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i was thinking about investing in Bitcoin. Please critique my thought process. 1. Bitcoin is not in my area of competence. I don't know cryptography, but I decided to give it a whirl anyways. 2. The market cap of gold futures is about 70x Bitcoin's market cap.
3. I figured that roughly 25% of gold is used as a store of Value. And that Bitcoin could probably capture 25% of that market, conservatively. 4. By this logic, Bitcoin has an expected future average price of 70*25%*25% = 4.375x its current price.pic.twitter.com/CAqnosVjAH
5. I spent a lot of time trying to understand its mechanics and potential downside threats. There's everything from the technical and non-technical stuff (i.e. fraud or key theft) listed here to government just banning it, preventing convertibility. https://en.bitcoin.it/wiki/Weaknesses#Attacker_has_a_lot_of_computing_power …
6. By this logic, I reasoned that Bitcoin had a 50% chance of achieving its future expected price target and a 50% chance of going to zero. Again, conservatively. 7. Since there is a good chance I am underestimating the chance of it going to zero, despite its survival for 10 yrs
I changed my probabilities to 25% chance of achieving future expected price and 75% chance of complete loss/implosion of value. 8. According to the Kelly Criterion (highly recommended!), I should bet .25/1-.75/3.375 = .027777 = 2.78% of my bank roll.pic.twitter.com/xHS178RmMu
3.375 is derived from the 4.375 I mentioned earlier, less 1, which is what I have to bet in order to get my 4.375. 9. However, if you look at the expected value of the bet, it sucks. .25*3.375+.75*-1 = .09375
10. Suppose it will take 10 years for Bitcoin's price to converge to its future expected price. Now calculate your IRR: .09375 = 1(1+r)^10-1 Solve for r. r = .009 That's a terrible IRR.
11. Okay, I'm not considering the possibility of another bull run up like what happened in 2017 and I may be underestimating the possibility of Bitcoin taking a bigger chunk of the market, but given the risks I feel okay with these choices. Bitcoin is a pass.pic.twitter.com/lgfZXRpEq8
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