I’ve been watching Bitcoin/crypto/blockchain from the sidelines for a few years.  I’ve set up an exchange account, downloaded wallets, downloaded the blockchain onto my computer, and studied about it off and on for a few years.  I’ve never pulled the trigger on actually buying any of it, however.  I’m careful to use the word ‘buy it’ (as opposed to ‘investing in it’).  There is a big difference.

I’m a Libertarian who also believes that much of the modern-day financial assets are in an overvalued bubble (tin foil hat alert).  Obviously, I am right square inside the Bitcoin community’s target audience.  What’s not to like for this guy?!?  Seemingly, not much!

I own commodities (and alternate assets) in my portfolio right now for this exact reason.  I won’t rehash my thoughts on this because I cover those in full detail here:

Physical Gold & Silver

https://deanorolls.com/2018/06/08/physical-gold-and-silver/

Commodities

https://deanorolls.com/2018/02/18/aberdeen-bloomberg-commodity-index-etf-bci/

That said, I’m a stock guy.  I would love nothing more than to be near 100% allocated to equities but not at the levels of the past few years.  I’ve been pulling money offline and investing in non-financial assets for the past year or so.  This is an active decision of playing a little bit of defense with my portfolio.  The stock market keeps going higher (recently setting new highs).  I’ve thought it might roar higher for the past few months (as the charts have been pointing that direction).  I don’t mind missing out on it at all.  I still have a large portion of my overall portfolio in stocks (and will).  I am not ‘all in’, however.  In the past few months, I’ve nailed down exactly what these allocations need to be.  I’m a bit underweight stocks from where I’d like to be and a bit overweight commodities/bonds from where I want to be.  None of the allocations are too far out of whack however so I’m not chasing anything at this point.

Physical gold and silver are more of an alternative currency play than a commodity play in my portfolio.  For me, it is the equivalent of taking money out of the system (the financial system and/or fiat currency system).  It is an insurance policy more than an investment.  I have a full/max allocation to these assets at this time.  I don’t want to own/add any more to these positions.  I think they will hold their value well in the coming years/decades.  Less likely, but possibly, they might provide protection in a broader systemic event.  Bitcoin is described as ‘digital gold’ so maybe I need to own some of that too?!?!

First off let me tell you why I’ve never made an ‘investment’ in Bitcoin (or any other cryptocurrency). It is too hard to know if it will work out or not!

  • Bitcoin is not an investment if anything it is money.  It is like gold and silver for me…money…MAYBE!  People who are investing in it like it is an asset (that’s value grows over time) are not right.  Bitcoin is not an investment.  It only is valuable if people believe it has value and uses it as a store of value.  Today, not many people do this.  Only about $190 billion of value exists in all cryptocurrency “market cap”.  At the peak of the last ‘bubble’, it was around $890 billion (https://coinmarketcap.com/charts/).  This is all very small potatoes in the grand scheme of things.  Much like matter (which cannot be created nor destroyed) neither can money (well, unless you are a Central Bank).  The only way it becomes worth more (or has more ‘market cap’) is if enough people decide to use it as money.  They trade in their existing money for their new digital money.  They might…or might not do this.  Too Hard!
  • I’m not sure Bitcoin will be around in 10 years or that it will ‘win’ and be the cryptocurrency of the future.  It is probably too early to tell who wins the cryptocurrency revolution (if that even becomes a thing).  Bitcoin is very interesting in concept for sure.  Today it has about 70% ‘market share’ amongst cryptocurrencies.  In the early days of crypto, it had over 95%.  At a recent high in alt-coins, it got down to 32%.  I’ve never invested in any of it so far.  I would always come back to the point of comparing it to the Internet.  The early days of the Internet boom are littered with companies that came and went.  Some of the leading companies from that era don’t even exist today or were passed by later on by superior companies/technologies that came into existence much later.  Picking which ones would win was probably more luck than skill.  If cryptocurrency is going to be a ‘thing’ I’d imagine it will be much the same.  Companies and governments around the world are not just going to let something like this happen without trying to seize control of it.  I figured it will be lifechanging and I’d just be happy (likely) to benefit from however it plays out (much like I did with the Internet).  I was content letting others to hash it all out (and try to mint/lose fortunes in the process).  Too Hard!
  • Alt-coins seem like the most made-up thing anyone ever invested in.  “I’ve created some fake thing…it is now worth money…you should give me money for it…it is worth something…promise!”  Lunacy!  Backing out of that logic Bitcoin is nothing more than the original alt-coin (it was just first and seemingly, at the moment, the best).  So, people assigning value to it is probably also lunacy.  But people do crazy things (have/will).  It doesn’t mean I have to join them.  Too Hard!
  • Talk about money made up from thin air!  One of the big reasons people ‘invest’ in Bitcoin is because they are upset that governments are printing money out of thin air and flooding it into the system.  I think a big thing they’ve missed is that that is precisely what they have done.  Bitcoin is nothing more than some 1s and 0s on a bunch of hard drives all over the earth.  ‘Money’, literally, created from thin air.  I’ve often wondered if the Bitcoin peeps see the irony in this.  When they have arguments in the open-source community, they fork things and create all-new ways to create money.  Alt-coins are this on steroids…and not even as good.  Grandma says if it seems too easy or too good to be true it probably is.  You can’t just create money for free (unless you are the Fed…so far).  Too Hard!
  • I am highly skeptical that it becomes the currency that everyone on earth uses to transact with.  I’ve always thought the concept of the blockchain (which Bitcoin runs on) is fascinating and see many uses for it (most completely unrelated to Bitcoin/currency).  I was never sold that Bitcoin would translate into everyone on earth trading in their US Dollars for it.  Not going to happen.  I don’t even think it can happen as a matter of fact.  Too Hard!
  • The terminal value of it could very easily go to zero!    This is ultimately the reason I’ve never invested in it to date…too hard…and could go completely away!  Bitcoin felt more like a lottery ticket than an investment/money because in the end it might be worth something but could also very likely be worthless and go to zero.  Losing all your money is a bad, bad thing! Way…Too…Hard!

