Why does an old-school investor embrace Bitcoin?
I still vividly remember my first trip to Las Vegas. It was just a year after I graduated from college when my best friend gave me a free plane ticket to join him for a few days of fun. We stayed at the Hard Rock Hotel, with its party-like atmosphere and smaller, more intimate tables than the large casinos on the Las Vegas Strip, along with generous giveaways—perfect for someone my age.
Even after 27 years, that memory is still vivid. I remember playing blackjack for several hours. At first, we played at a low-stakes table with a minimum bet of $10, but some early good luck quickly led us to increase our bets. In the first two days, I won about $1,700. But by the third day, things took a turn for the worse. By the evening, my friend went from winning a few hundred dollars to losing $750. Frustrated, he decided to call it a night early.
My situation was worse; my $1,700 profit shrank to only $300. But unlike my friend, I wasn't ready to quit. Losing that much money made me unwilling to back down, so with the remaining $300, I saw an empty low-stakes table with a minimum bet of $100 and thought, why not give it a try?
Lady Luck smiled on me again; in less than 20 minutes, I turned that $300 into $3,000. By the time I headed home, I had won 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 initial stock investment experience
I bring this up because early experiences often shape a person’s perspective. For me at the time, my first experience in Las Vegas was perfect. I gamed recklessly, partly due to my 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 bet $100 with only $700 in your bank account.
The same goes for stock investments. My first experience with stock investing was when I started working for Forbes, coinciding with the peak of the internet bubble in early 2000. In the six months before I joined, the stocks recommended by our department included eToys, VerticalNet, and Healtheon, which catered to the frenzied demand for everything internet-related at the time, whether it was new websites or companies that supported internet infrastructure development.
These three stocks rose by 66%, 92%, and 99% respectively within just three months. The biggest winner in this frenzy was Qualcomm, whose stock price skyrocketed about 2600% in the previous year. This is no typo.
At that time, I had saved some money and opened my first brokerage account. Timing couldn't have been worse, as it coincided with the onset of the internet/tech stock crash. The first two stocks I bought were recommended by my department during my first three months on the job: Net Perceptions and Wind River Systems, both of which are now defunct. I can't even remember what they did.
But one thing I remember vividly is that I held on all the way, watching them lose value in the market crash, ultimately losing 75%-80% on those holdings. This was a painful lesson that made me realize I knew nothing about stock investing and should never have ventured into it.
Become 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 seeking undervalued stocks across various industries. However, the painful experience of my first stock purchase still lingers in my mind. I lost a lot of money on those two losing stocks because, like many at the time, I was easily swayed by hype.
Influenced by my initial experience with stock trading and the value-oriented strategy of the stock recommendation service I was involved in, I avoided market hype as much as possible.
I studied Warren Buffett's investment philosophy, read "Security Analysis" by Benjamin Graham and David Dodd (which is still regarded as the bible of fundamental analysis), and began to primarily buy stocks of companies that I believed were trading far below their actual value after my research and analysis. In other words, I became a thorough value investor.
This meant I was looking for companies with strong future cash flow potential while also being disciplined enough to only act when stock prices were significantly undervalued. For example, after the 9/11 terrorist attacks in 2001 caused a stock market crash, our department recommended Amazon stock, which was then priced at $7.48, and I bought some myself.
However, less than four months later, when we advised subscribers to take profits when the stock price rose to $12.20, I did the same. (By the way, the 200 shares I bought back then are now worth about $880,000. Yes, every time I think about it, it doesn't feel good.)
Overall, I have had more investment successes than failures and am quite satisfied with my financial situation, having not taken on too much risk. While it is a bit regrettable to have sold Amazon stock too early, the same self-discipline has likely kept me from dozens, if not hundreds, of failures like [invalid URL removed].
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Getting acquainted with cryptocurrency
Having understood this, you might be surprised that I started investing in Bitcoin a few years ago. After all, many would say Bitcoin is the epitome of hype, something risk-averse value investors like me tend to avoid. It doesn't produce anything on its own and 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 at the time was practically the only option if you wanted to invest in Bitcoin through a fund.
Since then, I have steadily expanded my investment base by continuously increasing my positions in GBTC, as well as in Grayscale's newly launched Ethereum Trust (ETHE) and another Bitcoin exchange-traded fund (ETF)—the Bitwise Bitcoin ETF (BITB).
Some may point out that based on when I purchased and the prices of the underlying cryptocurrencies (Bitcoin and Ethereum) then and now, these investments have generally yielded decent returns, which may have led me to develop a bias similar to my first gambling experience in Las Vegas.
But it hasn't always been this way. In fact, during the terrible year of 2022, my holdings plummeted over 80% from their cost basis. In dollar terms, this was the largest paper loss I have ever experienced in an investment.
For many people, this would be enough to give up entirely and never look back. But I took the opposite approach and continued to increase my positions during the decline. Later, I even did something I rarely do: bought in during an upswing.
Take my BITB position as an example; 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, Bitcoin was trading at around $43,000, significantly higher than the price (about $28,000) when I last increased my Bitcoin holdings through GBTC.
The reason I hold cryptocurrency
So, why am I, a self-proclaimed old-school value investor who has adhered to this for over twenty years and avoided hype, constantly increasing my investment in an asset that I believe has no real intrinsic value? The reason is simple: my sons believe it has value.
