Saturday, March 30, 2013

The Irresponsible Jeff Tucker

Jeff Tucker is out with a column on bitcoins. Not surprising, it is filled with over the top commentary and errors in the fundamental presentation of economics, just like his IP work.

I really don't want to go into his full discussion of bitcoins, once I destroy Tucker, along with Kinsella, in Monday's debate, people will be much more careful about any of Tucker's views.

I do, however, want to point out one comment by Tucker that is quite irresponsible. He writes:
 Many people fear that Bitcoin is overpriced right now. This view is held even by people in the Bitcoin community who worry that a move from $15 to $93 in three months is not good for long-term viability. A crash could bring down the currency unit in devastating ways, leading to another round of debunking and clucking from the advocates of government money.
But here’s the truth: No one knows for sure. Maybe the price will keep climbing. Next month at this time, people might be kicking themselves for not getting in right now. My instincts right now tend in this direction. I’m seeing BTC at $250, then $500, and then $1,000 by year-end.
I also find bitcoins an interesting investment vehicle, but I would never make such an open ended comment as Tucker does here. I have recommended bitcoins in the EPJ Daily Alert, but I also recommended a limit, in the ALERT, on how much bitcoins should be bought. The limit being just 1% of an individuals portfolio. With Tucker's open ended commentary, he is setting up a situation where novice investors get too enthusiastic and plow all their money into bitcoins, which if things don't go right, could result in massive losses.

Bitcoins are attractive because they provide some degree of anonymity in conducting transactions. They are also extremely difficult, perhaps impossible, for the government to grab, which is something that you can't say about bank deposits (See Cyprus). But they are not now money.

They, in some ways, act like travelers checks, in some ways act like gold and have some characteristics of a penny stock pump and dump scheme. Bitcoins are not, however, any of the three entirely. As bitcoins get more popular, they are likely to gain more attention from the government, and the government is likely to continue to attack BTC at its most vulnerable point, the conversion point between dollars and bitcoins and vice versa. Thus, the potential for wild swings in bitcoins is very possible.

If BTC does take off and the coins climb in price by a multiple of their current price, by say, 10 or 20 times current levels, even a very modest investment of 1% of a portfolio, is going to show spectacular results, while limiting downside exposure.

Tucker's commentary is extremely dangerous, because, like an amateur, he fails to take in to consideration the possibility of something going wrong and adjusting for it. He is going to drive novices into going all in on an investment that is very complex and has downside if things go wrong. I am not saying that bitcoins should not be bought, but they should only be bought with the understanding that A. things could go wrong and B. price volatility is not out of the question. Thus, my conservative approach of only advising that 1% of portfolio be put into bitcoins (or for river boat gamblers 10%).

Downside always has to be considered in any investment, Tucker ignores this. The only investment that I am comfortable calling a very safe investment is nickels. I wouldn't have a problem with an investor putting 50% or more into nickels. I am nowhere near as comfortable with the intriguing investment, bitcoins.