Why investing in Bitcoin is a better idea than you think
My sister-in-law and her husband were over for dinner not to long ago and, as it often does these days, the conversation turned to crypto assets and whether it was some crazy scam or a legitimate investment.
It seems, in talking to people, the central feature of crypto assets, that being that there is no middleman, no government entity or company in the middle of the transaction, is the very thing causing everyday people the most fear, uncertainty and doubt … known in the crypto world as "FUD".
That is a big intellectual leap for someone to make if you are just now coming into this. As Cal said at dinner, “How do I know it’s real?”
I know this is a really normal reaction. I consider myself really open-minded. I am a technology geek. Generally a really early adopter. And a former wealth manager.
And, I’ll admit, when a friend of mine, who had suddenly inherited a big chunk of cryptocurrency first mentioned it to me, my first (uninformed), I hate to admit this … without any knowledge, my first impulse was to say … “Are you kidding me? It’s a joke. Sell it!”
I didn’t. And I am ashamed that I would even have an opinion with no basis to back it up. But that’s what our brains do.
And oh how I wish I had taken it seriously back when she first mentioned it. The price has more than quadrupled since then.
So, thus began my altMBA in crypto.
Now, being informed, rather than completely uninformed, my views are quite different. In fact, it turns out that what some view as negatives are actually positives …
There are three, I think, really, really solid reasons why I am now invested in crypto assets.
First is ... In spite of what you may hear from people who are uninformed, it is absolutely not a scam or a hoax.
There is a quote from -Arthur Schopenhauer …
That said, I want to be really clear what I am saying here. The technology is not a scam or a hoax. I do believe that it will change the world in much the same way the Internet did.
My father once famously remarked, at a family dinner, back in 1999, when my sister and I were trying to convince him he needed a website, “Do you really think this Internet is going to change anything?”
Back then, without the benefit of 20/20 hindsight, it too looked kind of like a toy. It was hard to see it’s potential or the implications.
That’s where blockchain, the underlying technology of crypto assets, is today.
Only, ironically, because of the Internet my dad didn’t think would change anything, people know about blockchain and crypto assets even earlier.
I heard Anton Antonopoulos say, in a talk, that Bitcoin and the other open blockchain platforms are, technology-wise, where the Internet was in 1992. But the hype around the technology is where the Internet was in 1998.
But, but, but … while the technology isn’t a hoax … and for sure the top two assets in market cap, Bitcoin and Etherium, are not scams or hoaxes … you have to know that when there is this much uninformed money sloshing around, there are and will be plenty of unscrupulous individuals who are going to be selling bogus advice, bogus ICOs, hacking of accounts and all sorts of nefarious schemes to part you from your money.
This is absolutely the wild, wild West, which is why you should never invest a large portion of your portfolio.
Buyer beware. You’ve been warned.
But that is also why the returns are so big. Profit is the reward for risk. There are market inefficiencies to be had that no longer exist in more staid financial markets.
So, all that said, to answer the first question Cal asked me that night at dinner, crypto assets are just as real as the money in your bank account.
In spite of all the big names warning against getting into crypto, you have thousands of trading desks at major Wall Street firms, hedge fund managers, billionaires, and family offices investing and invested in cryptocurrencies.
These people are in the business of making money, not losing it. And many have fiduciary liability.
They are not going to be investing in the space if it was as a scam.
And fortunately, there is still enough FUD about the asset class among mainstream investors and their advisors... it is still early enough, I believe, to have reasonable expectation of continued price appreciation.
The second reason I think Bitcoin and the other solid crypto assets are a better idea than you might think is it is basically a modern-day form of Pascal’s Wager.
For those of you unfamiliar with Pascal’s Wager, I’ll just give you a quick description from Wikipedia:
"Pascal argues that a rational person should live as though God exists and seek to believe in God. If God does not actually exist, such a person will have only a finite loss (some pleasures, luxury, etc.), whereas they stand to receive infinite gains (as represented by eternity in Heaven) and avoid infinite losses (eternity in Hell).
Historically, Pascal's Wager was groundbreaking because it charted new territory in probability theory, marked the first formal use of decision theory, and anticipated future philosophies such as existentialism, pragmatism and voluntarism.”
So, to sum it up, the nature of Pascal’s wager, as he laid it out, is, If you gain, you gain all; if you lose, you lose nothing.
In crypto assets, it isn’t true that we lose nothing. But, for the moment, the upside downside skew is so lopsided, that is probably the closest thing we will see.
Normal market rates of return will take 8 - 10 years to double your money. One year ago, Bitcoin was $892.91. As of this writing, in January, 2018, Bitcoin is at $12,182.30.
Even discounting for the run-up to $20K and then subsequent pullback to $12K, that is still a 1264% gain.
Those are venture capital type returns that a normal, every day non-accredited investor can choose to participate in.
Which of course, doesn’t mean that it will do that again this year. Or ever again. It could go to zero tomorrow. Which is why it is similar to Pascal’s wager.
If I put $50K of a $3M retirement portfolio in to crypto assets, if I lose it, it makes me sad, but it is not life changing.
If, on the other hand, that $50K had gone up to $682,000, which is what $50,000 invested a year ago today would be worth ... that IS meaningful.
It is THAT upside:downside skew that makes investing in crypto assets, if you have risk capital to do it, so compelling.
And, let’s be honest, it’s what has made it so compelling for people who don’t have risk capital to invest, which is why you hear stories of people buying crypto on their credit cards and taking out second mortgages on their houses.
While it has worked out so far, it won’t end well. It never, ever does. And those will be the same people who lose and ultimately cause the regulation to come in because they don’t have the skills to protect their downside. But that is the topic for another day.
For now, if you have an investment portfolio, it makes sense to peel of 2% and take Pascal’s wager.
Which brings me to my third point. And this one is going to blow your hair back. Crypto assets actually decrease risk on your in your portfolio, not increase it.
So, at this point, you probably think I’m smoking the crypto crack, but it’s true.
Modern Portfolio Theory, which is where the idea of diversification came from, first suggested in 1952, and for which Harry Markowitz finally won a Nobel Prize in 1990, says that "it is not enough to look at the expected risk and return of one particular stock or even one particular asset class. By investing in multiple, non-correlated asset classes, an investor can reap the benefits of diversification, particularly a reduction in the riskiness of the portfolio.”
Bet you didn’t see that one coming, did you?
This is why you hold a portfolio of stocks and bonds, commodities, real estate, etc. Crypto assets are a new asset class, albeit a tiny one, for now, that are totally uncorrelated with any of the other asset classes being held by the typical investor.
Which is why the hedge funds and family offices are all getting into crypto. The smart money knows you just don’t see this kind of opportunity … a non-correlated asset with such a lopsided upside:downside skew.
So long as you don’t screw up Pascal’s wager, by betting more than risk capital, which I would argue is no more than 2% ... at least that is what I am comfortable with in my own portfolio ... then Pascal’s logic would tell you investing is not only rational, it is the only rational choice.
I hope that was helpful ...
As always. If you have any questions at all, about this or anything else, if you agree, disagree , doesn’t matter .. I’d love to hear from you.
You can post in the comments below or, if you prefer, just email me at firstname.lastname@example.org. I answer every email personally. If I don’t know the answer, I’ll find you someone who does.