The reason is simple: my sons believe it has value.
Written by: Taesik Yoon, Forbes
Translated by: Luffy, Foresight News
My first trip to Las Vegas is still fresh in my memory. I had just graduated from college a year earlier, and my best friend gave me a free plane ticket, inviting me to play for a few days. We stayed at the Hard Rock Hotel and Casino, which had a party-like atmosphere and smaller, more private gaming areas compared to the larger casinos on the Strip, along with generous giveaways that were a perfect fit for someone my age.
Even 27 years later, this memory remains vivid. I still remember playing blackjack for several hours. At first, we were playing at a table with a minimum bet of $10, but a streak of good luck soon had us increasing our bets. In the first two days there, I won about $1,700. But by the third day, fortune took a drastic turn. By the evening, my friend had gone from winning a few hundred dollars to losing $750. He was extremely frustrated and decided to go back to the room early to sleep.
My situation was worse; my $1,700 profit shrank to only $300. But unlike my friend, I didn't want to stop. Losing so much money left me feeling unsatisfied, so I took the remaining $300 to a vacant table with a minimum bet of $100, thinking, why not give it a try? Luck smiled upon me again, and in less than 20 minutes, I turned that $300 into $3,000. By the time I went home, I had won about $3,600 in total. For a 23-year-old living in New York City at the end of the 1990s, that was a lot of money.
Lessons from early stock investing
I bring this up because early experiences often shape a person's beliefs. For me at that time, my first experience in Las Vegas was nothing short of perfect. I gambled recklessly, partly because I was extremely lucky and partly because I was young and naive. In my youth, having only $700 in my bank account, I was completely oblivious to how reckless it was to bet $100 per hand.
The same goes for stock investing. My first experience with stock investing came when I began working for Forbes, coinciding with the peak of the internet bubble in early 2000. In the six months leading up to my joining, the stocks recommended by our department included eToys, VerticalNet, and Healtheon, which catered to the frenzied demand for anything related to the internet at the time, whether it was new websites or companies supporting internet infrastructure. These three stocks rose by 66%, 92%, and 99% respectively in just three months. And the biggest winner in that frenzy was Qualcomm, whose stock price skyrocketed about 2,600% in the previous year. That's not a typo.
At that time, I had saved up some money, so I opened my first brokerage account. Timing-wise, it couldn't have been worse, as it was the beginning of the internet/tech stock crash. The first two stocks I bought were those recommended by my department in my first three months on the job: 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 clearly remember is that I held onto them all the way, watching them plummet with the market, and ultimately I lost 75% - 80% on those positions. This was a painful lesson for me, which made me realize that I was completely clueless about stock investing and shouldn't have ventured into it at all.
Becoming a value investor
In the following years, things changed. I pursued the Chartered Financial Analyst (CFA) program, became a stock analyst, and gained experience in searching for undervalued stocks across nearly every industry. But the painful experience of my first stock purchase has always stuck with me. I lost a lot of money on those two losing stocks because, like many at the time, I was taken in by the hype.
Influenced by my early experiences in stock speculation and the value-oriented strategy of the stock recommendation service I was involved with, I made it a point to avoid market hype as much as possible. I studied Warren Buffett's investment philosophy, read Benjamin Graham and David Dodd's Security Analysis (still regarded as the bible of fundamental analysis), and began primarily investing in stocks of companies whose prices were far below what I considered their true value after my own research and analysis. In other words, I became a thorough value investor.
This means I look for companies with strong future cash flow potential, while also being disciplined enough to only invest when the stock price is significantly undervalued. For example, after the 9/11 terrorist attacks in 2001, when the stock market crashed, our department recommended Amazon stock, which was priced at $7.48 at the time, and I bought some myself. But less than four months later, when we advised subscribers to take profits as the stock price rose to $12.20, I did the same. (By the way, those 200 shares I bought back then are now worth about $880,000. Yeah, every time I think about it, it doesn't feel good.)
Overall, I have been successful more times than I have failed in my investments, and I am relatively satisfied with my financial situation, considering I have not taken on too much risk. While it is somewhat regrettable that I sold my Amazon stock too early, it is also because of that same discipline that I avoided dozens, if not hundreds, of failed cases like Kozmo.com. You haven't heard of Kozmo? That's the point.
