Reasons to be long or short Bitcoin

Insofar as you think it likely for Bitcoin to be successful, you should buy Bitcoin; and insofar as you think it would be a good thing if Bitcoin is successful, you should sell Bitcoin.

This is a bit tricky, because if you like Bitcoin (think it’s a net good for the world), you’ll likely be bullish about Bitcoin’s future. Likewise, if you think Bitcoin isn’t so special, you probably don’t expect it to have great long-term prospects.

But these two positions aren’t necessarily perfectly correlated. It’s quite possible to think that Bitcoin is going to be widely used in the future while also bemoaning the stupendous amount of energy used ("wasted") to mine it. Similarly, you may simultaneously long for fiat money to be a thing of the past while also expecting governments to crack down before things reach that point.

Even someone who thinks that Bitcoin is both good and likely to be successful might be more confident in one of those two notions, and conversely for both hating Bitcoin and thinking it’s likely to fail.

So I claim: you should buy Bitcoin to the extent that you are more confident in Bitcoin’s success than in its potential for making the world a better place, and likewise sell Bitcoin short to the extent that your confidence in its goodness is greater than your confidence in its success.

(These two directions may well counterbalance each other: you might buy Bitcoin with less enthusiasm than you otherwise would if you think that Bitcoin is likely to revolutionize the world for the better.)

How so? Well, the first half, that you should buy Bitcoin if you think it likely to succeed and be widely used has a simple reason, but also a more complicated one. If Bitcoin takes over the world, each one of the limited supply of Bitcoins will be of greater value, so you should buy some now when it’s (relatively) cheap.

But there is another reason to buy Bitcoin if you think it likely to succeed, even if you think that the chance of success is already fully priced into the current price of Bitcoin!

Insofar as you believe that Bitcoin is destined for greatness you are structurally short it. Throughout your life, the total amount of Bitcoin you receive minus the amount you send to others is going to net at zero. 1 So if you think you’re going to have any expenses denominated in Bitcoin in your future—for instance if you think it likely that groceries and rent will be priced in Bitcoin—you are, as it were, short that amount of Bitcoin: you expect that you’ll have to get that Bitcoin from somewhere to fund your purchases. Even if you don’t know if Bitcoin would be worth more in a world where it’s widely used, the thing to do to reduce the risk of the price going up is to buy it now. That is—you can hedge your bets, and thus get a better risk-adjusted return, by covering your natural short position and buying Bitcoin now.

(I'm assuming that you, like every human being, are at least somewhat risk-averse. You value certainty, and so you can profit not just by making money, but by reducing risk. At worst, if you prefer profits over reduced risk, you can always lever up to regain whatever level of risk you like. Leverage is a way to transmute what otherwise would be risk-reduction into actual money—so even if you claim not to be risk-averse for its own sake, you still can profit from finding ways to reduce risk.)

The second half—that you should sell Bitcoin insofar as you think that it would be awesome to live in a future in which Bitcoin has won—is true for symmetrical reasons. If you think Bitcoin succeeding would be good, you are structurally long Bitcoin, and should hedge your position by selling short now. That is—if you think you’d enjoy living in the possible future world where Bitcoin really takes off and replaces all other money, but you’re less than completely certain that this will actually happen, then the possible futures where Bitcoin is successful represent good futures for you, or at least ones that are better than the alternative.

Thus from a risk-adjusted perspective, you should hedge your bets by selling Bitcoin short now: you make yourself happier in the (sad) worlds where Bitcoin fails, in exchange for making yourself sadder in the (happy) world where Bitcoin is a success. Instead of having one timeline where you are super-duper-happy, and others in which you are sad, you balance things out so that you are only somewhat happy in all those possible futures. You’ve hedged your bets—in the timelines where Bitcoin is a failure, at least you’ll have the money you made shorting Bitcoin as a consolation prize, though in the world where Bitcoin is a success your happiness ends up somewhat tempered by the money you lost.

These two sides may well balance out—if you think that a world in which Bitcoin is successful is a good one, but also that it’s fairly likely (but not certain) to come about, you should be reluctant to short Bitcoin: after all, it’s likely you’ll lose a lot of money on the trade, despite how good a consolation prize that short position would be if Bitcoin doesn’t take off. Similarly, you should be reluctant to buy Bitcoin: even if you think Bitcoin is likely (but not certain) to go up, it would really, really suck if you end up both not actually getting to live in the awesome world you hoped for in which Bitcoin wins, and at the same time also be out all that money you spent on now-worthless Bitcoin. So you probably should only buy or short Bitcoin a bit, if at all. Better to flatten out your expected value over possible futures, instead of gambling on specific ones.

1 Though for this to be true you need to count any Bitcoin you leave to your heirs when you die as Bitcoin sent.

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