Tharp's Thoughts Weekly Newsletter (View On-Line)
Bitcoin—Should Investors and Traders Care?
Updates to the Super Trader Program by Van K. Tharp, Ph.D.
$700 Discount on Forex Trading Workshop Expires Next Week
Over the coming years, Van Tharp foresees excellent trading opportunities in the currency market because of several big-picture forces. Primarily, central banks will continue their attempts to influence the relative value of their currencies against other currencies. Combine that with the imbalances caused by trade and debt levels and we have a currency market that promises to remain lively for some time to come. Don't miss the opportunities that trading the Forex market can provide. Our workshop this month will teach three forex trading systems and for the first time, you can add on two additional days to experience trading them live.
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Bitcoin — Should Investors and Traders Care?
“Our wretched species is so made that those who walk on the well-trodden path always throw stones at those who are showing a new road.”
I find it hard to fathom the many life-changing innovations that have occurred in my lifetime. As I look back, there is a definite theme to the introduction of these advances: lasting innovation rarely happens on the first try.
One of the earliest innovations that I can remember happened when I was a young boy and color TV became prevalent. It took more than a dozen years (from the first color broadcast of the Rose Parade in 1954 until the mid-1960s) for color to be widely accepted, and 18 years for the sale of color TVs to outpace black-and-white sets.
By the time I graduated college, the first IBM / Microsoft OS personal computers were just introduced. Again, it took more than 10 years for sales to move into the home in significant numbers thanks to the new widespread availability of Internet access.
I could list more — cell phones, HD TV, etc. For each of them, even in this age of rapid technological advancement, it has taken at least a decade from first commercial use to widespread use.
This brings us to transactional technology. Credit cards were the last widespread innovation in commerce transactions. They were a rarity until the 1970’s (with the original bank card, or “open-loop” card, introduced in 1966 as the BankAmericard).
Thinking back on this, I watch all of the Sturm und Drang over Bitcoin with great amusement — and interest. I’m not a Bitcoin fan-boy; nor do I believe it is a worthless endeavor. After doing a good deal of research on Bitcoin, here’s where I’ve landed: whether it flops or becomes a household name, I see Bitcoin as a necessary and ultimately useful step in the innovation cycle. Let’s look at a few things going on in the Bitcoin world, and then talk about whether we should care as traders and investors. (As a readability note — the current capitalization protocol for Bitcoin is to capitalize the “B” when talking about Bitcoin as a protocol and to use a small “b” when bitcoin is referenced as a currency.)
Since there is a lot of misunderstanding about what Bitcoin is, I’d like to take a shot at making a very brief primer on the key aspects of this phenomenon as I understand them. Please bear in mind these are the important aspects from my viewpoint — if I missed anything that you hold near and dear to your heart, please let me know using the email address at the end of the article. With that being said, I believe these to be the most important things about Bitcoin:
- Bitcoin is known by many synonyms: digital currency, virtual currency, cybercurrency — and you can replace the word “currency” with “cash” (more on whether Bitcoin qualifies as a “currency” a little later in the article).
- It was designed as a low-cost way to exchange money using the Internet.
- At the simplest level, Bitcoin is merely a universally-shared ledger of who owns how many.
- This central ledger is kept by every computer on the Bitcoin open-source peer-to-peer network and is tracked chronologically and permanently by a public record called the block chain.
- Add some very sophisticated algorithm-based security, and Bitcoin is basically just a secure way for a group of connected computers to maintain a ledger.
- This form of fiat currency is not regulated by any central bank.
- The peer-to-peer network is run by a complex process known as mining, where computers are run on the peer-to-peer network to maintain the security of transactions and the validity of the ledger. Miners are paid in bitcoins according to an algorithm that decreases the payment as more bitcoins are added to the system.
- Inside this system, anyone may transfer bitcoins to anyone else.
- The transactions are completely transparent, but the privacy (identity) of the people on both ends of the transaction can be maintained simply through pseudonyms.
- Bitcoin users have digital wallets that contain their bitcoins and their private keys. This part of the cryptography is sophisticated enough that hackers cannot guess private keys. The combination of the private key and your bitcoin holdings inside your wallet make a cryptographic signature that is unique, secure and allows the network miners to verify transactions.
