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4 Important Tips for Bitcoin Investors in 2018

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Bitcoin may be worth more than this, but I’ll only give two cents for it.

The infamous cryptocurrency, Bitcoin, saw its value explode in a matter of months. It was at $1,000 / bitcoin at the beginning of 2017, $6,000 a month ago, and around $13,000 today (well, stay put, that will change again tomorrow). Can you believe it started off with a negative value?

WHY ARE BITCOINS WORTH SO MUCH NOW?

Because there is a sudden surge in demand for it along with limited supply. Announcements and recent business deals made Bitcoins rapidly more popular, and as it gained value fast, more people wanted “in”, thus demand increased, and so did its value.

Bitcoins are continuously created (or “mined“) but at a modest, continuous and predictable rate. This is key for a currency to become a true alternative to dollars, euros and other currencies: its supply / quantity remains reliable. What happens when a currency is not supplied reliably? We saw an unfortunate example of this in Zimbabwe between 1995 and 2008.

Understanding the dynamics of demand and supply of bitcoins helps understand the craze around it. If it succeeds as an alternate currency to national currencies, it can help people live and survive beyond the failure of governments. It may have been used in Zimbabwe (yes, again) as an alternative mean of exchange, more reliable than local money.

This said, what can you use bitcoins for? What can you buy with it?

You’ve probably read about drugs, assassins for hire, escorts, and other unconventional businesses. Not untrue, but that’s not any different than what happens with dollars or yens. A few online services and shops started to accept payments in bitcoins, but would you really use bitcoins to purchase a pair of shoes, a car or a trip abroad? Definitely not now: even if the bitcoin price of an item varies along with bitcoin’s value, you’re most likely paying more for this transaction than by paying in dollars. Why would sellers bear any of the risks associated with the currency fluctuation?

So bitcoins can only really buy you money – they have no other use at the present time. Bear this in mind when you estimate future demand.

LET’S TALK ABOUT INVESTING IN BITCOINS

Now, we all want to be billionaires. And if it’s as easy as putting money in the right place, even more so. The recent exponential growth of the value of bitcoins makes everyone dream of it, particularly as the speculation for a continued growth is hotly debated among economists – supposedly the “experts”.

Is it a good idea to invest in bitcoins? In my opinion, no.

It feels like a gamble, rather than an investment, at this point in time. If you are not adverse to risk though, maybe there’s a lot to gain?

Say you want to consider trying it, this is what you should consider. Since value growth is about demand, it is about human behavior. If you want to beat it and earn while it grows, sell before it falls, you should do it with a minimum of discipline to optimize your results (and sleep at night). Most of it is passive and not necessarily time-consuming.

Here, some ideas to work on…

1. WHAT HAPPENED BEFORE DOES NOT DETERMINE WHAT HAPPENS NEXT

Sudden growths in investments are often made by “bandwagon effects“, i.e.nobody was interested in bitcoins until everyone else around them became interested. If you bought bitcoins early on, say on November 11 (a month ago) for about $6,000 each, you almost tripled your value. But did you?

It’s tempting to jump on the bandwagon, hoping that it will continue to grow. Realize that to continue to increase the value of bitcoins, demand for bitcoins must increase (and not stay the same): there has to be more people wanting to buy bitcoins than when you purchased it. To me, it sounds a lot like a potential Ponzi Scheme.

But without facts, there’s no confidence that it will continue to grow, there’s just hope.

 

2. SLOW DOWN ON THE NEWS AND STAY CRITICAL

News outlets make the case of increase demand and crazy stories about what people are ready to do to get bitcoins (including, apparently, mortgage their house). These news are only useful to you if others waste their time reading it.

Remember: to beat the market, everyone but you has to lose.

You must purchase bitcoins before everyone else, and sell them before everyone stops buying and sells. Why? Because as soon as people start selling, demand decreases and so does the value. When value decreases, more people may be tempted to sell to protect their earnings. And it goes on.

Reciprocally: everyone wants you to lose.

The Internet has spoken!

 

3. BE READY TO LOSE WHAT YOU’VE INVESTED

From a cherished economics professor, whom I trust for his sense of business: be ready to lose everything at a moment’s notice. Clearly the value of bitcoins changes a lot and will continue to do so until we find some use to it (retailers accept it and people use it there), so investing today feels like a gamble. Be ready to lose the bet.

Banks have tools to help you calculate what economists call your “aversion to risk”. If you’re a risk taker, take the bet. If not, consider other investments (there are plenty).

4. HAVE INVESTMENT OBJECTIVES

If you invest now, you’re likely to pay a for a high value estimate (compared to a month ago). But maybe it is still lower than the value in a month from now. Who knows?

Let’s say you invested $1,000 worth of bitcoins (about 1/16th).

