Why Does a Traditional Investor Embrace Bitcoin?
My first trip to Las Vegas is still vivid in my memory. It was right after I graduated from college, and my best friend gave me a free plane ticket to join him for a few days. We stayed at the Hard Rock Casino Hotel, which had a party-like atmosphere and smaller, more intimate gambling tables than the big casinos on the Las Vegas Strip. It was an ideal place for someone my age, with generous rewards and giveaways.
Even after 27 years, that memory remains vivid. I still remember playing blackjack for hours. We started at a table with a minimum bet of $10, but our initial luck allowed us to quickly increase our bets. In the first two days, I won about $1,700. However, on the third day, our luck took a turn for the worse. By the evening, my friend went from winning a few hundred dollars to losing $750. Frustrated, he decided to return to the hotel room and sleep.
My situation was even worse. My $1,700 profit had dwindled to only $300. But unlike my friend, I wasn’t ready to quit. Losing so much money made me determined to continue. So, with the remaining $300, I found an empty table with a minimum bet of $100 and thought, why not give it a try?
Lady Luck smiled on me again, and in less than 20 minutes, I turned that $300 into $3,000. By the time I returned home, I had won a total of about $3,600. For a 23-year-old living in New York City in the late 90s, it was a significant amount of money.
Lessons from my early stock market investments
I mentioned this story because early experiences often shape a person’s perspective. For me at that time, my first trip to Las Vegas was perfect. I gambled without any concerns, partly due to my exceptional luck and partly due to my youthful ignorance. Being young and inexperienced, I didn’t realize how reckless it was to bet $100 per hand with only $700 in my bank account.
The same can be said for stock market investments. My first encounter with stocks was when I started working for Forbes, coinciding with the peak of the dot-com bubble in the early 2000s. In the six months before I joined, our department recommended stocks like eToys, VerticalNet, and Healtheon, which catered to the frenzy surrounding anything related to the internet, whether it was new websites or companies supporting internet infrastructure development.
These three stocks rose by 66%, 92%, and 99% respectively in just three months. And the biggest winner of all was Qualcomm, whose stock price had surged by about 2,600% the previous year. No, that’s not a typo.
At that time, I had saved some money and opened my first brokerage account. Timing couldn’t have been worse because it was the beginning of the dot-com/tech stock crash. The first two stocks I bought were the ones recommended by my department in the first three months of my job: Net Perceptions and Wind River Systems, both of which no longer exist. I can’t even remember what they did.
But one thing I remember vividly is that I held onto them and watched them plummet along with the market. I ended up losing 75% to 80% on these holdings. It was a painful lesson that made me realize I had no understanding of stock market investments and shouldn’t have gotten involved in the first place.
Becoming a value investor
Things changed in the following years. I pursued the Chartered Financial Analyst (CFA) program, became a stock analyst, and gained experience in searching for undervalued stocks in almost every industry. However, the painful experience of my first stock purchases remained deeply ingrained in me. I lost a lot of money on those two stocks because, like many others at the time, I believed in speculation.
Influenced by my initial stock market experience and the value-oriented strategy of the stock recommendation service I worked for, I tried to avoid market speculation as much as possible.
I studied the investment philosophies of Warren Buffett, read “Security Analysis” by Benjamin Graham and David Dodd (still considered the bible of fundamental analysis), and started buying stocks of companies that were significantly undervalued based on my research and analysis. In other words, I became a true value investor.
This meant seeking out companies with strong future cash flow potential and having the discipline to only buy when the stock price was significantly undervalued. For example, after the stock market crash following the 9/11 terrorist attacks in 2001, our department recommended Amazon stock when it was priced at $7.48. I bought some for myself as well.
However, within four months, when we recommended subscribers to take profits as the stock price reached $12.20 after the approval of the Bitcoin ETF by the U.S. Securities and Exchange Commission (SEC). I followed suit. (By the way, those 200 shares I bought are now worth about $880,000. Yes, it leaves a bitter taste in my mouth whenever I think about it.)
Overall, I have had more successful investments than failures, and I am satisfied with my financial situation because I didn’t take too much risk. Although I regret selling my Amazon stock too early, my discipline allowed me to avoid dozens, if not hundreds, of other failed cases like Kozmo.
Introduction to cryptocurrencies
With all this in mind, you may be surprised that a traditional value investor like me started investing in Bitcoin a few years ago. After all, many people consider Bitcoin a typical speculative asset that risk-averse value investors like me should avoid. It doesn’t produce anything and has no earnings.