My first encounter with cryptocurrencies
Knowing this, you might be surprised that I started investing in Bitcoin a few years ago. After all, many would say that Bitcoin is a classic bubble, something that risk-averse value investors like me would avoid at all costs. It generates nothing and has no earnings.
However, that didn't stop me from first encountering Bitcoin at the end of 2020. I bought 500 shares of Grayscale Bitcoin Trust (GBTC), which at the time was almost the only option if you wanted to invest in Bitcoin through a fund. Since then, I have steadily increased my investment base through continuous purchases of GBTC, as well as positions in Grayscale's newly launched Ethereum Trust (ETHE) and another Bitcoin exchange-traded fund (ETF) – the Bitwise Bitcoin ETF (BITB).
Some might point out that considering the time I bought in and the prices of the base cryptocurrencies (Bitcoin and Ethereum) then and now, these investments have performed well overall, which may have led me to develop a bias similar to the first time I gambled in Las Vegas. But it wasn't always like this. In fact, during the terrible year of 2022, my positions once plunged over 80% from their cost basis. In dollar terms, this was my largest paper loss on an investment ever.
For many, this would be enough to completely give up and never look back. But I did the opposite and continued to add to my positions during the downturn. Later, I did something I rarely do: I bought in during the upswing. Take my BITB position, for example; this fund was only established after the SEC approved the Bitcoin ETF earlier this year. When I bought BITB in mid-January, Bitcoin was trading at around $43,000, which was significantly higher than when I last added to my Bitcoin position through GBTC at around $28,000.
Reasons for holding cryptocurrency
So why would I, a self-proclaimed old-school value investor who has avoided speculation for over twenty years, continue to increase my investment in an asset that I believe has no intrinsic value? The reason is simple: my sons believe it has value.
In the midst of the COVID-19 pandemic in 2020, shortly after my eldest son started first grade, he asked me if I had Bitcoin. Even though various social distancing measures were in place at that time, he heard a classmate bragging about how much money his dad made from Bitcoin, and he wanted to know if I had any. I told him I didn't, and dismissed Bitcoin as worthless. Nevertheless, he still wanted to buy some, despite being only 6 years old at the time.
It was then that I realized that Bitcoin is older than both of my sons. This means that Bitcoin has been around throughout their growing up. More importantly, it has always held value for them. Since then, this notion has become increasingly ingrained. In fact, my 10-year-old son checks the price of GBTC almost every day; he owns 10 shares, purchased with his pocket money saved over the years. For him, he would rather hold these than cash. I also feel that the increasing amount of Bitcoin I hold reinforces his belief that Bitcoin has real value (even though he is the one who sparked my interest in cryptocurrency investing).
Currently, my generation and the previous generation may have accumulated the most wealth. I believe this is one of the main reasons for last year's spike in gold prices to an all-time high. We see gold as a safe-haven asset that retains value and hedges against inflation, as it has played this role throughout our lives. However, the gold that my eldest son knows is the necklace he wears around his neck. The gold chain he currently wears was bought by his grandfather about 40 years ago, for the same reason that my son now holds Bitcoin: 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. Once our generation is gone, it will be our children who 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 numerous technological and industrial applications. But honestly, only about 7% of the gold mined is used for these industrial purposes. The rest of the mined gold is used to make jewelry, coins, and bars. I believe that the reason gold used for jewelry is so prized is not only because it is beautiful but also because people perceive it as scarce. This is also a significant reason why gold is widely regarded as a store of value. More importantly, in my lifetime, gold has never been valued less 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 largely based on analog signals. I was accustomed to associating value with tangible things. Music and movies were distributed through physical media such as cassette tapes, VHS tapes, CDs, and DVDs. Hell, I'm old enough to remember 8-track tapes and Betamax tapes. My sons have no idea what those things are. For them, streaming from the cloud is as natural as renting VHS tapes from Blockbuster was for me and my friends. They belong to the digital generation, where everything comes from nothing. Since the future decision-makers of Bitcoin's value likely won't need (or even want) it to exist in a physical form, Bitcoin doesn't need to have a physical presence.