What you need to do is to set yourself investment objectives that you will follow:

To limit your losses, you set a minimum value for your investment (say $500): if it reaches this point, you sell. In this example, it means that if bitcoins lose half of their value ($1,000 to $500), you sell. You’re losing money, but you are not losing all of it. People tend to keep their investment for too long and, worse, keep investing in it, hoping that buying at a lower value will help. It can, but it’s unlikely with something so volatile.

It’s called the “sunk cost fallacy”. In Thinking Fast and Slow, Daniel Kahneman said that

“organisms are more prone to minimizing the threats than maximizing the opportunities.”

To secure your gains, you also set a maximum value of my investment (say $1,500). If bitcoins continue to grow up to this point, you sell. Yes, you may be tempted to wait to see it grow more, but, again, what happened before does not predict well what will happen next.

Where you set your minimum and your maximum depends on your tolerance to risk with the money you invested.

THE BOTTOM LINE

Bitcoin’s potential is enormous as an alternate currency. It has been well received in low income countries as a way to protect individuals’ savings from government failure to protect and promote a country’s currency.

As an investment, bitcoin’s value is volatile and difficult to predict. Don’t be too sensitive to the news. Don’t trust what other people say, but look at what they do. Set yourself minimum & maximum values of your investment at which you will sell.

And chill.

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About the Author

This article was written by Gatien de Broucker of Non Solum Data. 

Experience

5 Important Reasons Not to Raise Capital for Your Startup

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I recently had dinner with co-founders of a startup who’d just raised quite a bit of money for their company, a deal which incidentally I’d passed on. The meal was fantastic: fresh salmon from the bay, washed down with a particularly good New Zealand pinot noir, while watching the sun go down over the water. Really you’d expect my mood to have been chipper… but it wasn’t.

The evening was spent with the founders congratulating themselves for raising money. I’m not being a killjoy but it felt like the end of the line, not the beginning. It felt like all the preparation had been done, all the work completed, all the sweat, tears and marriage breakups had already been had, and now finally they’d succeeded. Except of course that wasn’t the case. This was the beginning not the end.

All they’d done was raise some money. Money which, though it may be needed to fulfill their goals, stands as a liability. Now, I’m all for celebrating success but this attitude really worries me and here’s why.

VC culture has come to equate raising capital with success, where each successive round of financing successfully completed is denoted as success,but you know what, VC culture is wrong.

Success is success and raising money is raising money. Let’s not confuse the two.

Raising money amounts to taking someone’s hard-earned capital. Capital which has been acquired by sweat, savings, maybe even theft but it’s someone else’s nevertheless. That, folks, is a liability no matter which way you spin it!

Realise that even if the capital never came with strings such as board seats, preferred equity, liquidation preferences or any host of other typical “strings”, realise that capital ALWAYS comes with strings which I’ll get to shortly.

So in the event that you’re an entrepreneur, emboldened by the fact that most anyone in Silicon Valley today sporting a hoodie, some pimples, and professing to work out of his grandmother’s garage, can get funded and at eye-watering valuations, let me give you 5 reasons why raising money may be a bad idea for your business:

1. Lack of Focus

Multi tasking is rarely a great strategy for any business. If you doubt me, try rubbing your belly and patting your head.

37signals built one of the most successful businesses in their niche by remaining extremely focused on just one product. My point is that it’s next to impossible to be running around raising capital, while remaining focused on building your fledgling business.

Unless you’re sitting in Silicon Valley which stands as a distinct anomaly to the rest of the world, let me assure that raising money will likely take you far longer than you ever thought, will come with more distractions than you’ve even thought, and the progress in your business will suffer.

2. ROI Can Be Poor

Time has a cost. The time spent raising money can often be time poorly spent.

I little while ago I was pitched by a company which had developed a minimum viable product, cheap to produce, easily shipped and which when sold, netted a $10,000 profit. The founders were, however, trying to raise $250,000 and had been on a road show for 3 months already!

Consider that by focusing on building, marketing and selling that very product they needed only 25 products sold to reach their $250,000 they had spent the last 3 months raising. The sheer insanity of what they were doing forever precluded any investment.

3. It Can Be Expensive

Further to the above, as an entrepreneur you might consider paying brokers to raise you capital. While this is an option realise that in any financing round up to Series A, it’s not uncommon to have to pay up to 15% of capital raised, and sometimes even include some warrants, preferred stock or options.

In short, it’s expensive money. Really expensive.

4. Capital Comes with Strings

You should expect that incoming investors may want board seats and input in your company. Do you want that? Does the capital you’re looking for come with the kind of strings you are comfortable with?

You can take money from all sorts of sources.

  • Family and friends will invest because they like you, or maybe they hate you and want you to go away. Or they feel guilty and can’t bare the thought of the next thanksgiving dinner where they’re the only family member who haven’t backed your idea and aunt Marge will make a stink about it. These are psychological strings. Are you OK with them?
  • Angels will invest if they believe you’ve got a good chance at success and often, if they feel they can, add some personal expertise. These guys are not stupid though, and will likely structure deal terms including ratchets, liquidation preferences and so forth. Strings may be that the input by the angel(s) is not something you want. These guys can be of immense value but make sure interests and personalities are aligned otherwise you risk a lot of strife.
  • And venture capital comes with a set of different strings. This particular avenue of financing deserves an article in itself and I’ll write about it next week.

