Original author: Taesik Yoon, Forbes
Original translation: Luffy, Foresight News
I still vividly remember my first trip to Las Vegas. It was just a year after I graduated from college, and my best friend gave me a free plane ticket, inviting me to have some fun for a few days. We stayed at the Hard Rock Casino Hotel; the party atmosphere, smaller and more private gaming areas than the big casinos on the Las Vegas Strip, combined with generous giveaways, made it an ideal place for someone my age.
Even 27 years later, the memory remains vivid. I remember playing blackjack for several hours. At first, we played at a $10 minimum bet table, but an early streak of good luck soon led us to increase our bets. In the first two days there, I won about $1,700. But by the third day, luck turned. By evening, my friend had gone from winning a few hundred dollars to losing $750. He was frustrated and decided to head back to the room to sleep early.
My situation is worse; my profit of $1,700 shrank to just $300. But unlike my friends, I wasn't ready to quit. Losing so much money left me unsatisfied, so I took the remaining $300, saw a $100 minimum bet table with no players, and thought, why not give it a try? Fortune smiled upon me once again, and in less than 20 minutes, I turned that $300 into $3,000. By the time I headed home, I had won about $3,600 in total. For a 23-year-old living in New York City at the end of the 90s, that was a significant amount of money.
Lessons from my initial foray into stock investing
I bring this up because early experiences often shape a person's perspective. For me at that time, my first trip to Las Vegas was perfect. I gambled without hesitation; partly due to incredible luck and partly due to youthful ignorance. When you're young and haven't experienced much, you don't realize how reckless it is to have only $700 in your bank account yet dare to bet $100 on each hand.
Stock investing is no different. My first encounter with stock investing was when I started working for Forbes during the peak of the internet bubble in early 2000. In the six months before I joined, among the stocks recommended by our department were eToys, VerticalNet, and Healtheon, which catered to the frenzied demand for anything internet-related, whether new websites or companies that supported internet infrastructure. These three stocks rose by 66%, 92%, and 99% in just three months. The biggest winner in this frenzy, Qualcomm, saw its stock price soar about 2,600% in the previous year. This is not a typo.
At that time, I had saved some money, so I 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 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 vividly recall is that I held on all the way, watching them plummet with the market, ultimately losing 75%-80% on those positions. This was a painful lesson, making me acutely aware that I knew nothing about stock investing and shouldn't have ventured into it.
Becoming a value investor
In the following years, things changed. I pursued a Chartered Financial Analyst (CFA) program and became a stock analyst, gaining experience in searching for undervalued stocks across almost every industry. But the painful experience of buying stocks for the first time remains etched in my memory. I lost a lot of money on the two losing stocks mentioned above because I, like many others at the time, was misled by hype.
Influenced by my initial stock trading experience and the value-oriented strategy of the stock recommendation service I worked for, I avoided market hype as much as possible. I studied Warren Buffett's investment philosophy, read 'Security Analysis' by Benjamin Graham and David Dodd (still revered as the bible of fundamental analysis), and began primarily buying stocks of companies whose prices were far below what I believed their actual value to be after conducting my research. In other words, I became a full-fledged value investor.
This means I look for companies with strong future cash flow potential, while being disciplined enough to only take action when stock prices are significantly undervalued. For example, after the stock market crashed following the September 11 terrorist attacks in 2001, our department recommended Amazon stock, which was priced at $7.48, and I bought some myself. However, less than four months later, when we advised subscription users to cash out at $12.20, I did the same. (By the way, the 200 shares I bought back then are now worth about $880,000. Yeah, every time I think about it, it doesn't feel good.)
Nonetheless, overall, I have more successes than failures in my investments and am fairly satisfied with my financial situation, having not taken on too much risk. While I do regret selling my Amazon stock too early, it is also because of the same discipline that I avoided dozens, or even possibly hundreds, of failures like Kozmo.com. Never heard of Kozmo? Exactly.
Initial encounter with cryptocurrency
Given all 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 example of hype, something that risk-averse value investors like me tend to avoid. It does not generate anything by itself, has no earnings.
However, this did not stop me from first encountering Bitcoin at the end of 2020. I bought 500 shares of Grayscale Bitcoin Trust (GBTC), which was almost the only option at the time if you wanted to invest in Bitcoin through a fund. Since then, I have steadily expanded my investment base by continuously increasing my holdings in GBTC, as well as in Grayscale's newly launched Ethereum Trust (ETHE) and another Bitcoin exchange-traded fund (ETF) - Bitwise Bitcoin ETF (BITB).
Some might point out that based on when I bought in and the prices of the underlying cryptocurrencies (Bitcoin and Ethereum) then and now, these investments have performed well overall, which may have led me to develop a bias similar to that of my first gambling experience in Las Vegas. But it hasn't always been this way. In fact, during the dreadful year of 2022, my holdings plummeted over 80% from their cost basis. In dollar terms, this was the largest unrealized loss I have ever incurred on an investment.
For many people, this would be enough to give up entirely and never look back. But I did the opposite and continued to add to my position during the downturn. Later, I did something I rarely do: I bought during the uptrend. Take my BITB position, for instance; this fund was only established after the U.S. Securities and Exchange Commission (SEC) approved the Bitcoin ETF earlier this year. When I bought BITB in mid-January, the trading price of Bitcoin was around $43,000, which was significantly higher than the price (about $28,000) at which I last increased my Bitcoin holdings through GBTC.
