Written by: Taesik Yoon, Forbes
Translated by: 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 to join him for a few days of fun. We stayed at the Hard Rock Hotel, and the party-like atmosphere, with smaller and more private tables than those in the big casinos on the Las Vegas Strip, along with the very generous giveaways, made it an ideal place for someone my age.
Even after 27 years, this memory remains vivid. I remember playing blackjack for several hours. At first, we played at a table with a minimum bet of $10, but an early streak of good luck allowed us to quickly increase our bets. During the first two days there, I won about $1,700. But by the third day, my luck took a turn for the worse. By evening, my friend went from winning a few hundred dollars to losing $750. Frustrated, he decided to go back to the room early to sleep.
My situation was worse; my $1,700 profit shrank to just $300. But unlike my friend, I wasn't ready to walk away. Losing that much money left me dissatisfied, so I took the remaining $300 and saw an empty table with a minimum bet of $100 and thought, why not give it a try? Fortune favored 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. For a 23-year-old living in New York City at the end of the 90s, that was a considerable amount of money.
Lessons from initial stock investments
I bring this up because early experiences often shape a person's perspectives. For me at that time, my first experience in Las Vegas was perfect. I gambled recklessly, 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 bet $100 when you only have $700 in your bank account.
The same goes for stock investing. My first encounter 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, our department recommended stocks like eToys, VerticalNet, and Healtheon, which catered to the frenzied demand for anything related to the internet, whether it was new websites or companies that facilitated internet infrastructure. These three stocks skyrocketed by 66%, 92%, and 99% in just three months. The biggest winner of this madness was Qualcomm, whose stock price surged about 2600% the previous year. This is not a typo.
At that time, I had saved some money and opened my first brokerage account. The 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 the first three months of my job, Net Perceptions and Wind River Systems, both of which no longer exist today. I can hardly remember what they did. But one thing I remember vividly is that I held onto them and watched helplessly as they plummeted with the market, ultimately losing 75% to 80% of my investment in those positions. This was a painful lesson that made me acutely aware of my ignorance about stock investing and that I shouldn't have gotten involved in the first place.
Becoming a value investor
In the following years, things changed. I pursued a Chartered Financial Analyst (CFA) course and became a stock analyst, accumulating experience in finding 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, like many at the time, I was misled by hype.
Influenced by my initial experiences with stock trading and the value-oriented strategy of the stock recommendation service I was involved in, I avoid market hype as much as possible. I studied Warren Buffett's investment philosophy and read Benjamin Graham and David Dodd's 'Security Analysis' (still regarded as the bible of fundamental analysis), and began primarily buying stocks of companies that I believed were trading far below their actual value after my research and analysis. In other words, I became a full-fledged value investor.
This means I look for companies with strong potential for future cash flow, while also being disciplined enough to only invest when their stock prices are significantly undervalued. For example, after the stock market crash following the September 11 attacks in 2001, our department recommended Amazon stock, which was trading at $7.48 at the time, and I bought some myself. However, less than four months later, when we recommended that subscribers take profits as the stock price rose to $12.20, I did as well. (By the way, those 200 shares I bought back then are now worth about $880,000. Yeah, every time I think about this, it stings.)
Overall, I have had more success than failures in my investments, and I am fairly satisfied with my financial situation, having not taken on too much risk. Although I regret selling Amazon stock too early, it is thanks to the same discipline that I avoided dozens, if not hundreds, of failures like Kozmo.com. Haven't heard of Kozmo? Exactly.
Introduction to cryptocurrency
Knowing all this, you might be surprised that I started investing in Bitcoin a few years ago. After all, many would say Bitcoin is a classic case of speculation, something risk-averse value investors like myself strive to avoid. It itself produces nothing and has no earnings.
However, this did not stop me from first encountering Bitcoin at the end of 2020. I bought 500 shares of the Grayscale Bitcoin Trust (GBTC), which at that 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 by continuously adding to GBTC and the newly launched Grayscale 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) at that time and now, these investments have performed well overall, which may have led me to a bias similar to that of my first gambling experience in Las Vegas. But it hasn't always been that way. In fact, during the dismal year of 2022, my holdings once plummeted over 80% from their cost price. In dollar terms, this was the largest paper loss I have ever experienced on an investment.
For many, this would be enough to give up entirely 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 an uptrend. 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 at around $43,000, which was significantly higher than the price (around $28,000) when I last increased my Bitcoin position through GBTC.
Reasons I hold cryptocurrencies
So, why does this self-proclaimed old-school value investor, who has avoided speculation for over twenty years, continue to increase investments in an asset I believe has no intrinsic value? The answer is simple: my sons believe it has value.
