Bubble Logic

I have been reading a lot about cryptocurrencies lately. Before I go any further I must recommend two podcasts. They are:

Hash Power Part 1

Hash Power Part 2

These are impressive pieces of work. They were produced by Patrick O’Shaughnessy of the very excellent Investor’s Field Guide (you should also subscribe to Patrick’s regular podcast, Invest Like the Best). What I appreciated most about the podcasts is that they feature a number of intelligent, level-headed people trying their hardest to crack the toughest investment puzzle in recent history. These are not scumbag stock promoter types pumping and dumping ICOs. If you are interested in this kind of thing you should really check it out.

Anyway, back to the salient question(s). Are cryptocurrencies actually worth anything? If so, what are they worth?

I took a stab at this myself not too long ago. It was a useful exercise although it did not exactly end with concrete results. So despite having learned even more about blockchain and cryptocurrencies in the meantime, I remain stuck.

How am I supposed to invest in something that I cannot value?

Now, there is a pragmatic solution I have not really discussed (also mentioned by one of Patrick’s interviewees). That is, you can simply look at cryptocurrencies as call options (or, if you prefer less financial jargon, as lottery tickets). Viewed through the lens of portfolio construction this is far and away the best way of approaching the problem given the dramatic skew in the distribution of potential returns. Max downside is 100% of the original investment. And max upside is what? A 1000x gain? More? That is a pretty attractive option.

Yet it still doesn’t sit right with me. It feels too much like gambling. Which isn’t the worst thing in the world. I enjoy the occasional trip to the casino. However, conflating investing and gambling does not seem like a real answer. In fact it seems like bubble logic: gamble a little so you won’t miss out and regret it.