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I’ve been investing since the early 1980s. I have a business degree and took investing classes. A close friend of my parents wrote the first investing book I read at age 10, called Stock Market ABC by Joanne K. Friedlander and Jean Neal, published in 1969 and given to me on my 10th birthday in April of that year. This started my interest in investing. I also have a background in technology, going back to 1982. I started a technology consulting practice 15 years ago and continue to be a successful player in the field. This combination of background and interests was the genesis of my interest in Bitcoin. I was searching for a way to mitigate risk in my portfolio. Bitcoin’s design makes it an interesting investment option for those seeking a hedge against currency debasement and the irresponsible fiscal governance most countries suffer. With a relatively small investment in Bitcoin, you can add alpha to your portfolio safely and innovatively. If you want to know more about it, please ask questions here, and I’ll respond with advice on books, websites, and podcasts you can consume to increase your understanding and appreciation of this new asset.
In the spring of this year I hired a young fellow named Matt to paint the walls of my basement in preparation for selling the house. He is a Bitcoin evangelist and would not stop pitching it as the road to astonishing riches. I took a look and discovered that the price of Bitcoins had dipped and it looked like an entry point so I bought $5,000 worth of the Fidelity Bitcoin ETF. A few weeks later, it had gone up around 20%, so I sold out and made around $1,000. So, you could say that based on the astronomical rate of return I earned it was the best “investment” I ever made. You could also say it is not an investment at all and I could have just as easily lost $1,000 or my entire $5,000. Even though I made a little money I decided Bitcoin is not for me.
I think of Bitcoin as a multilayer bet. The first punt being made is that the price will keep inflating over the long term. The second punt is you’ll find a counterparty in Bitcoin’s speculative inflated future. But underneath those bets is a deeper one: what if the current financial system has fundamental problems? What if governments debase currencies, banks freeze accounts, or payment processors become gatekeepers?
Bitcoin is an outside bet that a decentralized alternative has value and a hail Mary around future valuations- basically insurance against the existing system failing or overreaching and a FOMO soother…Whether that bet pays off is anyone’s guess. Although I’ve taken a bet, it’s with play money only. I think of it as buying an exotic call option, any other framing seems illogical to my mind.
I’m a tech guy. So here’s my $.02 opinion
Change my mind.
Some thoughts to add to the conversation:
“The poster child of hype, bitcoin treasury company Strategy (formerly MicroStrategy), has recently been valued at more than three times its bitcoin holdings. Greater fools indeed. Now it’s 1.3 times. What happens if bitcoin sells off and then marginal holders and ETF funds start dumping? The train runs in reverse, with Strategy likely valued at half or less of its bitcoin holdings’ value. Could get ugly.” – Andy Kessler at the WSJ.
If stablecoins tied to the value of the dollar become available, will legitimate users of crypto prefer the stability offered? If yes, how might currencies such as bitcoin be affected? I truly don’t know much about the topic, still, it seems to me if the only holders of bitcoin are speculators and criminals, the former could be in trouble.
Index funds are an amazing invention and provide the unique ability to capture the opportunity cost of the market for virtually no cost. That said, by their very nature index, funds end up in some investment paradoxes. For instance, Vanguard does not allow any of its customers to invest in a bitcoin ETFs and they won’t offer a bitcoin ETF. Their sentiments are clear. But guess who is the largest shareholder in Strategy (MSTR), the world’s largest bitcoin treasury company, holding more bitcoin than any other entity? That’s right, it’s Vanguard because Strategy is a large firm in the QQQ ETF and so Vanguard must automatically own the shares. And if Strategy gets added to the S&P 500, which it already qualifies for, Vanguard will own a whole lot more bitcoin. Pretty ironic don’t you think? The guys at Vanguard are closet bitcoiners!
The beauty of index funds is that you always get the market average return, which comes from both winners and losers at any moment in time. The market average return over decades is more than enough to fund big life goals like retirement.
Bitcoin is a purely speculative instrument with no intrinsic value like stock, bonds, or real estate, worth only what the next buyer will pay. Though it’s quite handy for profiting from cybercrime.
For those who are humble investors, you can relax. Stock for the company now called Strategy (formerly Microstrategy, ticker MSTR) is no longer part of the S&P 500 index today, so no indirect Bitcoin in Vanguard’s VOO/VFIAX S&P 500 index fund. And MSTR is a tiny fraction of Vanguard’s VTI ETF, which holds shares of nearly all U.S. publicly traded companies. Companies in that index go out of business quite often and yet the long-term gains continue.
What’s backing bitcoin? Just the fact that there’s a limited number of them?
Gold is a real physical thing, a valuable thing. It will never tarnish or rust, it has good electrical properties, it can’t be created out of thin air. A limited amount is mined each year. Because of that, currency backed by gold (what we used to have) is hard to inflate, therefore it holds it’s value over time.
You are correct that you can not hold gold in your hand but I believe that there is real value in bitcoin and it will be more valuable as time passes.
Bitcoin is mainly based on decentralized network security (blockchain technology), global consensus and acceptance, as well as unique functions in cross-border payments and value storage. Gold has physical properties, while Bitcoin is digital scarcity. The scarcity logic of the two is different.
Blockchain infrastructure supports all cryptocurrencies like Bitcoin. It contributes no intrinsic value to them. It’s nothing more than a ledger; a clever, decentralized one, but still just a ledger.
I am interested in learning more about bitcoin. What are good beginner sources?
