9/1/17

Chicken Little Feels the pain of "opportunity loss"

Bitcoin, Ethereum and other cryptocurrencies have doubled -- 100% return - since Chicken Little made his purchase in May. See May post here. How does Chicken Little feel about making a 100% return in 3 months? 

Terrible. 

"Opportunity Cost" is the economic term for missed opportunity. I label the pain of owning too little of a winning investment as "Opportunity Loss."  Investing is a tough game. Losing money hurts. Making money also hurts when others are making more. 

Chicken Little feels the pain of not owning enough crytpo


Cryptocurrencies are on fire

Bitcoin is currently trading at $4,857. A $10,000 investment a year ago would be worth over $85,000 today. The boom in cyrptocurrencies exceeds any large scale asset rally in recent history, and perhaps ever. Bitcoin makes the tech bubble of 2000 look like kids play.

Furthermore, Bitcoin has done much worse than many other cryptocurrencies. There are roughly 1,000 different types of coin; many of these other currencies have risen much more dramatically than Bitcoin. For example, $10,000 invested in Litecoin a year ago would be worth over $200,000 today.



LiteCoin has tripled in three months!

Chicken Little is tortured

Chicken Little has a good friend who is literally minting millions from cryptocurrencies. This friend wishes to remain anonymous, so let us call him SG - super guy. Super guy borrowed money last year, invested more than 100% of his net worth into a basket of cryptocurrencies. Super Guy told Chicken Little to back up the virtual truck. Chicken Little did not listen. The consequence is that Chicken Little feels the pain of Opportunity Loss. Chicken Little has made a tiny amount on my tiny investment. Every $1 of gain increases the pain of my stupidity and cowardice.

2 comments :

  1. What do you learn from this outcome? Was your assessment of cryptocurrencies wrong, or was this just an unusual draw from the probability distribution?

    I struggle to find a framework to trade cryptocurrencies. Other than FOMO, what explains why they have gone up so much? FOMO doesn't seem tradable, to me, since it just justifies self-reinforcing price behavior and doesn't determine direction.

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    Replies
    1. Hi Joshua,

      I did learn one big lesson. It is to scale your investment relative to your conviction. I originally invested 1% on my net worth in crypto : https://goo.gl/9zRNWf


      The volatility was so enormous and my conviction is not that high so I scaled back my investment to 30 basis points and at the end of every month I trim it back to 30 bpsagain.


      I'm not interested enough in crypto currencies to do the work to have a lot of conviction. When I talk to people, most of them hate the idea. That makes me believe, based on my work during other asset rallies, that the rally is not over yet. I could be wrong. Hence the 30 basis points

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