When will Bitcoins peak? Part 2

My first article went through some scenarios of when Bitcoins will peak in price. I gave a very broad order-of-magnitude prediction of “not higher than US$10,000/Bitcoin”, but I’m now going to revise this to a peak price closer to present trading prices (roughly US$900/coin) than the upper threshold (US$10,000).

The reason is quite simple: Apparently some Ukranian firm has managed to obtain a majority of the computational power of the network. Blockchain dominance was one of the reasons why I thought this scheme would collapse.

A deviant entity will want to lay low in the shadows and be patient while others continue to pour money in the scheme, but the cartel’s inevitable goal is to vacuum as much capital out of the system as possible. There is no point in announcing to the world you are taking over the whole monetary system, but rather to wait in stealth and just wait for people that are generally unaware of this political dynamic to put their hard currency into it.

It is akin to playing in a marketplace with a central banker, which functionally takes the “independent” nature of Bitcoin out of the equation – if the Ukranian entity wants to pull the plug on the network by denying your transactions, they can.

Why bother when you have a real-world currency market to dabble around with? At least you can pay income taxes in the host currency, while in Bitcoins, you have nothing.

A binary phrasing of this is: Do you want your central bank to be controlled by a Ukranian corporation, or an arm of your national government?

The problem with good long-term performance

The problem with good performance is that you run into the mean value theorem.

So in my particular instance, due to the +17.7% over 8 years, there must have been some years where I was above and some where I was below that number (unless if all of my years had exactly that performance). I am under no illusions – I will not be able to sustain this number over time.

So now, let’s pretend I invested the whole of my portfolio at a risk-free rate of 15%. I would actually be decreasing my long-term performance even though every investor on the planet would jump on that 15% guaranteed rate with everything they could throw at it (and considering that money can be borrowed at less than 1% in US currency, why not?).

If there was political pressure to continue high performance (i.e. having clients with expectations of such superior returns), then I would almost be compelled by definition to take riskier and riskier ventures to ensure I keep it up – my hurdle rate of 17.7% would filter out almost everything other than the high risk investments out there (put it all on TWTR, TSLA, NFLX, and AMZN?).

So it should be emphasized that returns alone is not a sufficient barometer of performance – it also must include the risk taken to achieve that return.

Since I am sitting on roughly 30% cash at the moment, even if I were able to allocate the other 70% into something (hopefully with acceptable risk) earning 17.7%, I’d be sitting on a 12.4% gain for the year – not bad, but still it would drag the long-term performance down.

Almost everybody pays attention to the performance measure of return. Very few pay attention to risk.

The theme for me that started at the second half of 2013 is to continue ratcheting up my focusing on risk. I have always paid attention to risk, but I am more sensitive about it now, especially as markets continue their ascent.

Financial highlights of 2013 – currencies

Other than the usual stuff about the S&P 500 being up a huge amount for the year, perhaps the unexpected financial highlight for most Canadians is in the following chart:

cdw

Looking at the other major currencies, the Euro has appreciated slightly against the USD over the year (from US$1.32 to US$1.38 per Euro), while the Yen has weakened considerably, with 87 Yen being one USD at the beginning of the year – now this is 105!

jpy

The Chinese Yuan strengthened against the USD of the year, 6.23 CNY per USD, while today it is 6.07. This continues a very slow trend of appreciation for the Chinese currency since they changed their monetary policy since 2010:

cny

Some questions for 2014 will be:
– Will the Canadian dollar continue to downtrend?
– How low will the Yen go before Japan collapses its economy?

USEC Inc. – Another company on the discard list

USEC Inc. (NYSE: USU) is going to undergo a pre-packaged recapitalization to refinance a convertible debt offering that is maturing in 2014 that the company has no chance of repaying. Existing equity holders will get 5% of the newly reorganized entity, which constructively means the common shares presently trading represent 1/20th of the current market capitalization.

There is much more to the actual operating business in terms of strategy – uranium refining is not exactly a wide-scale industry and proper analysis requires looking at more geopolitical and government considerations than most investors would probably want to swallow.

After they announced their pending pre-packaged bankruptcy filing, I put this on my research radar. The risk/reward seemed quite good at around $3.50/share, but unfortunately the market caught up in a very efficient manner and while I still believe the entity is somewhat undervalued at its present $6.30/share, the risk/reward metric is not favourable enough to take a position. The proposed recapitalization is still contingent on the approval of a couple strategic partners, but they are receiving a stake in the new entity which they should be accepting.

So I will put this equity in my discards pile – feel free to make what you wish out of this. I’m still rather miffed that low priced companies that I have been researching lately are ruthlessly taken to more efficient prices before I can even complete any reasonable amount of due diligence.