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Sunday, Sep 21, 2014 - 01:03 SGT
Posted By: Gilbert

H.L. Ham Update

You guessed it - another week, another session with the hamsters; this time, it was Mr. Ham who arranged it, as a prelude to the long-delayed expert exchange on China, or so the little rascal claims.


Mr. Ham: Ah, the human! Come, come, have a seat. Want a cigar? It's one of my best Havanas.

Me: Nah, I don't smoke. So, what's up?

Mr. Ham: Oh, just wanted to have an unofficial meeting of H.L. Ham and human observers. *lighting up* So, some exciting days for Bitcoin recently, eh? It's tumbled back beneath US$400, even if only momentarily. Just as well that we got out above US$600, thanks to the intervention of my magic butt.

*Mr. Robo simmers quietly by the side*

Me: Really?

Mr. Ham: Well, mostly. Mr. Robo kept half of the half he's managing, so he got a little... concerned as the price plunged. I had to hit him with the emergency hammer I keep for these very occasions, to keep him from panic selling below US$400.

Mr. Robo: *icily* I think you enjoyed that a little too much.

Mr. Ham: Hey, it was for your own good. See, it's recovered - somewhat - overnight. Never trade on emotions, my furry partner. It'd be a waste of all your painstaking research.

Me: *sighs* Ok, a small review of the past months. Recent local top was still the US$680+ in early June, less than US$20 off the US$700 target we set out in April, and we touched US$380+ for a bit, close to but still above the US$350 bottom predicted then, so we've got the range pretty tight so far. It appears that H.L. Ham has gotten some breathing space, thanks to your July swing out at the six hundred level. Come to think of it, that's a lot happening in less than half a year.

Mr. Ham: Yep. And, of course, our research division has come up with an updated projection, but, just out of curiosity... what do you think will happen next?

Me: Well, I've warned repeatedly of the incredible volatility, so nothing new on that side. Again, since you mostly exited relatively high, I guess it was easy to take. I can see how stuff like this can discourage the more conservative - it can't be nice to watch one's net worth go down by a third in days.



You were forewarned
(Source: geekculture.com)


You could almost smell the desperation as the price fell, particularly from those who were leveraged, which is part of why I rather dislike that technique, particularly in this market - a wild swing could wipe one out totally on a margin call. Given how many of the movements have little reason - other than maybe manipulation - behind them, it's simply not worth it.

For this major down move, some have posited that it was due to speculators withholding or withdrawing funds to plonk on the huge Alibaba IPO, which given that other commodities got hit too, is not wholly implausible given the makeup of Bitcoin investors. From past evidence, trend following has further amplified any movements, creating Bitcoin's characteristic instability, which is good if you know where it's going.

Yet others have explained the drop as a concerted effort by serious buyers to get a good deal. This is due to a large portion of trade volume, including mining contracts - maybe even the bulk - taking place off public exchanges. However, their pricing is invariably pegged to leading exchange rates. Then, the reasoning goes, a big boy wishing to accumulate 50000 Bitcoin, say, over the next year, would have an incentive to drive the exchanges down by strategically dumping a thousand here and there and building sell walls to hold down the price.

This is not completely impossible either, and is good news in a way if true, since such actors would rationally not want to risk tanking the entire enterprise forever, by driving the price too low; in fact, this line of thinking is as old as the hills.

The irony is, however, that the fall came on the tail of a spate of very promising news, chief among them being PayPal announcing that it would accept Bitcoin. Then again, the strong uptake in merchant adoption does probably also increase selling pressure, as most aren't true believers like Overstock. It is easy to forget that close to 4000 coins are mined each and every day, which amounts to a daily external infusion of US$1.6 million simply to maintain the price at a constant US$400!

With there being no letup in hashrate, some have suggested that commercial miners are locked in an "arms race", so to speak, as they dump coins to reinvest in better equipment and claim a larger share of future takings - recall what we said about mining being unprofitable, unless you get the best machines hot from the manufacturers, a few of whom have been accused of mining using their newest products under the pretense of testing. Further, as the price falls, less-efficient outfits will be further pressed into selling everything they mine to pay costs, instead of holding some, again perpetuating any price trends.