In 2020, when the COVID-19 pandemic was rampant, my eldest son had just started first grade and asked me if I had Bitcoin. Despite various social distancing measures in place, he heard a classmate bragging about how much money his dad made with Bitcoin, so he wanted to know if I had any.
I told him I didn't have any and belittled Bitcoin. Even so, he still wanted to buy some when he was only 6 years old.
It was then that I realized Bitcoin has been around longer than my two sons. This means that Bitcoin has always existed during their growing up.
More importantly, Bitcoin has always had value for them. Since then, this notion has become more entrenched.
In fact, my 10-year-old son checks the price of GBTC almost every day. He owns 10 shares, which he bought with his pocket money that he has saved over the years. For him, he would rather hold these than cash.
I also feel that my increasing share of Bitcoin makes him more convinced that Bitcoin has real value (even though he was the trigger for my entry into cryptocurrency investing).
Currently, my generation and the previous one may have accumulated the most wealth. I believe this is one of the main reasons for last year's surge in gold prices to an all-time high.
We view gold as a hedge asset that can preserve value and resist inflation because it has always served this role throughout our lives. But the gold my eldest son knows is the necklace he wears around his neck. The gold chain he is currently wearing was bought by his grandfather about 40 years ago, for the same reason my son holds Bitcoin now: because to him, gold has always had value and will continue to have it in the future.
Unfortunately, my father is no longer with us. When our generation is gone, it will be our children who decide what is valuable and what is not.
Some might argue that comparing Bitcoin to gold is unfair because gold is a physical asset with intrinsic value in many technology products and other 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 gold mined in the world is used to make jewelry, coins, and bars.
I believe that gold, which is used to make jewelry, is favored 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.
The same goes for my sons and Bitcoin; we are products of our time. I grew up in a world largely dependent on analog signals. I have always associated value with tangible things. Music and movies were transmitted through physical media like cassette tapes, VHS tapes, CDs, and DVDs.
Damn, I'm old enough to remember 8-track tapes and Betamax videos. My sons have no idea what those things are. For them, streaming from the cloud feels as natural as it was for me and my friends to rent videos from Blockbuster. They belong to a digital generation where everything has emerged from nothing.
Since the people most likely to determine the value of Bitcoin in the future do not need (or even want) it to have a physical form, Bitcoin doesn't need to exist in a physical form either.
Be prepared to lose all your capital
That said, there are still many unknowns in the cryptocurrency market, and the risks are quite high. Most importantly, the number of cryptocurrencies needs to be reduced by about 99.9%. Taking gold as a 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 traded on the popular cryptocurrency exchange 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 become deeply integrated into people's worldviews; they are effectively becoming the gold and silver of the global digital economy we are in today. I guess, [invalid URL removed].
However, to invest in cryptocurrency, 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 you can afford to lose.
I am no longer that naive young person in my early 20s who didn’t understand the consequences of foolish financial decisions, naively thinking I could get rich overnight by diving into the internet boom. I fully understand the risks I am taking with these investments. But I also know that for many years, the vast majority of my family's investment portfolio has still been invested in value stocks.
Continuous adoption is key
Of course, for something to be accepted as a store of value or medium of exchange, and thus retain its value, is one thing. To make investing in Bitcoin at current prices worthwhile, there must be good reason to believe its price will continue to rise.
This largely depends on the supply-demand relationship. The supply side is known and quite favorable, as the total potential supply of Bitcoin is capped at 21 million (with over 19 million already mined), and with each halving, the growth rate of this limited supply will slow down.
This represents that the key to price increases 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 several Bitcoin ETFs in January 2024 that I mentioned earlier. In my view, this is a major catalyst for Bitcoin's 66% rise in 2024 before the U.S. elections on November 5.
Since election day, Bitcoin's remarkable surge has also confirmed this view. The price of Bitcoin recently broke $100,000 for the first time. This surge 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 introduce policies that will further increase demand for Bitcoin and other tokens.
Therefore, adoption is key. Most importantly, purchasing Bitcoin must be based on the belief that demand will continue to rise. For some, this is due to their enthusiastic promotion of Bitcoin's key advantages, such as its decentralized blockchain technology that allows funds to be transferred quickly and accurately around the globe at very low or even zero cost.
For me, this belief stems from my view of the group of people most likely to determine the value of Bitcoin in the future, rather than at present. Regardless of motivation, as long as it leads to increasing demand for Bitcoin, it will cause a growing imbalance between supply and demand. Some Bitcoin bulls even predict that by 2030, the price of Bitcoin will reach $1 million.
At that time, my eldest son still had two years before graduating high school. Why is this important? Because my goal 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 all attend 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, far exceeding our next largest expense, which is the remaining mortgage balance.
I know that some readers will find my reasons for buying Bitcoin absurd. This indeed goes against 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 won’t lead to my financial ruin because my cryptocurrency holdings constitute a small portion of our total investment portfolio, and even if they all go to zero, it won’t cause significant losses.
This 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 considerable, and if I'm right, they will lighten this heavy financial burden. I may no longer be the carefree gambler I was in my youth. But even for an old-school value investor like me, the potential for such enormous returns is hard to resist.
This article was co-published by: ShenChao
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