Why Does an Old-School Investor Embrace Bitcoin?
My first trip to Las Vegas is still vivid in my memory. It was just one year 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. The smaller, more intimate gambling tables in comparison to the big casinos on the Las Vegas Strip, along with the generous perks, made it the ideal place for someone my age.
Even after 27 years, that memory is still fresh. I remember playing blackjack for several hours. We started at a table with a minimum bet of $10, but a streak of good luck quickly prompted us to increase our bets. In the first two days, I won about $1,700. However, luck turned against us on the third day. By the evening, my friend went from winning a few hundred dollars to losing $750. Frustrated, he decided to call it a night and went back to the hotel.
My situation was worse. The $1,700 profit I had dwindled down to just $300. But unlike my friend, I didn’t want to quit. Losing that much money left me with a sense of dissatisfaction, so I took the remaining $300 and saw an empty table with a minimum bet of $100. I thought, why not give it a try?
Lady Luck smiled upon me again, and in less than 20 minutes, I turned that $300 into $3,000. By the time I left, I had won a total of about $3,600. For a 23-year-old living in New York City in the late 90s, that was a significant amount of money.
Lessons from my early stock investment experience
I bring up this story because early experiences often shape one’s perception. For me at that time, my first trip to Las Vegas was a perfect experience. I gambled without any reservations, fueled by a combination of extraordinary luck and 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 applies to stock investing. My first exposure to stocks was when I started working for Forbes magazine. It was 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 for all things internet-related, whether it was new websites or companies supporting internet infrastructure development.
These three stocks soared by 66%, 92%, and 99% in just three months. The biggest winner in this frenzy was Qualcomm, whose stock price had skyrocketed by about 2,600% the previous year. No, that’s not a typo.
At that time, I had saved up some money and opened my first brokerage account. Timing couldn’t have been worse, as it was the beginning of the internet/tech stock crash. The first two stocks I bought were the ones my department recommended in my first three months: 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 on to those stocks and watched them plummet along with the market. In the end, I lost 75% to 80% of my investment. It was a painful lesson that made me realize I had no idea about stock investing and shouldn’t have ventured into it.
Becoming a value investor
Things changed in the following years. I pursued the Chartered Financial Analyst (CFA) program and became a stock analyst, accumulating experience in finding undervalued stocks across various industries. However, the painful experience of my first stock purchases remained etched in my memory. I lost a lot of money on those two stocks because, like many at the time, I fell for the hype.
Influenced by my initial stock investing experience and the value-oriented strategy I adhered to in the stock recommendation service I worked for, I tried to avoid market speculation as much as possible.
I studied Warren Buffett’s investment philosophy and read “Security Analysis” by Benjamin Graham and David Dodd, which is still considered the bible of fundamental analysis. I started primarily buying stocks of companies that I researched and believed were significantly undervalued compared to their actual worth. In other words, I became a dedicated value investor.
This meant looking for companies with strong future cash flow potential and being disciplined enough to only buy when the stock was significantly undervalued. For example, after the stock market crashed following the 9/11 terrorist attacks in 2001, our department recommended Amazon stock. At that time, the stock price was $7.48, and I bought some for myself as well.
However, less than four months later, when we advised subscribers to take profits as the stock price reached $12.20 after the approval of a Bitcoin ETF by the U.S. Securities and Exchange Commission (SEC). When I bought BITB in mid-January, the Bitcoin trading price was around $43,000, significantly higher than the price I bought Bitcoin through GBTC (around $28,000).
Why I hold cryptocurrencies
So, why would an old-school, value-oriented investor like me continue to increase investments in an asset that I believe has no intrinsic value? The answer is simple: my sons see value in it.
In 2020, during the COVID-19 pandemic, my eldest son, who had just started first grade, asked me if I had any Bitcoin. Despite all the social distancing measures in place, he heard a classmate bragging about how much money his dad made with Bitcoin and wanted to know if I had any.
I told him I didn’t and even dismissed Bitcoin as worthless. Nonetheless, he still wanted to buy some, and he was only six years old at the time.
It was then that I realized Bitcoin had been around longer than both of my sons. This realization, along with the curiosity and interest my sons showed, made me reconsider my stance on cryptocurrencies. I started researching and learning more about Bitcoin and Ethereum, the two main cryptocurrencies at the time. The more I learned, the more I saw the potential and value they offered.
In late 2020, I bought 500 shares of Grayscale Bitcoin Trust (GBTC), which was virtually the only option for investing in Bitcoin through funds at the time. Since then, I have steadily increased my investment base by continuing to accumulate GBTC and adding positions in Grayscale’s newly launched Ethereum Trust (ETHE) and another Bitcoin Exchange Traded Fund (ETF) called Bitwise Bitcoin ETF (BITB).
Some might argue that based on the timing of my purchases and the prices of Bitcoin and Ethereum at the time and now, these investments have overall yielded decent returns, which might create a bias similar to my first gambling experience in Las Vegas. However, it hasn’t always been the case. In fact, during the terrible year of 2022, my holdings at one point suffered a more than 80% drop from their cost basis. In dollar terms, it was the largest investment loss I had ever experienced.
For many people, that would be enough to give up and never look back. But I did the opposite. I continued to accumulate during the downturn and even did something I rarely do: buy more as the prices started to rise.
