Are you looking for a secure way to grow your investments? That security may not be where you expect it.
I want to share here some of the reasons why we have built the first in a new class of self-managed financial product. Bitcoin Enhanced is actually two tokens, both designed to track the Target Price of a simulated long/short Bitcoin investment strategy. By simulated I mean that no Bitcoin or Bitcoin futures are actually traded. Unlike a traditional hedge fund, there are no underlying assets to give the tokens value. Token holders create the value themselves as they trade the tokens on the Waves exchange. That is what we mean by self-managing –token holders give the tokens their value and keep the value pegged to the Target Price. The factsheet reads:
“Bitcoin Enhanced is a self-managed product. Do not purchase tokens unless you are committed to trading them at the Target Price (CBE token) or of growing their value to reach the Target Price (XBE token) of the simulated Bitcoin strategy.
“There are likely to be times when you will have to wait until there are sufficient buyers to sell your tokens. In the event of a long terms absence of buyers your tokens could become worthless. The token issuer, Forecast Services Limited, does not intervene in the market to provide liquidity or to support the traded price.”
Now, you may ask yourself, what are the benefits of the self-managed approach and how can it help my investment portfolio?
To begin with there are two obvious advantages to the self-managed products:
1. No fees. Hedge funds typically charge 2% management plus 20% performance fee for their services. With the self-managed approach once you have bought the tokens, they are yours, free to trade on the open market at any time. For a medium to long term investment of 5 years or more no fees can make a huge difference to the return.
2. Greater access. Hedge funds and other investments are restricted by securities laws in many countries. Because token holders create the value of the tokens, they are not classed as securities. This makes the self-managed approach open to a far wider range of people. Even if you are an “accredited investor” this wider access means more potential buyers to help maintain liquidity for you when you come to sell.
But these benefits are not the KEY benefit to the self-managed approach.
Last night I arrived early to pick up my family from the airport so I went to buy some ginger at the supermarket. I have got totally used to using the self-service checkouts now. Initially, I missed the human interaction of the checkout person ringing up the items. Now I like speed and self-reliance of the self-service scanners.
I still had time when I got back to the car so I opened the windows — it was a hot summer’s evening — and watched the people. There was an enormous variety. Many were covered in tattoos. One woman in a flowing skirt had tattoos covering each shoulder like epaulets. A man as far as I could tell was covered with them. There were a single-child Asian family and an Indian couple, skinny, clearly well educated, sophisticated and well-traveled. A lot of overweight women. One woman, not overweight, was struggling to carry two cases of beer to her car. One middle-aged woman got out of her car, took a final drag on her cigarette and headed into the store. Next, to me, a car pulled up. The driver had a ring in her nose. She turned to caress a person in the passenger seat with short hair dyed blonde. Her son? The person that stood out the most was the uniformed figure of an air hostess.
I can’t say it was a pretty sight. But what a difference from a hundred years ago when the dress code and social etiquette meant that everyone’s appearance conformed to their “station”. The air hostess stood out because she still reflected that kind of conformity. A hundred years ago the majority of people were “outer directed” meaning that their identity and behaviour was primarily determined by the norms of the social strata to which they belonged. It was the era of trade unions and class structures. Today, the majority of people are “inner-directed”, that is, someone “guided by one’s own conscience and values rather than external pressures to conform.”
Finance may be one of the last areas of life where people retain the desire to conform to outer behaviours. The rise of ETF’s and passive investing in general over the last ten years could be an example of this. As Christopher Coles at Artemis Capital points out:
“Passive is just a crowded ‘liquidity momentum’ trade and its outperformance compared to active managers may be self-fulfilling and ultimately de-stabilizing in the long run.”
Coles explains that this herd mentality is likely to be creating its own market instabilities — what people thought safe may in fact turn out to be the opposite.
It is understandable if finance is one of the few remaining bastions of the collective desire to conform. Most people depend on income for their survival. Clothes and tattoos are means of self-expression but money goes to the very centre of one’s life.
That is what makes 15th September 2008 so interesting. When Lehman Brothers collapsed and governments had to step in with trillions of dollars to bail out other institutions as well as guarantee bank deposits around the world, it told us something about the nature of the financial system we have built.
Put simply, it is fragile. Most financial products depend on other financial products to give them value. For example, a gold ETF has gold bullion stored in vaults to support the value of the shares. Because banks and other financial institutions trade these products with each other, the value of each institution now depends of the value of others. That is why if one goes down, as did Lehman Brothers, they can all go down.
It is possible to see this domino-like fragility as a product of the “outer directed” mentality. People feel safety in numbers and mutual dependence. “As long as I am part of the larger system, I’m ok.” What 2008 taught, and Coles has reiterated, is that this way of thinking does not produce safety. Indeed the opposite. It is no co-incidence that a hundred years ago one world war had just finished and a second was on its way.
When people start to be driven by their own values and internal sense of self the result can look messy. There are a lot of wrong turns to take. A lot of dead ends. A lot of mistakes. That is the problem with being your own guide, you have to learn for yourself from your own experience. However, I would suggest, like the Internet itself, the result is far more robust.
Because of the diversity of experience society as a whole is stronger. The Internet is made up of routers, cables and servers. They are robust because if one goes down they do not all go down. In the same way, if one lifestyle crashes, society as a whole does not crash. In China during the Cultural Revolution millions starved because on man, Mao, believed birds were eating the harvest and ordered all birds killed.
Bitcoin was created expressly as a solution to the fragility seen in 2008. Its value is testimony that a growing number of people are aware that safety does not always rest with the herd. Bitcoin has value only because people have chosen to give it value. They like its independence from the financial system. They believe that this autonomy carries less risk than the dependencies of traditional markets. They like the fact it does not depend upon any authority, that it is self-managing.
Bitcoin Enhanced takes the self-managing approach a step further to make investment-like returns available while still maintaining independence from the financial system. If Bitcoin Enhanced actually traded Bitcoin and Bitcoin futures it would hook itself into the system of dependencies with its systemic risk. By letting token-holders manage the link between the Target Price and the traded value of the tokens, independence is preserved — like Bitcoin, Bitcoin Enhanced tokens are silos of value largely immune to what takes place in the wider financial system.
This self-managed approach to the value of Bitcoin and Bitcoin Enhanced tokens has one fundamental benefit for the investor — diversification. A diversified portfolio is one of the few things practically all investors agree on as the basis of sound investing. The rationale is that by having a range of different assets the risk of the whole portfolio is spread, making it more robust. However many investors have yet to wake up to the fact that in a financial system where every asset is linked to every other through their derivative nature, diversification has all but disappeared. When everything is connected to everything else diversification is dead.
I may not care for Tattoos or for smoking or for many of the other things I saw sitting in the supermarket car park. But I do appreciate robustness and I understand the diversity is the means by which robustness is built. Increasingly people are creating their own lives based on their own beliefs and values. This independence of thought is the bedrock of robustness because there are fewer external dependencies.
In the same way, you may not care for Bitcoin, or for Bitcoin Enhanced. But you may want to consider them are part of your portfolio because what you may care about is reducing the risk profile of your investments. Some things do not change. The means to reduce risk remains diversification. Self-managed products like Bitcoin or Bitcoin Enhanced are some of the few ways to achieve genuine portfolio diversification.