I Finally Invested in Bitcoin. Here’s Why.
After half a dozen podcasts, part of an audiobook, and countless articles from experts and bloggers: I finally bought $2 of Bitcoin. Not two Bitcoin, mind you. Two dollars worth of the stuff. At the time of initial investment, two whole Bitcoin would have set me back about $40,000, or about one maxed-out Kia Telluride. I had neither. My investment worked out to roughly 0.00008 BTC. Not an earth-shattering number, but a definitive moment of personal decentering in terms of economic mindset.
Why did I do it? What compelled me to take two hard-earned dollars and put them into a blockchain cryptocurrency that only a 26-year-old savant on Twitter actually seems to understand? And why now?
Three things changed my mind: YOLO, FOMO, and HODL.
BITCOIN? YOLO!
For many, investments took a nosedive in 2020. We were no different. While the stock market rose steadily and considerably, my wife and I experienced a domino knockdown of COVID-related financial setbacks, so we were forced to sell a significant portion of our portfolio to cover expenses.
Add to that a rather unsung anti-hero of the global pandemic meltdown that showed its true colors: cash investment depreciation. (Bring that one up during your next Zoom happy hour, and it might very well be your last. You’re welcome.)
Hard American currency didn’t inflate wildly, but the Annual Percentage Yield (APY) on cash holdings took a major hit — repeatedly. Just the other day, I received yet another email from one of my financial institutions letting me know that whatever little store of US dollars I might’ve held in their accounts was going to lose half — a full 50% — of its current APY, which had already been lowered substantially earlier in the year. Once you internalize the fact that cash loses its value in semi-regular intervals — a movie ticket only set you back 48¢ in 1952, for instance, the year both my parents were born — you begin to see the importance such things hold.
Naturally, lower income means less discretionary spending, which means fewer dollars available to invest for the road ahead — a real bummer for people like me who actually enjoy finance and economics. But we have debts to pay off like any other Lannister, along with a desire for future sustainability and actualization for ourselves and our (eventual) children. Even so, neither my wife nor myself currently has an employee-sponsored retirement package.
With all this in mind, and our income just starting to see the light of normalcy at the end of the tunnel again, I knew we needed to re-start our investing. You only live once, as the saying goes, and we want to make the most of it.
ALL ABOARD THE BITCOIN BANDWAGON
All this poses its own obstacles:
- How do you invest with so much income already earmarked?
- Where do you focus your precious investing dollars to get the most bang for your buck?
- Do you invest at all? Or do you simply direct energy at mitigating debt allocation?
We all know we need to hedge our bets with a diversified portfolio: market ETFs, a handful of historically strong individual stocks, a few bonds, gold, etc. That much is relatively certain. For these, I have a stable of standbys: Wealthfront, SoFi, Robinhood, inter alia.
In a “normal” world, there would also be a good argument to hold onto some cash, too. As we know, however, our particular timeline watched normal float into the clouds many moons ago, so I went looking for something to replace otherwise abysmal cash APY bank offerings.
Here was the surprise. It soon became clear that cryptocurrency might offer that very opportunity, and we might just be running out of time to get in on something faintly resembling the ground floor.
BITCOIN: A LITTLE BACKGROUND
The undisputed leader in the crypto-world is Bitcoin. There are others: Ethereum is a very distant second; Litecoin hangs out in the top ten; Doge is a particular fan favorite, though it trades more like a penny stock.
In fact, it turns out that Bitcoin has become not only something of a darling among nontraditional investors, but even a cash holding replacement for some large institutions looking for creative avenues to grow otherwise static assets. Or, as the Robinhood Snacks podcast recently put it: “corporate FOMO”.
One company in particular, Microstrategy, recently converted $425 million of their cash into Bitcoin.
Read that again.
$425 million. In Bitcoin.
The CEO, Michael Saylor, has become something of a crypto-evangelist. On the company’s website, Mr. Saylor explains his reasoning: “Bitcoin is a bank in cyberspace, run by incorruptible software, offering a global, affordable, simple, & secure savings account to billions of people that don’t have the option or desire to run their own hedge fund.”
He’s got a point. Mr. Saylor also points to the depreciation of hard currency over time as a key motivator for his company’s bullish turn toward the Bitcoin cryptocurrency over cash. This is a major selling point for Bitcoin believers who relate crypto to gold. John Rekenthaler, VP of Research at Morningstar says, “I put it in the same bucket [as gold].
Mr. Saylor will also remind anyone who’ll listen that Bitcoin has often outperformed a wide array of traditional investment instruments. And he isn’t alone. Morgan Stanley recently announced an increase of their ownership in Microstrategy to 10.9%.