Take my BITB position, for example. This fund was established only after the U.S. Securities and Exchange Commission (SEC) approved Bitcoin ETFs earlier this year. When I bought BITB in mid-January, the Bitcoin trading price was around $43,000, significantly higher than the price I bought Bitcoin through GBTC (around $28,000).
To conclude, as a value-oriented investor who has stayed true to my principles for over 20 years, I have embraced Bitcoin and other cryptocurrencies because they have captured the interest and belief of my sons. Their enthusiasm has led me to reconsider my initial skepticism and explore the potential value that cryptocurrencies can offer.Bitcoin has always been present throughout their growth process. More importantly, Bitcoin has always had value for them. Since then, this concept has become deeply ingrained.
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. For him, he would rather hold these shares than cash.
I also find that I have been accumulating more and more Bitcoin, which further convinces him of its true value (although he was the one who sparked my interest in cryptocurrency investment).
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 soared to a historic high last year.
We consider gold as a hedge asset, capable of preserving value and resisting inflation, because it has played this role throughout our lives. But my eldest son’s knowledge of gold is the necklace he wears around his neck. The gold chain he is wearing now was bought by his grandfather about 40 years ago, for the same reason my son now holds Bitcoin: because for him, gold has always had value and will continue to do so in the future.
Unfortunately, my father is no longer with us. When our generation is gone, it will be up to our children to decide what has value and what does not.
Some may say that comparing Bitcoin to gold is unfair, because gold is a physical asset with intrinsic value in various technological and industrial applications.
But to be honest, only about 7% of gold mined is used for these industrial purposes. The rest of the mined gold is used to make jewelry, gold coins, and gold bars.
I believe the reason gold used for jewelry is favored 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.
Damn, I’m old enough to remember 8-track tapes and Betamax tapes. My sons have no idea what those things are. To them, streaming from the cloud is as natural as my friends and I renting VHS tapes from Blockbuster back in the day. They belong to the digital generation, where everything is created from scratch.
Since the people who are most likely to determine the value of Bitcoin in the future do not need (or even want) it to have a physical form, Bitcoin does not need to exist physically.
Be prepared for the possibility of losing everything.
Having said that, the cryptocurrency market still has many unknowns and high risks. The most crucial aspect is that the number of cryptocurrencies needs to be reduced by about 99.9%. In comparison, there are 94 metals on the periodic table, but only three of them – gold, silver, and platinum – are widely accepted as stores of value. In contrast, there are currently around 270 cryptocurrencies traded 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 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 actually become the gold and silver of the global digital economy we are in today. I guess [removed invalid URL] will follow the same path.
However, to invest in cryptocurrencies, one must be prepared for the risk of the entire market collapsing. That’s why it’s best to invest money that you can afford to lose.
I am no longer the naive young man in my early 20s who had no idea about the consequences of foolish financial decisions and thought I could get rich overnight by joining the internet boom. I am well aware of the risks I am taking with these investments. But I also know that the majority of my investment portfolio built for my family over the years is still in value stocks.
Continuous adoption is the key.
Of course, being accepted as a store of value or medium of exchange and therefore preserving value is one thing. To make Bitcoin a worthwhile investment at its current price, there must be sufficient reason to believe that its price will continue to rise.
This largely depends on the supply and demand relationship. The supply side is known and quite favorable, as the total potential supply of Bitcoin is limited to 21 million coins (currently over 19 million coins have been mined), and the growth rate of this limited supply decreases with each halving.
This means that the key to price increases lies in increasing demand. The good news is that we constantly see favorable market dynamics that drive 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% increase in Bitcoin’s value by November 5, before the US presidential election.
The remarkable rise of Bitcoin since the election day also confirms this view. The price of Bitcoin recently surpassed $100,000 for the first time. This bullish trend is driven by market expectations that the soon-to-be-elected president, Donald Trump, is a strong supporter of cryptocurrency, and people expect him to implement policies that further increase the demand for Bitcoin and other tokens.
Therefore, adoption is the 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 Bitcoin’s key advantages, such as its decentralized blockchain technology, which allows funds to be transferred quickly, accurately, and at low or even zero cost globally.
For me, this belief comes from my view of the people who are most likely to determine the value of Bitcoin in the future, rather than the present. Regardless of the motivation, as long as it leads to a growing demand for Bitcoin, it will create an increasing imbalance between supply and demand. Some Bitcoin bulls even predict that the price of Bitcoin will reach $1 million by 2030.
At that time, my eldest son will be just 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 without any financial aid, paying for their higher education will be the largest expense before my wife and I retire, much larger than our next big expenditure, which is the remaining mortgage debt.
I know that by reading this, some people will find my reasons for buying Bitcoin absurd. It does go against the principles I believe in as a value investor, and I cannot deny that.
If I am wrong, it will be the most expensive lesson for me and my eldest son in history. But it will not lead to financial ruin, as my cryptocurrency holdings account for a small portion of our family’s total investment portfolio, and even if they all go to zero, it will not cause significant losses.
It should also not jeopardize our ability to pay for our children’s education, as 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, the potential for significant returns is hard to resist.
This article is a collaborative reprint from DeepChow.