- There is no 3rd party to a transaction — only a peer network that verifies and records each transaction. So there are currently no (or at least very low) transaction costs.
- The ultimate number of bitcoins is capped (as is the rate of additional bitcoins adding leading up to the ultimate cap) — so theoretically, they can’t be deflated by more units being added to the system.
- Bitcoin exchanges have developed to trade bitcoins for traditional currency (dollars, euros, etc.).
If you want to know the basics of the security algorithms and all the (admittedly pretty cool, as well as integral to the existence of the concept) stuff that is under the Bitcoin hood, feel free dig into the original whitepaper, which can be found at https://bitcoin.org/bitcoin.pdf . But much like the billion-plus people in the world who drive cars without knowing how an internal combustion engine works, we’ll stay at the application level of the digital currency as we look to see its usefulness and what role it is playing in a bigger trend.
A Juicily Divisive Topic
I’ve basically run into three types of people when I talk about Bitcoin:
- The big supporters. There are a few handfuls of these folks out there. They either love the peer-to-peer concept, the code, the math and algorithms, or are philosophically aligned with a decentralized currency.
- There are the big detractors — mostly the people Voltaire was talking about in the opening quote who are guarding the status quo, or who like to throw rocks at any innovative idea.
- By far the biggest group is the “we don’t know and we don’t care” group. This is the same group that could care less about cell phones in the early 1990s because “who needs one of those?” or those who thought HD TVs were for the wealthy few in the early 2000s.
Clearly, you can tell from those thoughts that I think that digital currency is going to stay with us in some way, shape, or form. And more than that, I believe it will be the future of commerce and transactional activities of the future. My best guess is that Bitcoin won’t be the ultimate winner, but much like VHS (and Betamax) technology paved the way for today’s DVRs, it is an important step along the way.
Since I’m into lists today, let me take a swing at listing the pros and cons of the Bitcoin currency as it stands.
What the haters are saying
- Bitcoin is not a currency because it doesn’t meet one or more of the characteristics of the definition.
- Classic economics says that money is
- A medium of exchange
- A unit of accounting
- A store of value
Bitcoin has been widely employed as a medium of exchange, and this doesn’t seem to be slowing. However, Buffet famously said in a CNBC interview that Bitcoin “is not a currency” because “it is not a durable means of exchange.” He followed that up with saying he “wouldn’t be surprised if it [Bitcoin] wasn’t around in the next 10–20 years”.
Far be it from me to disagree with the Oracle of Omaha. However, our time horizons may differ a bit here. I would add that in the near term, Bitcoin has proven quite robust, surviving the failure of its largest third-party exchange (mtgox.com) and a host of associated negative press, etc. On the other hand, I would not like to have a large portion of my wealth locked into Bitcoin with no chance to cash out until 20 years elapsed. So I’ll call this one a near-term draw, long-term negative for Bitcoin.
- Bitcoin owners have suffered through security breaches and have lost money.
That’s true — though the biggest problems have been outside the actual Bitcoin infrastructure. Bankrupt Bitcoin exchange mtgox.com claims that between 700,000 and 800,000 client bitcoins have been stolen from their ledger. However, this was not due to Bitcoin security, but rather the exchanges. Still, the losses have been from the Bitcoin ecosystem, even if they weren’t through the Bitcoin algorithms.
On the other hand, it’s a good thing there has never been widespread credit card fraud…oh, wait. Even good corporate citizens like Target show that almost all forms of transactions have vulnerabilities. Bottom line — I think that Bitcoin will be judged by history as contributing a revolutionary leap in transaction security, whether it survives or not.
- The wide speculative price swings make it tough to value.
Fair enough. But I’m not too keen on the price stability of Argentinian pesos, either. Because transaction costs are so low, merchants can immediately turn any purchase into dollars or euros or whatever and carry almost no volatility risk. Bottom line — this will continue to be a theoretical problem more than a practical one, and will wane as the currency matures.
