Please click the link to listen to the 85th episode of my weekly crypto podcast ‘Five Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Consider dropping a like and or a review on iTunes or Podbean if you enjoy the podcast. Comments and critiques welcome. Comment
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Five Minute Crypto–The Bitcoin Hodler Rabbit Hole: Risk (Part 2)
Some risks that are thought to be unknown, are not unknown. With some foresight and critical thought, some risks that at first glance may seem unforeseen, can in fact be foreseen. Armed with the right set of tools, procedures, knowledge and insight, light can be shed on variables that lead to risk, allowing us to manage them.
― Daniel Wagner
Welcome to Five Minute Crypto – this week’s episode marks part two of our examination of the need to be risk aware and proactive if you intend to hold Bitcoin over the long term.
As previously highlighted:A statement of hodling intent does not a hodler make. Part 1 focused on 2 broad areas of known risk – state bans and government or regulatory body restrictions and limitations. This week we turn our attention to protocol issues, bearish momentum, general fear, uncertainty, and doubt (FUD), and most pernicious of all – unrealistic expectations.
Despite its elegant design, BTC is not perfect – it is the product of human efforts, ongoing development, and implementation. As such, it is subject to error. In the past Bitcoin has indeed been found to contain bugs – some of them critical in nature. Notoriously – in 2010 a Bitcoin block contained an integer overflow bug that led to an exploit that created 184 billion BTC out of thin air. The exploit was noticed and hotfixed within a couple of hours but other serious bugs have been discovered before and since. In fact, dozens of code issues have been uncovered in the 11 years since Bitcoin first went live.
These days the network and all of its transactions are heavily monitored – the dev community is not asleep at the wheel. The fact remains, however, that at some point another critical error or exploit may emerge. If the bug allows a double-spend or some other material impact on the network to occur – BTCs market value could and very likely would be hit hard. Understanding that BTC is not perfect is important to contextualizing any issues that do emerge in the coming years.
Asset prices move in cycles – Bitcoin is no different in this regard. Where it does differ from other assets is to the degree with which it moves within a cycle and the volatility with which it does so. It a wild ride from new all-time highs to 90% retracements. With BTC – the highs and lows are very pronounced. While it’s relatively easy to hodl Bitcoin as it prints ever higher highs that is certainly not the case once the worm turns and turn it does and will again. How you choose to cope with these inevitable cycles is entirely up to yourself but you absolutely must anticipate and plan for them.
It also worth being aware that Bitcoin is an entirely new asset class – its history is being written as we speak. All previous trends are drawn from thin previous price action. BTC is a mere 3 halvings into its issuance cycle so predictions based on previous performance should be viewed with substantial skepticism. For example, just because the last two halvings led to a steep price rise does not, in and of itself, prove that the current halving will have the same outcome or that BTC would be doomed if that were not to happen. Speaking of Doom.
Fear, Uncertainty, and Doubt
A broader category but one simply enough distilled to – think for yourself and always reflect before you act. Bitcoin’s community adopted motto – ‘verify don’t trust’ is particularly apt here. The cryptosphere and beyond is always going to be full of Bitcoin to zero narratives – some blatantly obvious – others seductively structured and argued. Somewhat perversely, the more you engage with crypto the more exposed you are to the doom and gloom that awaits BTC hodlers. Over time it can simply wear you down. Just as COVID-19 was the catalyst to a global market meltdown so too can a diet of FUD set you up to panic sell your holdings.
Face it – you are probably lying to yourself right now. I’m in it for the long-run you glibly state. So, what exactly does that journey look like because for BTC – long should most likely be counted in decades or at the very least 3 or 4 full cycles. Three cycles – would take you to 2032 – are you really thinking at that kind of scale and if not -why not? We are surrounded by lofty price predictions -BTC to 50 thousand dollars by the end of 2021, no 100 thousand, no more, and on and on it goes. While it would be great for Bitcoin to hit such targets, you really are just setting yourself up to fail by placing to much credence in them. Be honest with yourself – do a little more research -see Bitcoin’s potential but remember you are going to most likely have to wait for it and longer than you would like!
In summary, acknowledging, assessing, and preparing for Bitcoin risk events increases the likelihood of successfully navigating through them if and when they arise.
As always, thanks for listening.