So, why am I buying it now after watching it (rise and fall and be hotly debated) for a few years?

  • More insurance!  To me, this is important as the Fed cranks up ‘Not QE’ again.  We are taking unprecedented steps to avoid/fix something.  No one seems to want to talk about what the problem is.  Everyone seems content to ride the markets to all-time highs.  My guess is the problem being solved must be big and the solution might not be too good.  If people don’t know how Bitcoin is going to turn out…they also don’t know how unlimited money printing is going to turn out.  I’d like to own some insurance.  Bitcoin is another way to have this insurance.  It is like gold, digital gold.  Not everyone owns gold/silver either these days but that doesn’t mean it is a bad way to allocate some capital.  It still has value (and has for many thousands of years).  Unfortunately, just because it has value doesn’t mean it is the best way to allocate capital (and I don’t think it is).  I do think it is worth some allocation as it is a way to hold an alternative asset to current financial assets.  I don’t expect that my house is going to burn down either…but I still have homeowner’s insurance on it!  Bitcoin and gold are my insurance against today’s financialized world.
  • If any current crypto wins I think it is Bitcoin.  It is a fairly amazing technology out of the box and has done a decent job of fulfilling its purpose.  There have been problems along the way for sure.  Name a brand-new technology that doesn’t have problems.  The fact that it is completely open-source and the direction it goes is decided by the community using it (and developing it) is a massive advantage for it.  No one person, group, government, or company really controls it.  One of the big things going against it is also this (that leaves a lot of enemies out there).  Regardless, I think being the first mover, in this case, is a huge tailwind.
  • Bitcoin has done what it is designed to do, for the most part, so far.  Some would argue that it has failed because it hasn’t done x or y.  I’m a skeptic naturally and don’t think it is ‘all the way to bright’ by any stretch BUT it has definitely not failed at this point.  It is finite, it is peer-to-peer, it hasn’t been hacked, and it works as a cost-effective, medium of exchange (payment method).  It has been doing all this for a decade now.  Over the past couple of years, it has processed between 175k and 400k transactions per week (https://www.quandl.com/data/BCHAIN/NTRAN-Bitcoin-Number-of-Transactions).  This is very real.  It is nowhere near the 150 million per day that VISA completes.  But VISA wasn’t built in 10 years either (they’ve been going strong for 60+ years)!  What will Bitcoin look like in 60 years?  My guess is a lot different than it does today (if it is still around).
  • Bitcoin has a rising interest from more and more investors and workers.  There continues to be a huge interest in crypto/digital currencies at this time.  It seems inevitable that soon enough we will all transact in some form of digital currency and no longer have paper currencies of any form in the system.  I think in the end we will wind up with some centrally controlled digital currency.  I think it is less likely that an open-source version of a digital/cryptocurrency wins the day in the end.  That said, I don’t think there is not a place in a legitimate world where it doesn’t have some value to society.  I think it might just become a commonly accepted global currency used by participants across the world (just like any other currency might be used).  In some ways it already has.
  • Bitcoin does allow me to pull money out of the fiat money ‘system’ which I think is broken.  If you believe that all fiat currencies are manipulated you are not excited about holding wealth denominated in them.  If you think the currency is manipulated then you have to recognize that financial assets are also manipulated.  Financial assets, particularly stocks, should help fight the ill effects of the problem and the inflation it is creating.  Some asset classes allow you to completely bypass the entire system.  Gold is one of these assets.  It is not tied to any particular currency but holds value against them all.  It is outside the financial monetary system.  Bitcoin is similar to this.  As long as the Bitcoin community adheres to its mandate/rules it should have a finite supply and hold its value in relation to financial assets.