- Bitcoins have no intrinsic value
On this one I have to disagree. I believe the sophistication and efficacy of the security algorithms, combined with the vast network of peer-to-peer computing power that enforces those algorithms, create an infrastructure that does lend intrinsic value to bitcoins. The ability to transact securely and instantly with low or no fees alone lends intrinsic value to the system. However, one could argue that this is a tenuous trust and that tactics like mass collusion could undermine this foundation. So far, it looks like the internal security features have worked in a very robust way.
- The privacy features mean that law enforcement agencies can’t track illegal activity.
This is a tough one to overcome, but not entirely true. Bitcoin has been an alleged component of drug trafficking and money laundering cases. But as Marc Andreesen said in his excellent New York Times article last month, Bitcoin is pseudonymous, not anonymous. It can be tracked, but not as easily as bank transactions.
Perhaps worst still, the Russian and Israeli central banks have issued warnings specifically about Bitcoin being used for terrorist funding. Unless the world’s crime enforcement agencies are sandbagging on this issue, it will still be an important one for Bitcoin and other digital currency ventures to address.
- The same privacy features make taxation enforcement difficult to impossible.
If the last bullet about drug trafficking, money laundering and terrorist funding wasn’t enough to get most government’s undies in a bundle, this one sure will. The bottom line for me is that the privacy issue will be the Achilles heel of Bitcoin. Governments can’t support or even stand aside and watch any transaction platform that can’t be taxed or policed for rule of law violations.
And now, some equal time for the Bitcoin positives
- Low transaction friction
- Almost instantaneous
- Low to no transaction fees
Bottom line: these are Bitcoin’s strongest edges, and why digital currency as a concept will eventually be a global commerce winner. Imagine a vendor of low-priced items, who might make about a 5% margin, being able to double his or her margins just by eliminating the current 2.5% (or more) fee that banks and credit card companies collectively charge to move money digitally. This is the real holy grail of digital currency. Bitcoin could also become an amazing tool to help the world’s poor by helping them send money and make financial transactions that are prohibited under current transactional structures.
Governments or courts can’t seize what they can’t find. Anti-government activists really like this part. Aside from conspiracy theories and end of the world scenarios, it’s tough to say these privacy pros outweigh the cons of facilitating illegal activities, terrorism and tax avoidance. Bottom line — the winners in the digital currency game will find a way to satisfy societal needs to limit illegal activities and facilitate reasonable taxation enforcement. Any virtual currency that flunks this test will be a niche player at best.
Since each Bitcoin transaction can be unique (eventually, all of them will be done this way), a bitcoin is almost exactly like cash — the owner owns it, and the giver cannot get it back by asking a bank or a credit card company to do a chargeback. This eliminates fraud at the personal level. The most someone with ill intent can do is steal one transaction, not a string of future ones like they can in credit card fraud. On a crypto-coolness level, Bitcoin has developed a security protocol that makes bitcoin transactions a major innovation in the ability to transfer property to another user of the Internet in a safe and secure manner.
Since only a limited number of bitcoins will be made, this will theoretically avoid the problem of overprinting. With limited supply, if demand escalates faster, bitcoins could conceivably appreciate significantly over time.
When I look at all the pros and cons, I conclude that Bitcoin, if it keeps to its current mandate, will be remembered as a hugely innovative step on the journey to the mass use and acceptance of digital currency. The leaps made in cryptography alone are very valuable intellectual property. There may be a way for Bitcoin to morph and make itself acceptable to central bankers and governments, and also reconcile a finite supply in an expanding global economy. But lacking that, it will be a grand experiment along the way to something bigger.
With the conceptual issues realized, Bitcoin does have some major advantages to dominate in the digital currency race. For example, Bitcoin already has a well-established platform and network. If this first-mover advantage grows, challengers will have an increasingly difficult time overcoming the existing network’s inertia.
Bitcoin and Its Relationship to Investing and Trading
Let’s address the obvious question of using bitcoin as a vehicle for speculation. With the volatility in this market, it certainly has the characteristics that one could use for speculation. There is also adequate liquidity. However, the exchanges are the current weak link, as mtgox.com has shown (as recently as the end of last year, mtgox.com was the main exchange, reported to be handling 70% of all Bitcoin transactions). So if you choose to speculate in bitcoins, do so using the caution and position size you would with any other unregulated speculative instrument.