5. Too Much Capital Can Actually Be a Bad Thing

I’ve seen good ideas go to the wind when founders raise too much money. Money can certainly make people do daft things and I’ve learned that as well.

The fancy office space suddenly becomes “necessary”. Scrappy goes out the window in favour of “professional”.

You want to know what is really professional? A company that manages its cash flows, is scrappy as hell, is intensely, manically focused on building awesome value, and realises that when markets turn, as they always do, it’s the strong that survive and thrive. And the strong are always scrappy.

Make sure the money is aligned with your outcomes. Understand who you’re dealing with and what the motivations are. Most of all, don’t just follow the herd because the herd is rarely right.

If, after reading this, you’re not scared away and believe that your company has world changing potential, is less than $10M pre-money valuation and “needs to exist” then feel free to contact me. I’ll be happy to look at your pitch. I’ll almost certainly say no and be kind about it but maybe, just maybe that doesn’t take place.

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About the Author

This article was written by Chris of of capitalistexploits.at.

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Entrepreneurship

Will Financial Liberalisation Trigger a Crisis in China?

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The People’s Republic of China (PRC) has been liberalizing its financial system for nearly 4 decades. While it now has a comprehensive financial system with a large number of financial institutions and large financial assets, its financial policies are still highly repressive. These repressive financial policies are now a major hindrance to the PRC’s economic growth.

The PRC is at the beginning of a new wave of financial liberalization that is necessary for supporting the country’s strong economic growth. The country’s leaders have already unveiled a comprehensive program of financial reform, which includes 11 specific reform measures in three broad areas: creating a level-playing field (such as allowing private banks and developing inclusive finance), freeing the market mechanism (such as reforming interest rate and exchange rate regimes and achieving capital account convertibility), and improving regulation.

But could financial liberalization lead to a major financial crisis in the PRC? What would be the consequences for financial stability as the PRC moves to further liberalize its financial system? If the PRC repeats the painful experiences of Mexico, Indonesia, and Thailand, then it might not be able to achieve its original goal of overcoming the middle-income trap.

International experiences of financial liberalization, especially those of middle-income economies, should offer important lessons for the PRC. In our new research, based on cross-country data analysis, we find that financial liberalization, in general, reduces, not increases, financial instability. This powerful conclusion is valid whether financial instability is measured by crisis occurrence or by fragility indicators, such as impaired loans and net charge-offs. The only exception is that financial liberalization does not appear to significantly lower the probability of systemic banking crises, although it does lower the risk indicators for banks. These results have higher statistical significance and are greater in magnitude for the middle-income group than for the entire sample.

The insignificant impact on banking crises, however, should be interpreted with caution. One of the possible explanations is that under the repressed financial regime, the government supports banks with an implicit or explicit blanket guarantee. This reduces the probability of an explicit banking crisis, although the banking risks may be even greater because of the moral hazard problem. In fact, government protection of banks could also increase the probability of a sovereign debt crisis or even a currency crisis before financial liberalization.

If financial liberalization significantly reduces the likelihood of financial crises, especially in middle-income economies, then why did some middle-income economies experience financial crises following liberalization? We further investigate whether the pace of liberalization, the supervisory structure, and the institutional environment matter for outcomes of financial liberalization.

We obtain three main findings. First, an excessively rapid pace of financial liberalization may increase financial risks. The net impact on financial instability depends on the relative importance of the “liberalization effect” and the “pace effect.” In essence, what the “pace effect” captures could simply be the prerequisite conditions and reform sequencing that are well discussed in the literature. Second, the quality of institutions, such as investor protection and law and order, also matter. International experiences indicate that investor protection can significantly reduce the probability of financial crises. Third, the central bank’s participation in financial regulation is helpful for reducing financial risks during financial liberalization. This is probably because central banks always play central roles in financial liberalization, especially in the liberalization of interest rates, exchange rates, and the capital account. If a central bank is responsible for financial regulation, its liberalization policies might be more cautious and prudent.

Our research findings offer important policy implications for the PRC. (1) Further financial liberalization is necessary not only for sustaining strong economic growth but also for containing or reducing financial risks. (2) Gradual reform may still work better than the “big bang” approach, and sequencing is very important for avoiding the painful financial volatilities that many other middle-income countries have seen. (3) The government should also focus more on improving the quality of other institutions, especially market discipline, to contain financial risks. (4) It is better for the central bank to participate in financial regulation. The new regulatory system should focus exclusively on financial stability and shift from regulating institutions toward regulating functions. It should also become relatively independent to increase accountability.

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About the Author 

This submitted article was written by  and  of Asia Pathways, the blog of The Asian Development Bank Institute was established in 1997 in Tokyo, Japan, to help build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in the Asia-Pacific region.

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