“Is this a good time to buy Bitcoin?”
It’s a question I get asked more than almost any other, so let’s figure out how you can find your answer.
Since I’m going dig deep into this topic, I’ll start off by sharing my answer to this question so it’s not a distraction:
- My opinion (not my advice) is I think everyone should own a little Bitcoin.
- Open up an account and deposit 1% of your current savings.
- Set up a 12-week automatic weekly buying program. Purchase an equal dollar amount of Bitcoin each week until you’ve invested the full 1% of your savings.
- Assume you will hold this investment for at least five years.
- UNLESS you have no savings. Then you shouldn’t invest! You should start saving.
That should satisfy the buying itch in a reasonable and safe way for at least the next couple of months. Now that that’s out of the way, let’s dig deeper.
“Is this a good time to buy Bitcoin?”
First, and most important, I don’t think this is the right question. No one really knows if Bitcoin is going to soar 100%, drop 50%, or do nothing. It’s important to have an educated guess (aka a belief) about the future of Bitcoin, but there are no guarantees.
The uncomfortable reality is that you are on your own, my friend. Investing is a solo sport. It’s a lonely occupation. It’s your money and only your money!
Welcome to the world of risk.
So, if that’s not the right question, what is?
What’s at stake
Before you even think of opening your wallet to buy Bitcoin, find out if it is right for you. Your mind is likely in motion on this topic already. The media is tapping into fear and greed.
We’ll start with the greed.
If you had invested $10,000 in Bitcoin five years ago when one Bitcoin was $440, you would have had $1,136,364 on February 16, 2021, when it crossed the $50,000 level.
Now here is some fear.
On the other hand, the same investment would have gone from $443,182 on December 15, 2017, to $73,864 one year later. That’s an 83% drop!
Do you feel like you’re on a roller coaster? You have to arrest this movement.
In 1999 I heard one of the most profound things ever said about investing. I had recently met a legend in the world of trading – Jake Bernstein. Author of more than 50 books, Jake is one of the all-time greats. At the time I had no idea what I was doing in the markets. But I did have the wits and guts to ask him this question, “What’s the difference between the winners and the losers?”
Jake said, “The winners don’t need the money.”
Over the past two decades his answer has formed the bedrock of my investing and trading philosophy.
What does it mean to “not need the money?” It means you have confidence (your vision of the future), you have coherence (your ideas make sense to you), and you are comfortable with the level of risk, whether you win or lose.
The head, the heart, and the gut
Where do you start with Bitcoin?
Sit down and steady your breathing. Go outside and take a walk, preferably in nature. Unplug from the media and look inside. Check in with your head, heart, and gut.
- Head: Do you know what Bitcoin is? Do you know why it is valuable? Do you think it’s likely to increase in value?
- Heart: Do you support its mission? Do you share values with other investors in the Bitcoin community?
- Gut: What does your gut have to say about Bitcoin? Don’t think too much. Just ask your gut, “Yes or no?” Note the response.
I’ll share my answers to these questions … but it’s really important that you answer them for yourself first.
Here are my answers:
Head
I believe that we are moving into a new digital reality. It’s being created before our eyes. People are accepting that purely “digital property” can have value. Case in point, the recent sale of digital artwork (just a single jpeg file!) that sold for $69 million at Christie’s.
Blockchain is the future of our digital lives. It’s as big an innovation as the Internet. It will enable a new world of digital property rights. In the new digital virtual reality, data is gold. Blockchain is what allows us to say that we own certain pieces of data and then exchange the data we own with others that see its value. And Bitcoin is the gold standard when it comes to cryptocurrency and blockchain.
It still takes some getting used to, especially if you’re over 50. But get used to it, because it’s coming … like a freight train. More and more, we’re living in a virtual reality. And BIG money is being invested in this new reality. It’s time to let go of any vestiges of grumpiness and incredulity.
So, my head is all in. Check.
Heart
One of my personal concerns is privacy. I’m uncomfortable with a world where massive corporations gather data from billions of people and then use that data in ways that we don’t understand with algorithms we can’t see.
I want a world where people have sovereignty over their data, have a say in what happens with their data, and can decide how they want to use it. I’m also passionate about what we can do for ourselves with more and more access to the data we generate. There is huge potential for improving our lives with data – not only health data but wealth data too!
I believe that cryptocurrency and blockchain enable a new Internet where individual privacy and data sovereignty is respected. I’m not completely naïve. I realize that new technology is a double edged sword. In the wrong hands, it creates opportunities for privacy breaches and even surveillance by big governments and big corporations.
But, in our new digital virtual reality, I think the privacy and digital property rights enabled by cryptocurrency and blockchain are a net positive for most people.
