Bitcoin is Nothing Either Good or Bad, but Sizing Makes It So

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“There is nothing either good or bad, but thinking makes it so.”

– William Shakespeare, Hamlet Act II (1602).

If you had put $100,000 of your savings into Bitcoin at the end of 2020 and are still HODLring (crypto-nese for “holding on for dear life”) those coins today, you’d be down 20% on your investment given its drop in price from $25,000 to $20,000 (as of July 5th).

If going long was no good, how about going short? An investor who put $100,000 into a crypto-brokerage account to short $100,000 of Bitcoin, with no further trading, would have been wiped out just a few months later in mid-February 2021 when Bitcoin more than doubled. This kind of shorting is effectively a form of automatic doubling down, since as the value of the asset goes up, the value of the capital supporting it goes down, causing the short position to get bigger and bigger (quickly) relative to capital.2 So, while “buy and hold” is a real strategy, “sell and hold” isn’t generally workable in practice. Instead, the short position that most closely represents the opposite of the buy-and-hold long position can be thought of as funding an account with that same $100,000 and then establishing and managing the short position so that at all times the size of the short is equal to the account’s liquidation value.