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Lambo index: The story of bitcoin winning as an asset class and losing as a currency

By Blackmoon COO Sergey Vasin

April Fools’ Day joke by Coinmarketcap

April Fools’ Day joke by Coinmarketcap might not be that funny. Bitcoin is lost. This is final. Great expectations of a decentralized currency fell victim to human greed. Is it bad? Probably, yes. Will crypto cease to exist? Definitely not.

Bitcoin was introduced as a peer to peer censorship- and government-free means of payment based on blockchain technology. This technology made any monetary interventions and capital flow restrictions impossible. Bitcoin supporters nicknamed it “digital gold”. The first 50 bitcoins were mined on 3 January 2009.

Fast forward to present day, Bitcoin has become an asset class. We buy and sell it for profit. Just like we don’t use physical gold as money any more, bitcoin is not the currency it was supposed to become. The North American Bitcoin conference didn’t accept Bitcoin as a means of payment.

According to macroeconomics textbook, in order to be money, an asset should be:

1. Medium of exchange. Which means one can buy and sell goods and services for it.
2. Unit of account. Which means one can measure wealth in it.
3. Store of value. Which means that its value should remain (relatively) stable over time.

While neither gold, nor bitcoin meet any of these criteria, let’s focus on the latter.

Amid the massive cryptocurrency meltdown that we have been witnessing this year, Bitcoin lost as much as 65% of its value. That being said, in 2017 it posted returns as high as 1 839%. While such swings alone are eye-popping, let’s put it into perspective.

It’s obvious that you cannot store value in bitcoins. In December 2017 Lamborghini Aventador cost as little as 21 bitcoins. On April Fools’ Day it cost 59 bitcoins or by 2.8 times more. If bitcoins were money, it would have been called inflation (to be precise devaluation that inevitably leads to inflation of imported goods).

It could have been feeling like the bear market and the price crash was the issue, and that there was nothing to complain about during the great bull market of 2017. The price of Bitcoin kept growing and everybody should have been happy. From the asset class perspective this is great. But Lamborghini-wise it was a deflation.

Deflation is equally damaging as inflation for the economy. Deflation is no less damaging to economy as deflation. For example, Japan has been struggling to overcome deflation for about three decades, fighting discouraged consumer spending, increasing debt value and lowering economy growth rates. The main reason is that deflation hampers trade. When the goods consistently cost less than they used to, people have incentives to hold off on their purchases, thus disrupting the whole idea of money as a medium of exchange.

As a result of an increased interest on the part of investors and new users flocking into the crypto-space, the price of bitcoin skyrocketed. Most holders never thought about Bitcoin as of currency. They considered it an asset class instead. As a consequence, Bitcoin became something it wasn’t supposed to be when Satoshi Nakamoto had mined the Genesis Block.

If Bitcoin is merely an asset class, what are the implications? One should treat Bitcoin as any other investment and should not be religious about it. For any asset class one should follow three simple principles.

1. Understand the difference between trading and investing. Traders are professionals that earn their living through buying and selling assets. Trading requires experience, full-time commitment and is associated with trading costs that eat into the profit. Unlike traders, investors are looking for capital appreciation in the longer run, making trades only when they need to rebalance their portfolio. Most people are better off being investors, take it or leave it. This is true for traditional investments as Warren Buffet proved this year as well as for bitcoin.

2. Set and follow the rules. Most people sell when the price already goes down and buy when the price is already up. In order to earn money, one should do quite the contrary. There is a substantial body of research proving that individual investors usually fall victim to cognitive biases. This deleteriously affects their financial well being. Consistency trumps everything.

3. Diversify. Diversification is a must for any portfolio. Unfortunately, there is no such thing as diversification in major cryptocurrencies. They tend to rise and fall simultaneously, with Bitcoin leading the way. Adding fiat oriented assets to portfolio dramatically improves the risk and return profile for the investor. Asset tokenization which is widely believed to be the major area of development in 2018 would receive another boost because of this desperate need for diversification in the crypto space.

As Marc Andreessen puts it, strong opinions should be weakly held. Bitcoin was the first cryptocurrency ever. It introduced the concept of blockchain. Despite the fact that it didn’t become the real currency, its proliferation as an asset class increased public awareness to such a level that financial giants, such as Credit Suisse, plan to introduce blockchain to their operations. Only time will tell whether we are to witness real crypto money that could be used for everyday payments. Meanwhile Bitcoin will remain a bellwether for the crypto space.