A longer-term play would be to uncover some of the companies that will likely win in the coming move to digital currency. We’ll dig deeper into that concept in a future article.
I’d love to hear your thoughts and feedback — just send an email to drbarton “at” vantharp.com. Until next week…
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Updates to the Super Trader Program
I am continuing to fine tune the Super Trader program and have a few more changes I’d like to share with you.
We currently have over 50 people in the program – nearly double of what we have had in it previously. I believe it grew to that size for two good reasons. First, we went from a two year program at $25k/year to a six year program at $10k/year. In addition, Trading Beyond the Matrix came out and enabled potential candidates to know what to expect. Our program was closed until now (March) and we are now only accepting one new person each month. As a result we now have a waiting list.
We need to double the size of our workshop room so I have an intention to purchase the office next door, however, it’s not actually on the market. At the point we are able to increase our workshop room size, I could begin accepting 2 people per month again as I did until last year. But until that happens, people will have to wait to get into the program, 1 per month.
In the last update on the program I announced several changes to the program and we will improve some of the recent changes now that we have had a chance to use them for a time.
Change 1 — Probation
I originally made the decision to institute a probation period at the end of 2013 because I thought it would weed out non-committed people and it would improve the chances that people would graduate from the program. Our company mission, however, is transformation (not graduation) so I’m rethinking this new caveat.
When I look at any of the people in our program, even those who have taken over six months to do lesson 1 of the program, the impact of the program on their lives has been dramatic. I am concerned that a mandatory probation period might eliminate many people who have and potentially will make major personal transformations.
Thus, starting March 2014 the probation will only be used at my discretion or at the discretion of the candidate (ie., probation is your chance to get a trial period in the Super Trader program to see if it is right for you). We suspect that most candidates will want to go directly into the program. If requested, the probation period will cost $10,000 and be fully deductible from the cost of ST1. (The probation period will consist of sending weekly reports to me and doing Lesson 1a and 1b.) If you do the probation period, it will include all the VTI products that we normally give super traders and it will give you an opportunity to see if the program is right for you. For example, if you cannot get yourself to do the work, then it probably isn’t a good fit.
The probation period does not add additional time for your entry into the program because every new member is required to complete Lesson One. Hopefully, this new step will help you determine if you want to continue with the program before you have to make your first large payment. However, you will not be able to attend workshops (at no charge) or the Super Trader Summit until you have been fully accepted into the program. The amount of time required to complete Lesson 1 varies greatly in each individual. You will work at your own pace.
Change 2 — Price Increase Coming August 2014
We raised the price of the program to $15k/year (or 45k total) last August. However, the program is still inexpensive compared with the full cost for the original two year program a few years ago.
Beginning August 2014 we will be raising the price of ST1 by $2,250 to $47,250. On a three year time frame that equals $750 per year. There will also be an increase in ST2, which will vary depending on how long it takes you to complete each phase.
We are willing to fill up the remaining 2014 slots at the old rate until the end of July. If you come in on probation prior to August 1st, you will get the old rate.
If there is a price increase once you are accepted into the program, YOUR price will not increase while you are in the program, the price per year remains constant at the rate when you joined.
For more details about the program go to http://www.vantharp.com/products/super-trader-program.asp
New Workshop Coming To The Super Trader Summit
Years ago I used to present a workshop called Mental Strategies for Traders which we stopped doing in 1996. Because I have been re-emphasizing that Super Traders learn and use these mental strategies now, however, I will reintroduce this workshop this year.
Mental Strategies include:
- Decision Making Strategy
- Motivational Strategy
- Convincer Strategy
- Knowing When a System Fits You strategy
- Knowing When to Trade and Not Trade a System Strategy
- Knowing How to Make a Decision about what to trade when there are too many opportunities
We will resurrect this workshop as part of the 2014 ST Summit in December. Based on the feedback of the attending Super Traders, we will decide whether or not to offer the workshop on a regular basis.
New Super Trader Two Summit Possible in 2015
Based on the rate of current ST1 completions, I expect that beginning in the summer of 2015, we will offer an exclusive Super Trader II Summit. Right now there are not enough people in the Super Trader II to make such a summit feasible, but we are expecting 10-15 Super Trader 1 completions in 2014 which will make this possible. We anticipate that this will also relieve some of the capacity stress on the year end summit.
