March 31, 2014 12:47 AM

Bears and Bitcoin: a hidden history

Let me start by making a sweeping statement that is generally found to be true. ‘Bulls have a positive outlook, they believe things will get better; Bears have a negative outlook, they believe things will get worse. Bulls and Bears, however, do have one thing in common, that is, that they both hate uncertainty. In order to explain why Bitcoiners should fear bears I intend to use simplistic examples, bear with me… get it?…bear… ah, forget it.
Let us assume for a moment that a particular company, ACME inc., has decided to float one million ordinary shares at $1 each. Now, our investor, the ever positive Mr. Ull, Mr. B. Ull, buys 100,000 of these shares at $1, believing that next year they will trade at $1.10 and he will make a 10% return, a killing. Now Mr. Bull believes that they will return 10%… but he’s not entirely certain… and he, like all investors, just hates uncertainty! Mr. Bull decides that he should seek to hedge, or minimise, his level of risk.
Now, Mr.Bull has a friend, a Mr.Ear, Mr. B.Ear, who is not that confident in the market continuing to grow. As a matter of fact, he believes the market will fall and he thinks that a smart investor would see that all investments should be moved into cash and gilts in order to mitigate the level of losses.  Now, Mr.Bear makes a proposal to Mr.Bull, That he takes 50,000 of the ACME stock off Mr. Bull, at $1, under contract, for a period of one year, and at the end of the year he will replace the 50,000 shares plus pay Mr. Bull a return of 5%. Now the Bull has just offloaded a large proportion of his risk, even if the shares do not reach 10%, he has a 5% return on half of them, equal to a 2.5% return overall. He has in effect, halved his risk and gotten a better return than inflation, as long as the other 50,000 don’t fall in value; If they begin to drop he is, of course, prepared to cut his losses and sell, so, he’s still ahead. Now, the Bear has 50,000 ACME shares that he expects to tank, so he sells them straight away and puts the return into gilts, government bonds and cash funds. If the price of ACME falls by 10% he will buy back the shares in twelve months for their new price of $45,000, pay the Bull the 5% return, or $2,250, and he has just made $2,750 plus, of course, the return on the money he had invested for twelve months. The more the shares fall in value, the more money the Bear stands to make.
Some Bears think long-term and research and select small portfolios of shares, that they believe to be overvalued or ‘vulnerable’; some think short-term and target large portfolios of shares, they believe the whole market will take a bath. Now, if a bear was to buy into, for example, 10,000 bitcoins, at $600 ea. He is exposed to the level of $6 Million Dollars. If bitcoins sell, at the end of the term, at $500, then he has made $1 Million dollars. Now, bitcoins are currently volatile in value, some days, they go up; some days, they go down. I have already written about the need to hold rather than sell but here is the problem: people are holding bitcoins that have, absolutely, no knowledge of the stock market. People are looking at trends and graphs and seeking to anticipate what the price will do next. They buy and sell on the basis of short-term trends in the graph. Bitcoin is $540 on a Monday, $555 on Tuesday, $568 on a Wednesday; Our investor buys in, $572 on a Thursday, and so forth. The following Tuesday, a rumour comes from Russia, China or the USA and Bitcoin drops by $60.  On the Wednesday, it drops by another $10, and investors begin to offload stock to prevent further losses; Then it stabilises and climbs again.
If the above scenario looks familiar, it is because the market for cryptocoins has been paying wages to Bear investors since last November. In order to minimise the effects of this behavior on price we need to bring smaller Bitcoin holders on board and encourage them to save and spend bitcoins. We must warn the short-term investors about the possibility of market manipulation because we seem to be in one of the easiest markets to manipulate in the history of investing. Remember, Don’t panic, hold bitcoins and fear the bears! Our ancestors were right: Bears will eat you!

PJ Delaney @P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.