In 2020, during the COVID-19 pandemic, my eldest son had just started first grade when he asked me if I had Bitcoin. Even though various social distancing measures were in place at the time, he 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 when he was only 6 years old.
It was then that I realized that Bitcoin existed longer than my two sons have been alive. This means that Bitcoin has always been around during their upbringing. More importantly, Bitcoin has always had value for them. Since then, this notion has become increasingly entrenched. In fact, my 10-year-old son checks the price of GBTC almost daily and owns 10 shares, which he bought with his pocket money saved over the years. For him, he would rather hold onto these than cash. I also feel that my own growing share of Bitcoin further convinces him that Bitcoin has real value (even though he is the catalyst for my foray into cryptocurrency investment).
Currently, my generation and the previous one may have accumulated the most wealth ever. I think this is one of the main reasons why gold prices surged to historic highs last year. We view gold as a safe-haven asset that retains value and hedges against inflation because it has played that role throughout our lives. But the only gold my eldest son knows is the necklace around his neck. The gold chain he wears was bought by his grandfather about 40 years ago, for the same reason my son holds Bitcoin: because gold has always had value for him and will continue to do so. Unfortunately, my father is no longer here. Once our generation is gone, it will be up to our children to decide what is valuable and what is not.
Some might say it’s unfair to compare Bitcoin to gold because gold is a physical asset with intrinsic value in a variety of technological and industrial applications. But honestly, the portion of gold used for these industrial purposes only accounts for about 7% of total mining. The rest of the gold mined in the world is used to make jewelry, coins, and bars. I believe the reason gold used in jewelry is favored is not only because it is beautiful but also because people perceive it to be 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 is true for my sons and Bitcoin; we are all products of our time. I grew up in a world mostly reliant on analog signals. I associate value with tangible things. Music and movies were distributed through physical media like cassette tapes, VHS tapes, CDs, and DVDs. Damn, I'm old enough to remember 8-track tapes and Betamax. 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 back in the day. They belong to the digital generation, where everything comes from nothing. Since the people 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.
Be prepared to lose everything
That said, the cryptocurrency market still has many unknowns and is quite risky. 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 genuinely regarded and accepted as stores of value: gold, silver, and platinum. In contrast, there are approximately 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 are deeply integrated into people's worldviews; they will effectively become the gold and silver of the global digital economy we are living in today. I suspect that the vast majority of other cryptocurrencies will ultimately follow the path of Kozmo.com.
However, to invest in cryptocurrency, one must be prepared for the risk of the entire market going to zero. This is why, if you plan to invest, it’s best to use money you can afford to lose. I am no longer the naive young person in my early 20s who didn’t understand the consequences of foolish financial decisions, thinking that diving into the internet boom would lead to overnight wealth. I am well aware of the risks I take with these investments. But I also know that over the years, the vast majority of the investment portfolio I have constructed for my family is still invested in value stocks.
Sustained adoption is key
Of course, something being accepted as a store of value or medium of exchange, and thus retaining its value, is one thing. To make investing in Bitcoin at current prices worthwhile, there must be ample 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 of Bitcoin is capped at 21 million (over 19 million have already been mined), and the growth rate of this limited supply decreases with each halving.
This means the key to price increases lies in rising demand. The good news is that we continually see favorable market dynamics driving up demand and adoption rates. One of the most significant events 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% increase before the U.S. elections on November 5.
From the day of the election, Bitcoin's remarkable rise also confirms this view. Recently, the price of Bitcoin broke the $100,000 mark for the first time. This surge was driven by market expectations that the incoming president, Donald Trump, is a strong supporter of cryptocurrency, and people anticipate that he will introduce policies that will further increase the 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 because they loudly promote Bitcoin's key advantages, such as its decentralized blockchain technology, which allows funds to be transferred globally quickly and accurately at very low or even zero cost. 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 motivation, as long as this leads to increasing demand for Bitcoin, it will create 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 until he graduated from 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 college education funds for my two sons. Assuming they both attend traditional four-year universities with no financial aid, paying for their higher education will be the largest expense my wife and I face 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. It does indeed contradict the principles I hold as a value investor, and that is undeniable. If I am 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 represent a small portion of our total investment portfolio, and even if they all go to zero, it won't result in significant losses. This shouldn't jeopardize our ability to pay for our children's education expenses because, like many families, we have been making more traditional investments for their higher education.
However, I also have a significant position in cryptocurrencies, and if I am right, they will ease 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 for enormous returns is hard to resist.