Be prepared to lose everything
That said, the cryptocurrency market still has many unknowns and carries significant risks. Most importantly, the number of cryptocurrencies needs to be reduced by about 99.9%. To compare with gold, there are 94 metals on the periodic table, but only three are truly regarded and accepted as stores of value: gold, silver, and platinum. In contrast, there are currently about 270 cryptocurrencies traded on popular platforms like Coinbase, while the total number of cryptocurrencies in the global market is nearly 18,000!
All of my cryptocurrency holdings are concentrated in Bitcoin, with only a small allocation to Ethereum. In my view, these two currencies have the most legitimacy in the public eye and have become deeply integrated into people's worldviews; they will in fact become the gold and silver of the global digital economy we find ourselves in today. I suspect that the vast majority of other cryptocurrencies will ultimately follow the path of Kozmo.com.
However, to invest in cryptocurrencies, one must be prepared for the risk of the entire market going to zero. That's why if you plan to invest, it's best to use money that you can afford to lose. I am no longer that naive young person in my early twenties, who didn’t understand the consequences of foolish financial decisions and naively thought that jumping into the internet boom would make me rich overnight. I am well aware of the risks I take with these investments. But I also know that the vast majority of my family's investment portfolio that I have built over the years is still invested in value stocks.
Sustained adoption is key
Of course, for something to be accepted as a store of value or a medium of exchange and thus retain its value is one thing. For investing in Bitcoin at current prices to be worthwhile, there must be ample 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, as the total potential supply of Bitcoin is capped at 21 million (over 19 million have been mined so far), and the rate of growth of this limited supply will decrease with each halving.
This means that the key to price increases lies in rising demand. The good news is that we continually see favorable market dynamics that drive up demand and adoption rates. The most significant event is the approval and launch of numerous Bitcoin ETFs in January 2024, which, in my view, is the main catalyst for Bitcoin's 66% increase leading up to the U.S. election on November 5.
The impressive surge in Bitcoin's price since election day also supports this view. Bitcoin's price recently broke $100,000 for the first time. This surge was driven by market expectations that the soon-to-be-elected president, Donald Trump, is a strong supporter of cryptocurrencies, and people anticipated he would introduce policies to further increase demand for Bitcoin and other tokens.
Therefore, adoption rate is key. Most importantly, purchasing Bitcoin must be based on a belief that demand will continue to rise. For some, this is because they loudly promote Bitcoin's key advantages, such as its decentralized blockchain technology that allows for quick and accurate transfers of funds globally at very low or even zero cost. For me, this belief stems from my view of the group of people who are most likely to determine Bitcoin's value in the future, rather than the present. Regardless of motivation, as long as this leads to increasing demand for Bitcoin, it will create an ever-growing imbalance between supply and demand. Some Bitcoin bulls even predict that by 2030, Bitcoin's price will reach $1 million.
At that time, my eldest son had two years left until he graduated high school. Why is this important? Because my purpose for investing in Bitcoin isn't to get rich overnight. It is part of my financial planning, which involves providing college education funds for my two sons. Assuming they both go to traditional four-year universities without any financial aid, paying for their higher education will become the largest expense for my wife and me before retirement, much more than our next big expense, which is the remaining mortgage.
I know that some people reading this might find my reasons for buying Bitcoin utterly absurd. This indeed goes against the principles I uphold as a value investor, there's no denying that. If I'm wrong, this will be the most expensive lesson my eldest son and I have ever faced. But this won't lead to my financial ruin, as my cryptocurrency holdings represent a small portion of our family's total investment portfolio, and even if they were to all vanish, it wouldn't lead to significant losses. It shouldn't jeopardize our ability to pay for our children's education either, as, like many families, we have been making more traditional investments for their higher education.
However, my cryptocurrency holdings are also not small, and if I am right, they will lighten this heavy economic burden. I may no longer be the carefree gambler I once was in my youth. But even for an old-school value investor like me, the potential massive returns are hard to resist.