However, that didn’t stop me from getting involved with Bitcoin for the first time in late 2020. I bought 500 shares of Grayscale Bitcoin Trust (GBTC), which was almost the only option at the time if you wanted to invest in Bitcoin through a fund.
Since then, I have steadily increased my investment base by continuing to add to my GBTC position and acquiring positions in Grayscale’s newly launched Ethereum Trust (ETHE) and another Bitcoin exchange-traded open-end index fund (ETF) called Bitwise Bitcoin ETF (BITB).
Some may point out that based on the timing of my purchases and the prices of the underlying cryptocurrencies (Bitcoin and Ethereum) at that time and now, these investments have performed well overall, which may have biased me similar to my first gambling experience in Las Vegas.
However, it hasn’t always been smooth sailing. In fact, in the terrible year of 2022, my holdings were down over 80% from their cost basis. It was the biggest loss I have ever experienced in my investment history.
For many people, this would be enough to make them give up completely and never look back. But I did the opposite. I continued to accumulate during the downturn. I even did something I rarely do: buy more as the price went up.
For example, with my BITB position, the fund was only established after the U.S. Securities and Exchange Commission (SEC) approved Bitcoin ETFs earlier this year. When I bought BITB in mid-January, the price of Bitcoin was around $43,000, which was significantly higher than the price I paid when I increased my Bitcoin exposure through GBTC (around $28,000).
Why I hold cryptocurrencies
So, why would a self-proclaimed traditional value investor like me, who has held firm for over twenty years and avoided speculation, continue to increase investments in an asset that I believe has no intrinsic value? The answer is simple: my sons believe it has value.
In 2020, during the COVID-19 pandemic, my oldest son, who had just started first grade, asked if I had any Bitcoin. Despite all the social distancing measures in place, he overheard a classmate boasting about how much money his dad had made from Bitcoin and wanted to know if I had any.
I told him I didn’t and downplayed the value of Bitcoin. But even so, he wanted to buy some, and he was only six years old at the time.
It was at that moment that I realized Bitcoin had been around longer than both of my sons. This realization made me question my own biases and preconceived notions. If my young children saw value in Bitcoin, maybe I should reconsider my own perspective.
Moreover, as I delved deeper into cryptocurrencies, I discovered the potential they hold for the future. Blockchain technology, the underlying technology behind cryptocurrencies, has the potential to revolutionize various industries and create new opportunities. It is still an emerging field, and there is much to learn and explore.
While I still approach my cryptocurrency investments with a value-oriented mindset, I am also open to the possibilities and potential they offer. I believe it is important to adapt and evolve as an investor, always seeking new opportunities while maintaining discipline and a long-term perspective.
In conclusion, my embrace of Bitcoin and cryptocurrencies is driven by a combination of personal experience, the influence of my children, and an openness to the potential of blockchain technology. As a traditional value investor, I continue to apply my investment principles, seeking undervalued assets and maintaining discipline. However, I also recognize the changing landscape of the financial world and the need to explore new opportunities.Bitcoin has been present throughout their growth process. More importantly, Bitcoin has always been valuable to them. Since then, this concept has become even more deeply rooted.
In fact, my 10-year-old son checks the price of GBTC almost every day. He owns 10 shares himself, which he bought with his accumulated pocket money over the years. For him, he would rather hold onto these shares than have cash.
I also find that I have been accumulating more and more Bitcoin myself, which further reinforces his belief in the true value of Bitcoin (even though he was the catalyst for my venture into cryptocurrency investments).
Currently, my generation and the previous generation may have accumulated the most wealth. I believe this is one of the main reasons why the price of gold surged to a historical high last year.
We view gold as a hedge asset that can retain its value and withstand inflation because it has played this role throughout our lives. But what my eldest son knows about gold is the necklace he wears around his neck. The gold chain he is currently wearing was bought by his grandfather about 40 years ago for the same reason my son now holds Bitcoin: because for him, gold has always been valuable and will continue to be in the future.
Unfortunately, my father is no longer with us. When we, this generation, are gone, it will be up to our children to determine what is valuable and what is not.
Some may argue that comparing Bitcoin to gold is unfair because gold is a physical asset with intrinsic value in various technological products and industrial applications.
But to be honest, only about 7% of gold mined worldwide is used for these industrial purposes. The rest is used to make jewelry, gold coins, and gold bars.
I believe that the preference for gold in jewelry is not only because it is beautiful but also because people perceive it as scarce. This is also an important reason why gold is widely regarded as a store of value. More importantly, in my lifetime, the value of gold has never been lower than its actual intrinsic value.
The same goes for my sons and Bitcoin. We are all products of our time. I grew up in a world that relied mostly on analog signals. I was used to associating value with tangible things. Music and movies were distributed through physical media such as cassette tapes, VHS tapes, CDs, and DVDs.
