Why Does a Traditional 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 of fun. 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 perks and gifts.
Even after 27 years, that memory remains fresh. I still remember playing blackjack for hours. We started at a table with a minimum bet of $10, but a streak of good luck allowed us to quickly increase our bets. In the first two days, I won about $1,700. But on the third day, luck turned against us. By the evening, my friend went from winning a few hundred dollars to losing $750. He was frustrated and decided to go back to the room to sleep.
My situation was worse. My $1,700 profit dwindled to just $300. But unlike my friend, I wasn’t ready to quit. Losing so much money left me feeling unsatisfied, 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 headed home, 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.
Lesson from my early stock market investment
I bring up this story because early experiences often shape one’s perspective. For me at the time, my first trip to Las Vegas was perfect. I gambled without any worries, fueled by both incredible luck and youthful ignorance. Being young and inexperienced, I didn’t realize the recklessness of betting $100 per hand with just $700 in my bank account.
Stock market investing was similar. My first exposure to it was when I started working for Forbes in the early 2000s, during the peak of the dot-com bubble. In the six months before I joined, our department recommended stocks like eToys, VerticalNet, and Healtheon, which catered to the fervent demand for all things internet-related, whether it was new websites or companies supporting internet infrastructure development.
These three stocks rose 66%, 92%, and 99% respectively in just three months. And the biggest winner in this frenzy was Qualcomm, whose stock price had surged about 2,600% in the previous year. No, that’s not a typo.
At that time, I had saved up some money and opened my first brokerage account. Unfortunately, the timing couldn’t have been worse, as it was the beginning of the internet/tech stock crash. The first two stocks I bought, which were recommended by my department in the first three months of my job, were Net Perceptions and Wind River Systems, both of which no longer exist today. I can’t even remember what they did.
But one thing I remember vividly is that I held onto those stocks and watched them plummet along with the market. In the end, I lost 75% to 80% of my investment in those positions. It was a painful lesson that made me realize I knew nothing about stock market investing and shouldn’t have been involved in it.
Becoming a value investor
Things changed in the following years. I pursued the Chartered Financial Analyst (CFA) program and became a stock analyst, gaining experience in finding undervalued stocks in almost every industry. But the painful experience of my first stock purchases stayed with me. I lost a lot of money on those two stocks because, like many others at the time, I fell for the hype.
Influenced by my first stock market experience and the value-oriented approach promoted by the stock recommendation service I worked for, I tried my best to avoid market speculation.
I studied the investment philosophy of Warren Buffett, read “Security Analysis” by Benjamin Graham and David Dodd (still considered the bible of fundamental analysis), and began buying stocks of companies whose stock prices were far below what I believed their actual value to be after conducting my research and analysis. In other words, I became a true value investor.
This meant looking for companies with strong future cash flow potential and having enough discipline to only buy when their stock prices were deeply undervalued. For example, after the stock market crash following the 9/11 terrorist attacks in 2001, our department recommended Amazon stock when it was trading at $7.48. I bought some for myself as well.
However, less than four months later, when we advised our subscribers to take profits as the stock price reached $12.20 after the SEC approved Bitcoin ETFs, I followed suit. (By the way, those 200 shares I bought at the time are now worth about $880,000. Yes, it’s a bitter feeling whenever I think about it.)
Overall, I’ve had more successful investments than failures, and I’m satisfied with my financial situation, as I haven’t taken too much risk. Although I regret selling my Amazon stock too early, my discipline has saved me from dozens, if not hundreds, of failed investments like Kozmo.
Introduction to cryptocurrencies
Knowing all this, you might be surprised that a traditional value investor like me started investing in Bitcoin a few years ago. After all, many people would say that Bitcoin is a typical speculation and something risk-averse value investors like me should avoid. It doesn’t produce anything tangible and has no earnings.
However, that didn’t stop me from getting involved with Bitcoin in late 2020. I bought 500 shares of the Grayscale Bitcoin Trust (GBTC), which was almost the only option if you wanted to invest in Bitcoin through a fund at the time.
Since then, I have steadily increased my investment base by continuing to accumulate GBTC, as well as positions in the Grayscale Ethereum Trust (ETHE) and another Bitcoin exchange-traded open-end index fund (ETF) called Bitwise Bitcoin ETF (BITB).
Some might point out that these investments have overall performed well considering the time I entered and the prices of the underlying cryptocurrencies (Bitcoin and Ethereum) at the time and now. This might create a bias similar to my first gambling experience in Las Vegas.
But that hasn’t always been the case. In fact, during the tumultuous year of 2022, my holdings temporarily plummeted over 80% from their cost basis. In dollar terms, it was the largest investment loss I have ever experienced.
For many people, that would be enough to completely give up and never look back. But I did the opposite and continued to increase my positions during the downturn. I even did something I rarely do: buying during an upward trend.
Take my BITB position, for example. This fund was only established after the SEC approved Bitcoin ETFs earlier this year. When I bought BITB in mid-January, Bitcoin was trading around $43,000, which was significantly higher than the price I last increased my Bitcoin exposure through GBTC (around $28,000).
Why I hold cryptocurrencies
So why does a self-proclaimed old-school value investor like me, who has stayed true to his principles for over 20 years and avoided speculation, keep increasing his investment in an asset that he believes has no inherent value? The answer is simple: my sons believe it has value.
In the year 2020, when the COVID-19 pandemic was raging, my older son had just started first grade and asked me if I had any Bitcoin. Despite various social distancing measures in place, he had heard a classmate bragging about how much money his dad made from Bitcoin and wanted to know if I had any.
I told him I didn’t and dismissed Bitcoin as worthless. Even so, he still wanted to buy some, and he was only 6 years old at the time.