Impact of Super Trader 1
Our goal in the Super Trader program, especially ST1, is massive transformation. We really want to raise the level of consciousness of our Super Traders and we believe that the best way to do that is by monitoring and working on raising their level of happiness. David Hawkins believes there is a one to one correlation between happiness and level of consciousness. If he is right, as the graph shows, we are doing a great job. The happiness test goes from minus 55 (really depressed) to plus 85. And I consider that when people are constantly showing scores above 75, that they are “awake” or close to it.
Old News — Repeated But Still Applicable:
I’ve already mentioned our desire to hire a new research assistant from our Super Trader program, but a few of the details have change. I already have two research assistants and both have been great additions. We believe it will pay us (and them) great dividends over time. Both are computer programmers who now form our research team.
I want to emphasize a lot of new product development in 2014. This means that our two staff members involved in this area, RJ and Jessie, will have their plates full in the coming two years and we are looking to add a new research assistant to help them. That person will become a full time VTI employee and get a salary of $25,000 per year plus the Super Trader program for free. It is possible that such a person might now exist in the Super Trader program. While we are somewhat open to the skills of the new person, that person must meet as minimum the following criteria:
- Be a US citizen who is willing to move to Cary, NC to work/live here. We have no plans to handle the visa issues so please don’t apply if you are not a US citizen.
- Submit an application and join the Super Trader Program. This means that you must take either Peak 101 and/or the Oneness workshop first to even be admitted into the program.
- Be thoroughly familiar with all of our products. At minimum read Trading Beyond the Matrix as that book is required for admission to the ST program.
- Have some skill sets that we find useful. Chances are we are not looking for another programmer, but we are open to whatever happens.
- Interview with our current staff members and be acceptable to all of them.
Please do not submit resumes unless you meet or plan to meet all of the above criteria. The ideal person is committed to do the Super Trader program regardless of whether or not this opportunity exists, rather someone who would only consider the program if they got this opportunity.
Trading Beyond the Matrix Contest
Some of you know that we are running a contest for Trading Beyond the Matrix. In my opinion, this is the most important book I’ve ever written and reading it is a requirement for getting into the ST program because it will give you an idea of what the Van Tharp Institute is all about. I actually wrote the book so that someone could just read the book and have everything necessary to transform themselves into a super trader without even doing the program. However, coaching and the energy we give you in the program is usually a critical part of the success achieved.
Right now that book has a huge impact. It is a core statement about what the Van Tharp Institute is all about — Transformation. The book has helped fill our recent peak performance workshops and the Super Trader program and those who attend our workshops all say it is a masterpiece.
One of our goals for 2014 is to get everyone who reads this newsletter to read that book. Consequently, we are running a contest. If you have read the book and it has impacted your life, then write an article (1,500 to 2,500 words) on how the book has impacted you. Each article that we accept for submission in Tharp’s Thoughts will win a $20 product credit good throughout 2014. In addition, once we have 25 submissions, the best article (as voted upon by our staff) will get one of our free core workshops (Peak 101, Blueprint or Systems) Our goal is to run one new article per month.
In addition, if you like the book, please write a review on one of the book seller web sites. Right now people either agree with me that it is the most significant book I’ve written or it is not for them. We’d like to get it up to at least a four star total rating on Amazon and B&N. Thank you very much for your help.
Matrix Insight Entry
One of my biggest insights so far (I still have 50 or so pages to go) has been the impact of position sizing, as well as the whole system of using R multiples to develop expectancy. I really didn’t “get it” until I read the first part of Matrix (it’s the first book by you that I’ve ever read).
Something struck me about this being important information, so I decided to develop an Excel spreadsheet with some historical data from my trading, using R multiples. When I did that and looked at the results it really just blew me away how I could see the expectancy of my system change with small tweaks to position sizing, average win / loss size, and percentage winning trades. Using this information I’ve been able to refine my goals with an expectancy profit zone. As long as I stay in the zone it’s all good.
Fantastic book that is really helping me tremendously with many new insights. Thanks for your help and all the best.
Regards, Jim C.
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