Hell, I’m old enough to remember 8-track tapes and Betamax tapes. My sons have no idea what those things are. For them, streaming from the cloud is as natural as my friends and I renting videotapes from Blockbuster back then. They belong to the digital generation, where everything is created from scratch.
Since the people most likely to determine the value of Bitcoin in the future don’t need (or even want) it to have a physical form, Bitcoin doesn’t need to exist physically.
Be prepared to lose everything.
That being said, the cryptocurrency market still has many unknowns and high risks. The most crucial aspect is that the number of cryptocurrencies needs to decrease by about 99.9%. Comparing it to gold, there are 94 metals on the periodic table, but only three are truly considered and accepted as stores of value: gold, silver, and platinum. In contrast, there are currently about 270 cryptocurrencies trading on the popular cryptocurrency exchange Coinbase, and the total number of cryptocurrencies in the global market is close to 18,000!
All of my cryptocurrency holdings are concentrated in Bitcoin, with only a small allocation to Ethereum. In my opinion, these two currencies have the most legitimacy in the public eye and have deeply integrated into people’s worldview. They will essentially become the gold and silver of our current global digital economy. I guess [removed invalid URL] has taken the old road.
However, to invest in cryptocurrencies, one must be prepared for the risk of the entire market going to zero. That’s why if you plan to invest, it’s best to use money that you can afford to lose.
I am no longer the naive young person in my twenties who didn’t understand the consequences of foolish financial decisions and thought I could get rich overnight by jumping into the internet boom. I am well aware of the risks involved in these investments. But I also understand that the majority of the investment portfolio I have built for my family over the years is still invested in value stocks.
Continued adoption is key.
Of course, being accepted as a store of value or medium of exchange and retaining value is one thing. To make investing in Bitcoin at current prices worthwhile, there must be sufficient reason to believe that its price will continue to rise.
This largely depends on the supply and demand dynamics. The supply side is known and quite favorable because the total potential supply of Bitcoin is capped at 21 million coins (over 19 million coins have already been mined), and the growth rate of this limited supply decreases with each halving event.
This means that the key to price increases lies in increasing demand. The good news is that we continue to see favorable market dynamics that drive increased demand and adoption. The most significant event is the approval and launch of numerous Bitcoin ETFs in January 2024, as I mentioned earlier. In my opinion, this will be a major catalyst for a 66% surge in Bitcoin before the November 5th US election in 2024.
The remarkable surge in Bitcoin’s price since the election day also confirms this viewpoint. The price of Bitcoin recently surpassed $100,000 for the first time. This surge was driven by market expectations that the incoming president, Donald Trump, is a strong supporter of cryptocurrencies, and people anticipate that he will implement policies that further increase the demand for Bitcoin and other tokens.
Therefore, adoption is key. Most importantly, buying Bitcoin must be based on the belief that demand will continue to rise. For some, this is because they heavily promote the key advantages of Bitcoin, such as its decentralized blockchain technology that allows funds to be transferred quickly, accurately, and at extremely low or zero cost globally.
For me, this belief stems from my view of the people who are most likely to determine the value of Bitcoin in the future, not the present. Regardless of the motivation, as long as it leads to growing demand for Bitcoin, it will cause an increasingly imbalanced supply-demand relationship. Some Bitcoin bulls even predict that the price of Bitcoin will reach $1 million by 2030.
By then, my eldest son will be two years away from graduating high school. Why is this important? Because my purpose in investing in Bitcoin is not to get rich overnight. It is part of my financial planning, which involves providing funds for my two sons’ college education.
Assuming they both attend traditional four-year colleges and receive no financial aid, paying for their higher education will be the largest expense before my wife and I retire, much larger than our next largest expense, which is the remaining mortgage debt.
I know that when you read this, some of you may think my reasons for buying Bitcoin are absurd. It indeed goes against the principles I, as a value investor, believe in, and I cannot deny that.
If I am wrong, it will be the most expensive lesson for my eldest son and me. But it will not lead to financial ruin because my cryptocurrency holdings make up a small portion of our overall investment portfolio, and even if they all go to zero, it will not cause significant losses.
It should not jeopardize our ability to pay for our children’s education either because like many families, we have also been making more traditional investments for their higher education.
However, my cryptocurrency holdings are not insignificant, and if I am right, they will make this heavy economic burden much lighter. I may no longer be the carefree gambler I was when I was young, but even for someone like me, a traditional value investor, it is hard to resist the potential enormous returns.
This article is a collaborative reprint from DeepWave.