Many people worry that big banks, brands or government-backed cryptocurrency will kill bitcoin.

One of my newer SANE CRYPTO Mastermind members, Mike, sent me this email:

“I had a question that came up with one of my highly skeptical friends. His thesis: Bitcoin is the first crypto-currency, and once the big players get involved (Bank of America, Chase, etc.) and they make their own crytpo-currencies, people will buy those because they are name brands with trust, and the government and the monied elite, behind them.

In his view (and his friends who supposedly work at Etherium), Bitcoin and Etherium will be the Friendster or MySpace to “Amazon-coin” or “Chase-coin’s” Facebook. I was a little compelled by this thought because if we are in the first wave of the crypto-currency era, why wouldn’t Bitcoin suffer the fate of a first wave dot.com company like Pets.com? What makes Bitcoin different that it can survive as more “trusted” crypto pops up?”

This is a really important question and I’m so glad you asked Mike.

Not surprising that I could argue both sides

First of all, you should know that I both agree and disagree with pieces his friend’s thesis.

In fact, I make a very similar argument in explaining why I don’t invest in alt coins.

Familiarity bias

On the other hand, the argument smacks of familiarity bias. It is the same argument we have seen made, and made to look foolish, thousands of times.

To wit, ask any of the venture capitalists who scoffed at Airbnb, when they had the chance to invest back in 2008, when the the company was raising a $150,000 seed round, at a $1.5 million valuation.

Many, many recount that their thought process was something to the effect of… Are you kidding? Who would sleep in someone’s house over a brand name hotel like Holiday Inn or Marriott? Ick!

And yet, today, Airbnb has over 5 million listings worldwide, including nearly 3000 castles and 1400 tree houses. ‘On any given night, something like 3 million people are staying in other people’s homes around the world on Airbnb.’ And they are now larger than the top 5 hotel brands combined.

That original $150,000 investment? Today it is worth $25 billion!

Why absolutely NONE of the above matters

The truth is… it doesn’t matter what I think, or your friends think, or even what Warren Buffett, or Satoshi Nakamoto or Vitalik Buterin think, because … no one knows. No one.

And this is a key concept you must wrap your brain around to become a successful investor. The moment you hear yourself saying the words, “I think …” that should be a big red flag that pulls you up short.

Everything is just a guess… or supposition… colored by our cognitive biases. Some are better guesses than others. Some more informed or less biased than others. But until Silicon Vally invents a crystal ball, it is all just a guess.

Wrong even when we are right!

Moreover, I would argue, that people are really, really bad at predicting the outcome, even when their guesses prove correct.

I have many, many examples from my investing career. But one always sticks out.

I think it was late 2002, my investment method had many of our clients in one of the few dot com stocks left standing…

Not because we thought it was going to go up.

Or it would become one of the iconic winners of the early generation of dot-com startups.

But because it was volatile. And we use volatility to generate cash flow, which is the objective of the Snider Method.

Every time the price would take a big hit, as it did often, a few of my investors would call to say, “I reaalllly think we should sell this stock.”

After all, it was trying to disrupt a well-know retail brand.

“How on earth are they going to compete? This is crazy. We’re going to lose all our money.”

And, I would remind them, as I am reminding you, we have no idea what will happen. Stick to the process.

But now, the stock is down like 50% or 60% from its all time high and Wal-Mart announces they are getting in the game. And then my phone really starts ringing.

“Did you see the news? Wal-Mart is opening a competing service. They’re going to get clobbered! We HAVE to sell.”

And, as I always do, I said, trust the system. You have no idea what will happen.

Now, you’re probably thinking to yourself, I’m going to tell you the stock was Amazon. But it’s not. Close.

It was a little startup called Netflix. And the behemoth they were going up against, originally, was Blockbuster.

Of course, now, everybody knows how the story ends.

Netflix took over Wal-Mart’s competing Online DVD business in May of 2005 and Blockbuster, having long since become a shell of its former self, declared bankruptcy in 2010.

What’s the moral of the story?

We think we know. But, of course, we don’t.

Could Netflix have lost to Wal-Mart or Blockbuster? Totally.

The point is, in the moment, we can’t know. So we have to design our investment processes around that lack of knowing…

Our job is to accommodate a range of possible outcomes such that we don’t get killed when they go against us but we do really well when they go our way.

Which leads me back to cryptocurrency…

Cryptocurrency is really a venture capital investment dressed up in a publicly traded asset’s clothing…

What you are being offered is the chance to make an early stage startup investment, with commensurate levels of potential upside and potential risk.

You’ve probably heard me talk about Pascal’s Wager until you’re ready to throw up if I mentioned again. Fair enough.

The technical term for Pascal’s Wager is optionality. Nassim Taleb describes optionality, in his book, Anti-Fragile, as:

… the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).”

Tren Griffin, of the highly recommended blog, 25iq, says:

“Venture capital, when practiced properly by a top tier firm, is a classic example of a business that benefits from optionality. All you can lose financially in venture capital is what you invest and your upside can be more than 1000X of what you invested.”

“If you ‘have optionality,’ you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don’t have to be right that often. All you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur.” (Taleb)

And then, finally Tren Griffin again:

“It is not always possible, but when positive optionality does appear, jumping on that train is a very good idea. Fantastic opportunities don’t present themselves to a human being every day, but when they do it is important to take advantage of them. Being patient and yet aggressive when an attractive opportunity presents itself is a great way to prosper and be happy in life. Low downside and a big upside? You do it. Big downside and a small upside? You don’t do it. Big downside and big upside? You ask yourself whether you are playing with house money that you really don’t need and how passionate you are about what is involved. Small upside and small downside? Meh.”

Investing is a probability game. Nothing more. Nothing less.

When you understand that, you understand the keys to being a great investor. Cullen Roche, of Orcam Asset Management, put it this way:

“The smartest investors know that they’re actually not that smart. That is, they recognize the fact that they’re going to be wrong a lot. But in realizing this they also acknowledge a more important fact – they don’t have to be right all the time to succeed. They just have to be right about the right stuff when it matters.”

So how do you play the probability game like investing in cryptocurrency?

1. Know the game you are playing. That is half the battle. Because most people don’t.

2. Creating and sticking with an investment process or system to improve the chances of us not doing something stupid that messes up the probabilities.

3. Invest a small a small amount. In trading, it’s called position sizing. In investing, it’s allocation. Either way, it is a critical aspect of managing risk. I believe, at this stage, cryptocurrency should be 2% or less of your total investable assets. Because of the optionality, we make small bet on big outcome. If it hits, great. If not, no harm done.

Links and Resources For a Deeper Dive:

Ep. 016: Ask Kim: What Is An ICO and Why Don’t You Invest In Them? – SANE CRYPTO Podcast

What Is An ICO And What Are The Risks Of Investing In Them? – Kim Snider

The Third Wave: The Third Wave: An Entrepreneur’s Vision of the Future – Steve Case (Amazon aff. link)

Airbnb is now bigger than the world’s top five hotel brands put together – The Spaces

The investors who passed on Airbnb’s seed funding had their reasons – Quartz

Anti-Fragile: Things That Gain From Disorder – Nassim Nicholas Taleb (Amazon aff. link)

Great Investors Think in Terms of Probabilities – Cullen Roche

Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts – Annie Duke (Amazon aff. link)