My heart is on board. Check.
Gut
Remember, I keep this brief. My brain has had plenty of time to chew on this. I don’t want to give it enough time get involved here, too.
What does my gut say? “Yes, but I think that Bitcoin going from $3,000 to $60,000 in a little over a year is frenzied.”
My gut is in. Check.
Will Bitcoin go up or down?
It’s clear that I’m in. Are you?
“How can I know if you haven’t told me whether Bitcoin is likely to go up or down in the near future?” you may be asking.
I don’t know. No one knows. Don’t believe anyone who tells you they do.
I believe over the next few years Bitcoin is more likely to go up in value than down. I also believe that the worst case scenario is unlikely but possible, Bitcoin goes to zero. I am on board with a future that involves Bitcoin. If you are too, then it’s time to take the next step.
Bitcoin is the classic asymmetric bet. The value could increase exponentially, as it already has, or it could drop precipitously, as it already has. It could even go to zero if, as some credible people fear, the SHA-256 encryption algorithm gets cracked by a quantum computer.
Anytime an investment could go to zero, you shouldn’t invest more money than you can afford to lose.
I invest 10% of my money in asymmetric bets and spread it across a few different opportunities. This is how venture capital companies invest. They make 10 bets and hope that one or two of them will go to the moon. They expect that several will completely flame out, and the remaining three or four will be a wash.
10% is aggressive. If you’re not comfortable with the possibility of losing 10% of your money, allocate less or nothing at all. Of my asymmetric bets, Bitcoin is my biggest bet – 4% of my total investable capital.
I bought most of my Bitcoin a few years ago. At the time I didn’t have an exit strategy. It was a moonshot and I planned on holding indefinitely. With the recent surge, I set $50,000 as the sell target for half of my Bitcoin. I’ve been gradually selling into the rally as it approached and exceeded $50,000.
I plan on holding my remaining Bitcoin indefinitely. I believe that it has a huge asymmetric upside. I think that Bitcoin could potentially play a role in a new reserve currency system for the global digital economy. I think that it could go to $1M per Bitcoin. I’m well ahead on my Bitcoin investment, and I’m playing with house money.
“Great,” you say, “You’re sitting pretty. But what the heck do I do? I haven’t bought any Bitcoin yet?”
Do the same thing I did. Yes, you’re starting at a higher price than I did, but when I was buying the price was very high to me! Buying Bitcoin back then was really hard. It will always be hard. Welcome to the world of asymmetric bets.
Find something you feel strongly about, and make sure it’s endorsed by some people you respect and admire. Then figure out how much money you can afford to never see again – or at least not see for five or ten years.
Now you’re ready to take the plunge … almost. You need a parachute. But don’t take my word for it.
I recently interviewed Jack Schwager – author of the Market Wizards series. Jack has done in-depth interviews and research on dozens of wildly successful investors and traders. I asked Jack what these investors have in common.
He said the one thing they all have in common is a commitment to risk management. That was music to my ears! Then he said something that blew me away, “90% of risk management boils down to knowing when you are going to sell before you buy.”
I’ve known for a long time that selling is more important than buying. My first big success was technology I built in 2004 that helped investors know when to sell. But what Jack said struck me in a new way.
What this means is that if you make this one single change in your investing and trading strategy, you’re 90% closer to joining the world’s most successful investors. It’s simple.
Know when you’re going to sell before you buy!
Admittedly, my Bitcoin sell strategy was a little more vague when I started. But I went into it with my eyes open. I didn’t invest more than I could afford to lose, but I did invest enough to make a meaningful difference in my financial future.
Bottom line, anytime you invest, decide when you’re going to sell before you buy.
What’s next
As I shared earlier, I decided I believe in Bitcoin, because it is an innovative technology that will form the basis of a more privacy-focused internet. I decided to hold for as much as 10 years, sell half after 1,000% gains, and hold the rest indefinitely.
This is my strategy. There is no right way. The main thing is that I have a plan and I’m sticking to it.
Billionaire hedge-fund manager Cliff Asness is widely regarded as the father of momentum-based investment strategies. He did his PhD at the University of Chicago under Eugene Fama, the economist often credited with consolidating the academic theory of the efficient market hypothesis (EMH).
All this to say that Asness is a smart guy, which is what makes one of his most famous quotes so striking:
“I used to think being great at investing long-term was about genius. Genius is still good, but more and more I think it’s about doing something reasonable, that makes sense, and then sticking to it with incredible fortitude through the tough times.”
Cliff Asness
If it’s good enough for Cliff Asness, it’s good enough for you and me. Don’t try to be smart. Be reasonable. And stick to it with incredible fortitude through the tough times. That’s how you make money in the markets.