Other than that, the GABI investment fund launched, but despite claims of US$200 million in new money, it does not appear to have made as large a splash as fans have hoped.



Yes, yes, rub it in again
(Source: imgur.com)


Mr. Ham: *impatiently* Yes, very interesting. Er, so, what would you do if you were in charge of investing in this environment, like, if you were me? Just askin'.

Me: Yeah, about that. Well, given that the US$350-700 year-on range has proven itself thus far - not that it necessarily means all that much - this does look like another tasty buy-back-in price. But then, it has to be repeated, not that much has changed since we arrived at that figure in April, or even since we predicted a US$200-400 bottom last December. Therefore, I think it is fair to claim that our model of the market is at least plausible. If so, there's no need to be too concerned at the drop.

This model included, of course, the fact that Bitcoin is currently still heavily inflationary - its supply will increase by over 10% this year, and this will only go below 3% around the year 2020. Theorists have been going on about how it will handle deflation eventually, but in practice this is something we won't have to concern ourselves with for quite a while yet, assuming Bitcoin survives that long, of course.

Despite that, we should also remember the other side of the equation - two-thirds of all Bitcoins that will ever exist, have already been mined and distributed. Incredibly, the computational power that will be involved in mining the final third will completely dwarf that expended on the first two-thirds - to give some idea of the scale involved, the network hashrate today is ten thousand times that of a year and half ago. In other words, the influence of miners and new coins will only decrease as time goes by, which should naturally encourage stability.



You're excited about 0.39 Bitcoins a block?!
Hah, I remember it being fifty in my grandpa's days!
(Source: museumca.org)


Mr. Ham: So, you're saying, it's time to go back in?

Me: Oh, that. Yeah, why not? Basically, if my May opinion about Bitcoin being essentially a commodity play is true, it shouldn't even matter that much in the longer term. There's that famous Graham quote: "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

In short, the entire analysis can be reduced to two questions: do cryptocommodities have a future, and if so, will Bitcoin remain the dominant - or at least a major - one? If the answer to both is yes, then I wouldn't even bother overly much about the week-to-week fluctuations. Per another well-worn nugget: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes." If no, and it turns out to be just a seigniorage scam, then it doesn't matter either.

An ever-present threat to the ecosystem is, of course, countries limiting access to forestall capital flight. We've seen China's hoops, Bangladesh's joining in, and Putin's gunning for the whole Internet, bless him. In a way, though, such attempts inspire confidence, all the more since the stance of more-democratic nations has tended towards regulation and taxation.

And as to competitors... we haven't really witnessed any credible threats, with most altcoins flagging harder than Bitcoin in the long-term shakedown, as per the "attractive force" theory, even accounting for interesting concepts like Ethereum; Dogecoin has gone as far as to implement merged mining with Litecoin to safeguard its security. Therefore, I think it's a fair bet that Bitcoin retains its top dog status for the foreseeable future, especially as this industry seems to be one where "good enough" should be sufficient to preserve first-mover advantage.

Mr. Robo: I'm almost getting excited again!

Me: Well, Mr. Robo, you've seen it go up 50% and come back down in just five months, so I hope you don't get too invested in the short term. To be honest, I'm not seeing the US$800 by the end of this year as called, but then again, anything can happen.

In a way, it's fairly impressive how much money has been sunk in wholly through slightly-dodgy exchanges, which is why many predict a boom once a true exchange-traded fund is approved. That said, I'd not place too high hopes on "Wall Street money", since as an insider pointed out, Wall Street doesn't hold bags - Wall Street takes its pound of flesh from every trade.

Still, I'd say that there's no huge hurry to buy back immediately, just in case - there's not much danger of missing a big rally, as no doubt others are also thinking. It wouldn't be a bad idea to just calm down and watch for a bit, and see if the market wants to break back up past maybe US$450.

Mr. Ham: You know, that sounds like good advice.

Me: I'm glad you think so.

Mr. Ham: ...but I'm not gonna follow it. We're hamsters, man! We win! Mr. Robo, hold your balls tight, as before - we're in!






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Next: Not Again


Related Posts:
Story Of A Bit
Pieces And Bits
What It Is (Part One)
Wrestling With Doubts
Riding The Current
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