  • In the end, it doesn’t matter what I think.  If enough people think Bitcoin is a good thing it will come to pass.  I saw a chart recently of all the different technologies that are being layered on top of the Bitcoin concept (https://medium.com/digitalassetresearch/a-look-at-innovation-in-bitcoins-technology-stack-7edf877eab14).  These are smart people spending time and money to build awesome technologies on top of an open-source, peer-to-peer digital payment tool.  There are a lot of smart people (with smart money) investing in this technology (as well as other crypto/digital currencies).  They are working on ways to make the current solution scale to be a solution that will work for the masses.  I believe it will ultimately amount to something.  Bitcoin might not be the end game-winner but it has enough history and momentum that I believe it has as good a chance as any.
  • I’m often wrong!  As I’ve said I am skeptical that Bitcoin can/will carry the day.  Even though I’m not sure this is the solution I think there is ‘enough’ [information, reasons, risks, etc.] to make it worth some allocation.  There was an episode of Seinfeld where George Costanza decides that he will start doing the opposite of what he would normally do because he is always wrong.  This allocation is a hedge in my own stupidity and bias.  It is an anti-confirmation bias allocation.  This inherently means it will be the most money I will ever make in my life!  Ha!
  • It’s not a lottery ticket.  There are several fairly new ‘valuation models’ that are floating around that attempt to place a value on the current Bitcoin stockpile today and into the future.  Some of these are fairly off the wall.  Some others make a lot of sense.  So, if you can place a value on it in a way that makes complete sense to you then it has to have some value.  Right?!?  Everybody knows valuation models are always right.  Ha. That makes it totally NOT a lottery ticket!
  • It’s a lottery ticket.  I have never bought a lottery ticket in my life.  I think it is stupid.  I don’t even like going to casinos.  I work too hard for my money to flush it.  That said, for me, this is as much like a lottery ticket as anything in my portfolio.  This is why it is a small allocation overall.  It is small enough that if it goes away, I won’t really miss it.  It is meaningful enough that if Bitcoin is successful it will be a worthwhile allocation.  I’m prepared for either.

So, I’ve purchased some Bitcoin in the last little dip down to $6,600 (USD) in mid-December.  I’ve researched what I believe is the best way to do this and the best way to hold the allocation going forward.  The amount isn’t lifechanging and is a small percentage of my overall portfolio.  I might add to it a bit more over time depending on how things play out.  I will likely not sell this position unless I see some giant fundamental change that I don’t expect at this point (and if that happens it will likely be too late).  Otherwise, I’ll just hold the position forever.  It will probably be one of my more interesting positions since this space is kind of like the wild west of money these days (and likely for some time to come).  HODL!

NOTE TO FUTURE SELF: At some point in the future you will likely look back at this writing and think “I knew I shouldn’t have done that…I knew it…”.  I’ve read financial books my entire life filled with talk of bubbles, manias, and conmen.  At this point, I’ve talked myself into believing this is not that.  This is probably stupid!  Just remember:

  1. It is only money; you can always make more money.
  2. It is better to regret things you have done than to regret things you haven’t done.
  3. Enjoy the bridge you are living underneath.  It isn’t as bad as you think!

12/27/2019

Published by deanorolls

Well, if I told you that you wouldn't need to go to my website...now would you?!?!

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