it will collapse. There may be some usage of the blockchain in the future – although I think it is fair to say that it hasn’t been useful for anyone yet – but the application of the blockchain won’t try to build the new world’s money supply from a bubble. It has never happened in the history and it will never happen. All transitions like that have to be continuous and mostly preserve the wealth ratios of all the people. The higher capitalization the Bitcoin reaches before the collapse, the more people will lose a lot of money, the more people will be miserable because they will have been so totally greedy, irrational, and irresponsible. Everyone who is promoting BTC or cryptocurrency-based products without warning the buyers of the risks is really a financial scammer and as far as I can say, he should be jailed for years.

    Dominic could have defended a fun game 4 years ago when it was small and innocent and the collapse wouldn’t be a big issue. It was all academic. One could have provoked. But at the capitalization of $350 billion for cryptocurrencies, it’s really becoming a time bomb that will be heard when it detonates.

  • Ben Stubbens

    Hi Dominic. I’m listening to your book at the moment on Audible. Early days but really enjoying it! I have a small amount of both Bitcoin and ethereum in Coinbase and have looked at withdrawing. However it says I can only withdraw to a EUR account. Any ideas what I do? Do I set up an account with another exchange that can withdraw into GBP and transfer my Bitcoins across (all 0.05 of them!)
    Ben

    • Dave Hawkins

      I set up an account on LocalBitcoins.com -> sent the Bitcoin to the address LocalBitcoins gave me -> they appeared in my wallet on LocalBitcoins after a few minutes -> chose a buyer who did bank transfer and had good feedback. Once you receive the cash from the buyer into your bank account you release the BitCoin to them on LocalBitcoin (until then it is held in Escrow). Not sure LocalBitcoin supports Etheruem – although if you were in a massive pickle you could sell Ethereum then buy Bitcoin with the proceeds (but suffer the transaction costs).

      Or you could use another exchange – just check the withdrawal process first.

      I had a few problems trying to send Bitcoin out of my CoinBase wallet – if you’re sending the full amount you need to manually adjust down for network transaction charges – helpfully CoinBase tells you what these are when you go to send but doesn’t automatically deduct them before sending – it tries to send the full amount and fails because there is not enough left to pay the network transaction fees!

  • Inam

    Hi Dominic, Great article and served as a reminder for me. I am pretty heavy in cryptos now and investing with my own strategy (not saying it is any good, but I have made great returns). But, as I have told my private group, enjoy the party, but look for the elephant in the room. Be aware of the elephant when you find it and know where the door is. When others find out about the elephant there will be panic and they will run, but by that point you will already be at the door!

  • Chris Narbeth

    Dominic
    Wonder if you have any updated thoughts on whether Blockchain technology will ever be able to handle serious volumes of transactions. That to me is the key to whether this is a total scam or not. Right now Bitcoin’s distributed database could barely handle the number of transactions that an average Tesco store sells in a day let alone replace the Forex market. Unless this changes dramatically the paradigm shift will be put on hold
    In the meantime, I looked at CoinMarketCap.com graphs. If they are to be believed then through 2015/2016 around 100k bitcoins were trading daily … about 1% of total volume outstanding. In Q1 ’17 this rose unto 250k per day in Q2 upto 1mm daily and this sort of level appears to have been sustained through Q3 and Q4. So basically the entire stock of Bitcoins in existence (<20mm) is changing hands ever month
    That sort of makes sense to me, people take a punt buy some of the KoolAid wait a month then take a 20-50% profit … seems like serious "greater fool territory to me"

    • Mr T

      There are ‘second layer’ solutions coming up e.g. the Lightning Network, built on top of the ‘base layer’ of the blockchain. That will enable enormous numbers of transactions. Here’s an explanation: http://bit.ly/2vWO8Yf

    • Kevin

      Real world use? The Australian Stock Exchange has been testing a blockchain system for the past 2 years and will be the first Stock Exchange in the world to run on a blockchain digital system when it switches over in March 2018. This ground breaking tech is crossing over from the nerdish internet world into the world of mainstream business and just like AI, nothing is going to stop this from happening. The crypto currencies created by many blockchain projects are simply the means by which people get paid for their work in running the network and processing the data passing through it and become like Ether can become the ‘oil’ or ‘fuel’ that keeps the wheels turning. Other crypto tokens become the means of using the utility (dApp) that sits on top of the blockchain and interacts with it during the data process. This is how the world will work in 5 to 10 years time. https://cointelegraph.com/news/australian-stock-exchange-will-become-worlds-first-to-adopt-blockchain