Reasons for holding cryptocurrency
So, why would I, a self-proclaimed old-school value investor who has avoided hype for over twenty years, continue to increase my investment in an asset I believe has no intrinsic value? The reason is simple: my sons believe it has value.
In 2020, during the peak of the COVID-19 pandemic, my eldest son, not long after starting first grade, asked me if I had any Bitcoin. Despite various social distancing measures being in place, he heard a classmate bragging about how much money his dad made from Bitcoin, so he wanted to know if I had any. I told him that I didn't and belittled Bitcoin as worthless. Nevertheless, he still wanted to buy some, and he was only 6 years old at the time.
It was then that I realized that Bitcoin was older than my two sons. This means that Bitcoin has been around throughout their upbringing. More importantly, it has always held value for them. Since then, this idea has become increasingly ingrained. In fact, my 10-year-old son checks the price of GBTC almost every day; he holds 10 shares, which he bought with his pocket money saved over the years. For him, he would rather hold these than cash. I also feel that my increasing share of Bitcoin has further convinced him that Bitcoin has real value (even though he is the catalyst for my venture 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 gold prices soared to historic highs last year. We view gold as a safe-haven asset that retains value and protects against inflation, as it has played this role throughout our lives. But the only gold my son knows 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 holds Bitcoin: because gold has always had value to him 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 determine what has value and what does not.
Some might say it is unfair to compare Bitcoin to gold because gold is a physical asset with intrinsic value in many technological and industrial applications. But to be honest, the portion of gold used for these industrial purposes accounts for only about 7% of the total mined. The rest of the mined gold is used to make jewelry, coins, and 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, throughout my life, the value of gold has never fallen below its actual intrinsic value.
This is also true for my sons and Bitcoin; we are all products of our era. I grew up in a world largely dependent on analog signals. I am accustomed to associating value with tangible things. Music and movies were disseminated 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 these things are. For them, streaming from the cloud feels as natural as when my friends and I rented videos from Blockbuster back in the day. They belong to the digital generation, creating everything from nothing. Since the people most likely to determine Bitcoin's value in the future do not need (and may not even want) it to exist in physical form, Bitcoin does not need to exist physically.
Be prepared to lose all your money
That said, the cryptocurrency market still has many unknowns and is highly risky. Most importantly, the number of cryptocurrencies needs to be reduced by about 99.9%. By comparison, 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 about 270 cryptocurrencies currently traded on the popular cryptocurrency trading platform Coinbase, while the total number of cryptocurrencies in the global market is close to 18,000!
All 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 deeply integrated into people's worldview; they will effectively become the gold and silver of the global digital economy we are currently in. I guess the vast majority of other cryptocurrencies will ultimately follow in the footsteps of Kozmo.com.
However, to invest in cryptocurrency, you must be prepared for the risk of the entire market going to zero. That is why if you plan to invest, it is best to use money you can afford to lose. I am no longer that naive young person in my early 20s, unaware of the consequences of foolish financial decisions and foolishly thinking that diving into the internet boom would make me rich overnight. I am well aware of the risks I am taking with these investments. But I also know that the vast majority of my family's investment portfolio, which I have built over the years for my family, is still invested in value stocks.
Sustained adoption is key
Of course, being accepted as a store of value or medium of exchange, and thus retaining value, is one thing. For investing in Bitcoin at current prices to be worthwhile, there must be sufficient reason to believe 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 limit of Bitcoin is 21 million coins (over 19 million have been mined so far), and with each halving, the rate of growth in this limited supply will decrease.
This means that the key to rising prices lies in increasing 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 that I mentioned earlier. In my view, this is the main catalyst for Bitcoin's 66% rise in November 5 before the U.S. election in 2024.
Starting from election day, Bitcoin's remarkable surge also corroborated this point. The price of Bitcoin recently broke through $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 anticipate that he will implement policies that will further increase demand for Bitcoin and other tokens.
Therefore, adoption rates are key. Most importantly, purchasing Bitcoin must be based on the belief that demand will continue to rise. For some, this is due to their loud proclamations of Bitcoin's key advantages, such as its decentralized blockchain technology that allows funds to be transferred globally at very low or even no cost, quickly and accurately. For me, this belief stems from my view of the group of people most likely to determine Bitcoin's value in the future, rather than the present. Regardless of the motivation, as long as it leads to increasing demand for Bitcoin, it will create an increasing imbalance between supply and demand. Some Bitcoin bulls even predict that Bitcoin's price will reach $1 million by 2030.
At that time, my eldest son still had two years left until he graduated from 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 my two sons with funds for their college education. Assuming they both attend a traditional four-year university without any financial aid, paying for their higher education will become the largest expense for my wife and me before retirement, far exceeding our next major expense, which is the remaining mortgage balance.
I know that reading this, some may find my reasons for purchasing Bitcoin utterly absurd. This indeed contradicts the principles I uphold as a value investor, and that is undeniable. If I'm wrong, this will be the most expensive lesson my eldest son and I have ever learned. But it will not lead to my financial ruin because my cryptocurrency holdings represent a relatively small percentage of our family's total investment portfolio; even if they were to be wiped out, it would not cause significant damage. It should not jeopardize our ability to pay for our children's education, as like many families, we have been making more traditional investments for their higher education.
However, my cryptocurrency holdings are also substantial, and if I am right, they will lighten this heavy financial burden. I may no longer be that carefree gambler of my youth. But even for me, an old-school value investor, the potential for such enormous returns is hard to resist.