For further fodder, consider the Vanguard ETF $VOO, which tracks the S&P 500. That fund was up roughly 14.5% over the last year, as of December 24, 2020. Over that same period, Bitcoin was up over 220%, and growing. Extending the event horizon a bit from the same day in December, we can see that the S&P 500 is up about 83% over the last five years. Same timeframe for Bitcoin? Over 5,200% growth.
Skeptics will remind Bitcoin enthusiasts like Mr. Saylor that cryptocurrencies as a whole are a Wild West of volatility, making it a risky investment at best, and at worst a poor substitute for cash, relegating Bitcoin to nothing more than a gamble, more akin to betting on the Super Bowl than the stock market.
Take the example of February and March of 2020, when the world was beginning to collapse on the news of the spread of COVID-19. On February 11th, Bitcoin was trading at $10,360 USD. Exactly one month later, on March 11th, it had fallen to $4,840. That’s a drop of over 50%. By contrast, the Vanguard S&P 500 ETF only fell from $308 to $250 per share, a drop of only 19%.
This is an isolated example, but a telling one, and there are plenty of others like it, such as the 2017–2018 Bitcoin price drop (or correction, depending on whom you ask). On the other side of the fence, some market analysts actually tout the volatility of Bitcoin as a hedge against the stock market, because they don’t always trend up or down in tandem. As with so many investment opportunities, so much depends on perspective.
BITCOIN: THE “HODL” MENTALITY
In December of 2017, Bitcoin had ridden a wave to over $19,200. One year later, almost to the day, the price per coin had plummeted to $3,199, a drop of over 80% of its value. Crashes like this can and do occur in the history of the stock market, too. They often take place in connection to external world events (such as the coronavirus pandemic) and balance out over time.
This is why “buy and hold” is such an effective strategy. Publicly traded equities as a whole may lose some value in the short term, but they typically return (and then some). As the banal adage goes, historical returns are not an indication of future success, though more often than not the stock market as a whole climbs right back. With Bitcoin, we have seen something similar, but in the cryptocurrency world they lovingly call it “HODL”.
Of course, with such a short track record, it’s hard to know whether Bitcoin will also tend to bounce back as the stock market has done repeatedly in its long and storied history.
So, Why Bitcoin? Why Now?
Once enough individuals and institutions vouch for a specific financial vehicle, it becomes harder and harder to deny it outright, to insist that it’s nothing more than a Tamagotchi or Beanie Baby. With major companies and even some banks touting cryptocurrency as a replacement for cash savings (JPMorgan Chase analysts predict Bitcoin could top $146,000), I find myself with fewer and fewer reasons not to take the plunge — and more and more reasons to do so.
In other words, the balance has shifted. In other other words, sometimes the bandwagon gets it right.
The scales have begun to tilt in favor of diversification into Bitcoin as an acceptable alternative to cash savings. This does not mean anyone should put all their money into crypto or take out a massive loan to do so.
Naturally, all of this might be said for many publicly traded stocks that have soared over the years. Facebook, Apple, Amazon, Netflix, and Google (FAANG) are household names now, but they were not always that way. Each one of these companies had to start somewhere and to build up to where they are now.
But things might not have gone this way at all. As the biologist Stephen Jay Gould once said of history on earth, “Alter any event, ever so slightly and without apparent importance at the time, and evolution cascades into [a] radically different channel.”
Though it is not a bank, a company, or an evolutionary science, Bitcoin is in a similar position today. One might even argue that Bitcoin’s not being a company actually works in its favor, and many cryptocurrency enthusiasts do exactly this. No one person can derail Bitcoin, they say, by making a boneheaded decision at the corporate level or issuing a faulty product or getting involved in some messy scandal.
In many ways, Bitcoin is essentially run by the people and for the people. Recent work by Jack Mallers (the Twitter user mentioned earlier) has shown that it even has the potential to liberate unbanked and underbanked communities, such as those that rely heavily on remittances. Above all, this aspect is perhaps its widest moat and why so many people invest so much of themselves into it — financially as well as personally.
Bitcoin may have the potential to replace fiat currencies (such as dollars, pounds, or euros) as the gold standard (pun very much intended). That much remains to be seen. While an exploration of this would require much more space to unpack, suffice it to say that it seems more is working in Bitcoin’s favor than not these days. As someone always on the lookout for diversification and a potential for straightforward cash appreciation, it’s simply become far too much for this particular investor to ignore.
Disclosures: I own partial shares of Bitcoin. Learn more about Bitcoin on bitcoin.org.
