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Comment by zenmonk | Hacker News Reader

See, this logic makes no sense to me, unless you bought way more bitcoin than you could afford. Every bitcoin I sell now (without topping back up, as I would normally do for my spending bitcoins) represents a potentially massive amount of future wealth. The downside is limited to the amount I put in to begin with.

If bitcoin crashes to nearly nothing, I will be sad that such a brilliant experiment has failed. I'll also be bummed that my money is gone, but I won't be destitute and it won't make my life worse off.

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" Every bitcoin I sell now (without topping back up, as I would normally do for my spending bitcoins) represents a potentially massive amount of future wealth. The downside is limited to the amount I put in to begin with."

Lets say you purchased 10 BTC at 40 bucks. Losing 400 won't break the bank. Now it crossed 120. If you sold 4 BTC you'd still have 6 BTC and make 80 bucks in the process. The $80 isn't as important as the fact that you've already effectively reduced the cost basis of the 6 BTC to zero, in which case you literally could just sit there and wait. If the price did crash to zero, you would still be net ahead.

You're making the sunk cost fallacy. The amount you paid for an asset is irrelevant to its present value, and equally irrelevant to whether and how much of it to sell.

'Sunk cost' implies an irreversible transaction. Bitcoins are highly liquid. Nothing fallacious about this logic.

It does not imply anything about reversibility. It applies just as well to a liquid asset like bitcoin or stock as to an illiquid asset such as a house.

Two people each have 1 BTC. One paid $5 for it, the other paid $10 for it. Their present situations are identical, therefore the rational behavior is the same for both of them, despite their different purchase prices.

How is this a sunk cost fallacy? As an investment, selling off a portion locks in gains, rather than leaving it all at risk should BTC lose significant value.

Selling off a portion of your investment to protect yourself from excessive risk is perfectly rational. Doing it partially as a function of the price you originally paid is not.

You may have reduced your effective book cost basis in the remaining 6 BTC to zero, but for tax purposes their (cost) basis should remain unaltered. This is important, because the foreign exchange gain (or loss) you recognize on the conversion of BTC depends on the exchange rate at the time of conversion and your cost basis in the currency units converted.

"but for tax purposes their (cost) basis should remain unaltered."

You can elect (at least in the US) to use average basis (which is what you are talking about), FIFO (IIRC LIFO is not permitted), maximum capital gains or minimum capital gains. You can elect to minimize capital gains this year, but that comes at the expense of reducing the tax basis of the residual to 0

For stock, at least, you can exactly pick and choose which individual shares you are selling, UNLESS you are also buying at a similar time. That would be a "wash sale" and LIFO is Required in that case.

It makes sense if you don't actually believe there is a sound reason for bitcoins to be worth $122 right now. If you think this crazy price curve actually makes sense, then, by all means, hang onto your bitcoins because they're just going to go up, up, up. One does have to wonder what exactly you think has fundamentally changed about bitcoins in the past two months to make their value skyrocket, but maybe you have some insight I don't (honestly -- I don't mean to snark. I'm not a believer, but if this is real, more power to you). On the other hand, if you notice anything distinctly bubble-like about the sudden hype and soaring price, it is pretty obvious that at the top of a bubble, things are overvalued, and that if you are holding onto something you know is overvalued, you should sell the hell out of it and buy it back when it is under- or right-valued.

The utility of Bitcoin doesn't change even if its value drops close to zero, unless you can't buy anymore Bitcoin to facilitate your trade, in which case the price of Bitcoin will go up because of more demand. It can't fail while there is demand for virtual trade on the Internet.

If the value drops so much that there aren't enough coins in circulation to support then spending level, you can't spend it. If sellers aren't also buyers in the virtual market, they won't generate demand for BTC.

The utility function for money for humans is not uniform.

Also, people hate to lose money. i.e. the difference between losing 1 dollar and breaking even is not large in fact, but is really large in mind. Even people who recognize this is irrational still suffer if feel they have lost money - so, removing this suffering is valuable to them.

If you only have 10 btc, selling one to break even lifetime will permanently mean you did not lose money. If btc go to a million each, an extra million will not make much difference, since utility of money at the top is much less than at the bottom.

Therefore I think it makes perfect sense for humans who bought btc cheaply to sell fractions of their total holdings to remove the possibility of losing money on btc overall.

If you want to get meta, then people should not invest at all-- no risk of loss. But people also enjoy then thrill of gambling, son let it ride.

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