Natalie Brunell has an excellent youtube channel that has tutorials and she has a guest join her every few days to discuss bitcoin. https://www.youtube.com/@nataliebrunell
Mastering Bitcoin
Thanks for sharing Dan. I wrote off bitcoin in 2017 for all the usual reasons. In 2022 I began to study it and it has been a fascinating journey. I would encourage anyone who is currently skeptical to take an open minded look at it. It’s not easy to wrap your mind around, but once it becomes clear you’ll be amazed at the sheer genius of it. What does anyone have to lose by taking a good look at it?
Well, they stand to lose their entire “investment”.
There is nothing which will prevent Bitcoin from going to $0. Only widespread delusion props up its current price as it did in all the great bubbles in history — the South Sea bubble, the Dutch tulip bulb bubble, the dot com bubble. There are no physical assets with cryptocurrency, no steady and growing earnings which can be returned as income to shareholders via share repurchases or dividends. There is no contractually obligated interest income as a bond produces, or income as a REIT fund produces; no rent payments as with direct real estate holdings. Even gold has some intrinsic value from its use in industrial applications (e.g. electronics) or jewelry.
I agree with Patrick that curiosity, research and educating oneself is a critical part of investing. I assume this is one of the reasons we visit the HD site.
As I have posted elsewhere I was a bitcoin (BTC) naysayer for years but I do currently have a limited holding within a Roth IRA, utilizing IBIT ETF and a disciplined approach to harvesting gains. This approach sits within an otherwise conservative retirement portfolio that is essentially 50:50 bonds and diversified low cost index funds.
I understand BTC is a highly volatile and speculative investment, and that many will stay away. Just as many will stay away for individual stocks, private equity or underperforming ‘managed’ mutual funds (I do also).
If I recall correctly, when John Bogle launched his first index fund another Wall Street investment firm took out a full page advert in the WSJ calling his index fund “unAmerican”. I say this because the early index fund adopters acted on their own research and judgment, helped by the writings of the likes of Jonathan Clements, in the face of the prevalent Wall St ‘advice’ to the contrary. It took a number years for the real world results to show the outperformance of index funds or should I say underperformance of managed mutual funds?
This comment is not an attempt to compare bitcoin with index funds but to support Patrick’s comment and encourage staying curious and educating oneself. I try to do this even if the research more often than not results in me not voting with my wallet.
I like “disciplined approach to harvesting gains.” That way, your risk is contained as well.
Stay curious, but also stay humble. Jonathan bravely fought through the darkest times of the mutual fund industry, when firms tried to baffle investors with BS, hide poor returns, and drain investor gains with high fees or foolish offerings. A lot of this nonsense will never go away. That’s why we have hundreds of new leveraged or super-concentrated ETFs which are complex, risky options for losing money. It’s why we now have cryptocurrency flogged as an “investment”.
I’ve been investing for over 40 years and I see no reason to stray from the humble, vanilla stock index fund and bonds as the core of a solid, diversified portfolio for decades more of growth and income.
i agree and appreciate your bringing this point.
and do you own any of it?
Hard pass.
I got into crypto a couple years back and it was really confusing at first. What helped me get a better handle on price trends and timing was following VIP crypto signals. They don’t guarantee anything, but they pointed out patterns and info I would’ve missed on my own. I still cross-check everything, but they gave me a bit more confidence while I was learning the ropes.
Agreed. I can’t invest in gold, Bitcoin or similar assets where you are just hoping that someone will pay more for it than you did. By investing in the share market, you are a part owner of businesses that are striving every day to become more profitable. For me, the difference is stark and definitive.
My thoughts exactly. The risk that the world will just decide that they are no longer interested in Crypto is too great for me. While crypto may be stable for many years and decades to come, many people probably thought the same thing about tulips back in the day when they were the hot investment item. If you don’t know about the tulip bubble, you should study it before you invest in crypto. I like assets with an intrinsic value.
It is wrong to equate Bitcoin with the tulip bubble. The scarcity of the tulip bubble was artificially hyped and highly replicable; the total amount of Bitcoin is rigidly stipulated by the algorithm and can never be arbitrarily increased, and no one can change this. More importantly, Bitcoin is not only a scarce commodity, it is also a decentralized, globally circulated, censorship-resistant digital asset with real financial functions. The value of paper money and gold relies on trust, and the value of Bitcoin also comes from global consensus, but its mechanism is more transparent and cannot be manipulated by humans. Even legal tender and credit currency are untenable in questioning that Bitcoin has no intrinsic value.
Please tell us some good sources (unbiased) for learning about how it is made, traded, trusted, etc. Thanks.
Thanks for this article. This could get interesting.
From Fidelity. The emphasis is theirs:
“Fidelity now has 2 crypto funds—one for bitcoin, one for ether—so you can add exposure to crypto in brokerage, trust, and IRA accounts.
Spot crypto ETPs (FBTC and FETH) are for investors with a high risk tolerance and invest in a single cryptocurrency, which are highly volatile and could become illiquid. Investors could lose their entire investment.”
I don’t often see fund managers advising that one could lose their entire investment in a product.
where is the ‘ha ha’ button!
What impact do you believe quantum computing will have on Bitcoin over the next few years? I keep reading articles postulating that Bitcoin mining will be vastly simplified through this.
I would not worry about crypto mining from quantum computing. I would worry about its ability to break Blockchain encryption, and therefore the security around the assetis at risk. There are encryption techniques available using quantum computing, but until they are in place, the entire blockchain world may simply be obsolete.
From Grok (good suggestion David)
Threat to Cryptography: Bitcoin relies on elliptic curve cryptography (ECC) for securing private keys and transactions. Quantum computers, if sufficiently advanced, could use Shor’s algorithm to efficiently solve the discrete logarithm problem, potentially compromising private keys from public keys. This could allow attackers to steal funds or forge transactions.
Do you ever use Grok? If so, “deepsearch” and “think” are pretty good at answering these types of questions.