Your exit strategy
This is a fascinating step in the process. You’ve rested and decided you want in. You’ve invested and knew when to sell before you bought. You’ve stuck to it with incredible fortitude through the tough times.
That, in and of itself is, winning.
Of course, this kind of winning doesn’t mean that you’ll make a profit every time you invest. Regardless, if you take it this far, you’ve won! If you take these steps consistently with a sequence of opportunities, you put yourself in a great position to grow your wealth.
Stay focused on the forest and accept the fact that some trees will thrive and some won’t. That’s the way forests (and portfolios) work. It’s not personal.
Let’s take a quick look at the different kinds of gains that you might keep in this important final step.
- Irrational loss: You broke your rules by not sticking to your plan and took a bigger loss than you intended. Ouch. It happens. You’re human. Put this one in your journal. Burn it into your memory in hopes of not making the same mistake again.
- Rational loss: You determined your maximum acceptable loss for this investment and you stuck to it. Congrats! It’s a huge win even though it’s tinged with disappointment.
- Rational profit: You want this to be your most common outcome. Your response to a rational profit should be about the same as your response to a rational loss. You stuck with your plan. It’s nice that it’s a winner, but the real win was the execution.
- Irrational profit: One of your investments has paid off beyond your wildest dreams. Undoubtedly this one has been a wild ride, but you did it. You kept your monkey mind out of it. Instead of taking a “rational profit” you strapped yourself to the mast like Ulysses and let your winner ride, and it paid off big time. That doesn’t happen unless you’re sticking to it with fortitude. Make sure to do something for yourself to celebrate. This calls for positive reinforcement!
Bitcoin is my biggest gain. I acted on conviction with an amount of money that made me uncomfortable but wasn’t going to change my life if Bitcoin was a bust. Bitcoin has been an irrational profit for me and hopefully will be the source of continued irrational profits to come.
Why do I call it “irrational profits”? They aren’t really irrational. They are only possible with the most acute rationality. It’s actually irrational to believe we know what’s going to happen in the future. What’s rational is to say, “I don’t know what’s going to happen so I’ll spread my bets around and let the markets decide. Then I’ll focus on the bets that are working.”
Sticking with (and keeping) game-changing profits feels irrational, even though it isn’t. This feeling we have is a bias that everyone has. It’s called “loss aversion.” Two Nobel prizes in economics have been awarded (Daniel Kahneman (2002) and Richard Thaler (2017)) for documenting this bias in the financial decision making software that lies between our ears.
Here’s how loss aversion gets us into trouble. We hate to lose, but this bias plays out differently depending on our frame of reference:
- When an investment is losing, we don’t want to sell. Selling means we have to swallow a loss. So we hold on and double down – anything to not take the loss!
- On the other hand, when our investment is up, we become afraid of losing our profits and we start getting itchy to sell and take those profits off the table.
We are slow to sell our losers and quick to sell our winners. Hmm. Sound like a recipe for disaster? It is.
What I’ve found is the only thing that really stops us from harvesting regular irrational profits is a feeling (a bias) that, “this seems crazy and I better get outta here before I lose the profits I already have.”
Remember … The winners don’t need the money. When we can put ourselves in a position to “not need the money,” we have the opportunity to make more money than we dreamed possible.
Most people assume that “not needing the money” is about money, as in, “I’m already rich so I don’t need the money.” It’s not. It’s about psychology. Not needing the money is a state of mind.
If you’re alive and can take a deep breath, you’ve got food in the fridge, and you have family and friends, then you’re already rich. So take a minute to bask in your wealth.
While you’re at it, if you’re a fan of southern rock, check out the song Whiskey Bottle by Uncle Tupelo. Listen for the money verse:
There’s a trouble around, it’s never far away
The same trouble’s been around for a life and a day
I can’t forget the sound, ’cause it’s here to stay
The sound of people chasing money and money getting away
Hopefully the epic crashing guitar is still ringing in your ears, but whether it’s John Maynard Keynes, Daniel Kahneman, or Uncle Tupelo, the idea is the same – when you’re chasing money, the money’s getting away.
In conclusion, we started out with a question, “Is this a good time to buy Bitcoin?” Hopefully you’re starting to see what’s wrong with this question. For starters, there will never be a good time to buy Bitcoin. It will always be stressful. You will never know the future. More important, the answer to this question is different for different people.
Instead of, “Should I invest in Bitcoin?” ask yourself, “How can I invest in Bitcoin in a way that I can be a winner who doesn’t need the money?”
Finding answers to questions is often more about asking the right questions. With a better set of questions, we can start on the journey to some real answers.