It was then that I realized Bitcoin existed before both of my sons. This made me realize that their perspective might be different from mine, and I should take it seriously. After all, it was my job as their father to listen to them and understand their interests and aspirations.
So, I decided to invest in Bitcoin not because I think it has intrinsic value, but because I want to support my sons’ interests and beliefs. I want them to have the opportunity to learn, grow, and explore their own paths, even if it means embracing something that goes against my traditional investment principles.
Conclusion
As an investor, I have learned that experiences shape our perspectives, and sometimes we need to adapt and evolve. My first trip to Las Vegas taught me the thrill of taking risks and the pain of losing. My early stock market investments taught me the dangers of speculation and the importance of value investing.
Now, my sons have introduced me to the world of cryptocurrencies, specifically Bitcoin. While I may not fully embrace the concept of cryptocurrencies as a traditional value investor, I am willing to support my sons’ interests and beliefs. After all, being a father means being open-minded and understanding that different generations may see value in different ways.
So, as an old-school investor, I continue to balance my traditional investment principles with the willingness to explore new opportunities that align with my values and support my family’s aspirations. And that’s why I embrace Bitcoin, even if it goes against my traditional investment beliefs.Bitcoin has been a constant presence in their growth process and, more importantly, has always held value for them. This idea has become deeply ingrained over time.
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 saved allowance. For him, he would rather hold onto these shares than have cash.
I, too, have been increasing my holdings of Bitcoin, which has further solidified his belief in its value (even though he was the one who got me into cryptocurrency investing).
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 historic highs last year.
We view gold as a safe asset that holds value and protects against inflation because it has played this role throughout our lives. However, my son’s knowledge of gold is limited to the necklace he wears around his neck. The necklace he currently wears was bought by his grandfather about 40 years ago for the same reason my son holds Bitcoin now: because gold has always held value for him and will continue to do so in the future.
Unfortunately, my father is no longer with us. When we, the current generation, are gone, it will be up to our children to decide 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 and industrial applications.
But the truth is, only about 7% of gold mined is used for these industrial purposes. The rest is used to make jewelry, coins, and bars.
I believe that the popularity of gold in jewelry is not just because it is beautiful, but also because people perceive it as scarce. This is a significant reason why gold is widely regarded as a store of value. Moreover, in my lifetime, the value of gold has never been lower than its actual intrinsic value.
The same is true for my sons and Bitcoin. We are products of our time. I grew up in a world that relied mostly on analog signals. I associated value with tangible things. Music and movies were distributed through physical media like cassette tapes, VHS tapes, CDs, and DVDs.
I remember 8-track tapes and Betamax tapes vividly because I’m old enough. My sons have no idea what those things are. For them, streaming from the cloud is as natural as my friends and I renting VHS tapes from Blockbuster back then. They belong to the digital generation, where everything is created from scratch.
Since the people who are most likely to determine Bitcoin’s value in the future don’t need (or even want) it to have a physical form, Bitcoin doesn’t need to exist physically.
Prepare for the worst-case scenario
That being said, the cryptocurrency market still holds many unknowns and significant risks. The most critical 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, gold, silver, and platinum, are considered and accepted as stores of value. In contrast, there are currently around 270 cryptocurrencies traded on the popular cryptocurrency exchange platform 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 view, these two cryptocurrencies hold the most legitimacy in the public eye and have deeply integrated into people’s worldview. They will essentially become the gold and silver of the current global digital economy. I guess [invalid URL] will follow suit.
However, investing in cryptocurrencies requires being prepared for the risk of the entire market going to zero. That’s why it’s best to only invest money that you can afford to lose.
I am no longer the naive young person in my early twenties who didn’t understand the consequences of foolish financial decisions and believed that jumping into the internet wave would make me rich overnight. I am fully aware of the risks involved in these investments. But I also know that the majority of the investment portfolio I have built for my family over the years is still in value stocks.
Continued adoption is key
Acceptance as a store of value or medium of exchange that preserves its value is one thing. To make investing in Bitcoin at its current price worthwhile, there must be sufficient reason to believe that its price will continue to rise.
This largely depends on supply and demand. The supply side is known and quite favorable because Bitcoin has a total potential supply limit of 21 million coins (over 19 million have already been mined), and the growth rate of this limited supply decreases with each halving.
This means that the key to price appreciation lies in increasing demand. The good news is that we continuously see favorable market dynamics driving an increase in 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 view, this will be a major catalyst for Bitcoin’s 66% surge before the US election on November 5, 2024.
The remarkable rise of Bitcoin since the election day also confirms this viewpoint. The price of Bitcoin recently surpassed $100,000 for the first time. This surge is driven by the market’s anticipation that President-elect Donald Trump, a strong supporter of cryptocurrencies, will enact policies that further increase the demand for Bitcoin and other tokens.
Therefore, adoption is key. It is crucial to believe that the demand for Bitcoin will continue to rise when purchasing it. For some people, it is because they heavily promote Bitcoin’s key advantages, such as its decentralized blockchain technology that allows funds to be transferred quickly, accurately, and at extremely low or even zero costs globally.
For me, this belief comes from my view of the people who are most likely to determine Bitcoin’s value in the future, rather than the present. Regardless of the motivations, as long as it leads to increasing demand for Bitcoin, it will create a growing 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 two years away from graduating from high school. Why is this important? Because my investment in Bitcoin is not about getting 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 most significant expense before my wife and I retire, much larger than our next largest 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 contradict 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. But it will not lead to financial bankruptcy because my cryptocurrency holdings make up a small proportion of our family’s overall investment portfolio, and even if they all go to zero, it will not result in 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 also significant. If I am right, they will make this heavy financial burden much lighter. I may no longer be the carefree gambler of my youth, but even for a conservative value investor like me, the potential for significant returns is hard to resist.
This article was cooperatively reproduced from Shenchao.