The reason is simple: my sons believe it has value.
Written by: Taesik Yoon, Forbes
Translated by: Luffy, Foresight News
I still vividly recall 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 spend a few days together. We stayed at the Hard Rock Casino Hotel, which had a party-like atmosphere and smaller, more intimate gaming areas compared to the large casinos on the Las Vegas Strip, along with generous perks that made it an ideal place for someone my age.
Even after 27 years, this memory remains vivid. I still 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 led us to quickly increase our bets. In the first two days there, I won about $1,700. But by the third day, my luck turned. By the evening, my friend went from winning a few hundred dollars to losing $750. He was so frustrated that he decided to head back to the room and sleep early.
My situation got worse, with my $1,700 profit shrinking to just $300. But unlike my friend, I didn't want to quit. Losing so much money left me feeling resentful, so I took that remaining $300 and saw an empty table with a minimum bet of $100, thinking, why not give it a try? Fortune 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 in the late '90s, that was a lot of money.
Lessons from the first foray into stock investing
I bring this up because early experiences often shape a person's worldview. 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 I was young and hadn't experienced much, I had no idea how reckless it was to bet $100 when I only had $700 in my bank account.
The same goes for stock investing. My first encounter with stock investing was when I started working for Forbes at the peak of the internet bubble in early 2000. In the six months prior to my joining, among the stocks recommended by our department were eToys, VerticalNet, and Healtheon, all of which catered to the frenzied demand for anything internet-related at the time, whether it was new websites or companies supporting the internet infrastructure. 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 soared about 2,600% the previous year. This is not a typo.
At that time, I had saved 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 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 distinctly remember is holding onto them as I watched their prices plummet with the market, ultimately losing 75% - 80% on those positions. This was a painful lesson for me, making me realize that I knew nothing about stock investing and should never have ventured into it.
Becoming a value investor
In the following years, things changed. I enrolled in the Chartered Financial Analyst (CFA) program, became a stock analyst, and gained experience looking for undervalued stocks in 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 those two losing stocks because I, like many others at the time, was gullible to the 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 speculation 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 started primarily buying stocks of companies whose prices I believed were far below their actual value after conducting 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 I am also disciplined enough to only act when the stock price is significantly undervalued. For example, after the stock market crash following the 9/11 attacks in 2001, our department recommended Amazon stock when it was priced at $7.48, and I bought some myself. However, less than four months later, when we suggested that subscribers take profits as 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. Yeah, every time I think about it, it doesn't feel good.)
However, overall, I have had more successes than failures in investing and am quite satisfied with my financial situation, considering I haven't taken too much risk. While I regret selling Amazon stock too early, it was also due to the same discipline that I avoided dozens, possibly hundreds, of failures like Kozmo.com. You haven't heard of Kozmo? Exactly.
Initial acquaintance with cryptocurrency
Knowing this, you might be surprised that I started investing in Bitcoin a few years ago. After all, many people would say Bitcoin is a typical speculative asset that value investors like me, who despise risk, tend to avoid. It doesn't produce anything 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 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 by continuously adding to GBTC, as well as positions in Grayscale's newly launched Ethereum Trust (ETHE) and another Bitcoin ETF, the Bitwise Bitcoin ETF (BITB).
Some might point out that, considering the time I bought in and the prices of the underlying cryptocurrencies (Bitcoin and Ethereum) then and now, these investments have performed well overall, which might 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 positions fell over 80% from their cost basis. In terms of dollars, this was my largest paper loss on an investment ever.
For many, this would be enough to give up completely and never look back. But I went against the grain, continuing to add positions during the downturn. Later, I did something I rarely do: I bought in during the uptrend. Take my BITB position, for instance; 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 about $43,000, significantly higher than the price (around $28,000) when I last added to my Bitcoin position through GBTC.
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 invest more in an asset I believe has no real intrinsic value? The answer is simple: my sons believe it has value.
In the midst of the COVID-19 pandemic in 2020, my eldest son, who had just started first grade, asked me if I had any Bitcoin. Despite various social distancing measures in place, 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 downplayed Bitcoin's value. Even so, he still wanted to buy some when he was just 6 years old.
It was then that I realized Bitcoin is older than both of my sons. This means that throughout their growing up, Bitcoin has always been present. More importantly, it has always held value for them. Since then, this notion has become increasingly entrenched. In fact, my 10-year-old son checks the price of GBTC almost every day, holding 10 shares that he bought with his saved pocket money 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 of its real value (even though he was the trigger for my entry 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 that role throughout our lives. But the gold my eldest son knows is the necklace he wears around his neck. The gold chain he wears was bought by his grandfather about 40 years ago, for the same reason my son now holds Bitcoin: because gold has always held value for him and will continue to do so. Unfortunately, my father is no longer with us. Once our generation is gone, it will be up to our children to determine what is valuable and what is not.
Some might argue that comparing Bitcoin to gold is unfair because gold is a tangible asset with intrinsic value in various technological 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 supply. The rest of the gold mined in the world is used to make jewelry, coins, and bars. I believe the reason gold used for jewelry is favored is not only because it's beautiful but also because people perceive it to be scarce. This is also a significant reason why gold is widely regarded as a store of value. More importantly, in my lifetime, the value of gold has never fallen below its actual intrinsic value.
The same goes for my sons and Bitcoin; we are all products of our times. I grew up in a world that mostly relied on analog signals. I was used to associating value with tangible things. Music and movies were spread through physical media such as cassette tapes, VHS tapes, CDs, and DVDs. Goodness, 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 when my friends and I rented videos from Blockbuster.
Be prepared to lose your entire investment
That said, the cryptocurrency market still has many unknowns and is fraught with risk. The key issue is that the number of types 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 considered and accepted as stores of value: gold, silver, and platinum. In contrast, there are about 270 cryptocurrencies currently traded on popular cryptocurrency exchange Coinbase, while the total number of cryptocurrencies around the world 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 eyes of the public and have deeply integrated into people's worldviews; they will effectively become the gold and silver of the global digital economy we find ourselves in today. I suspect that most of the remaining 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 you can afford to lose. I am no longer the young and naive person in my early 20s who didn't understand the consequences of foolish financial decisions and naively thought I could get rich overnight by jumping into the internet boom. I am fully aware of the risks I am taking with these investments. But I also know that the vast majority of the investment portfolio I have built for my family over the years is still invested in value stocks.
Sustained adoption is key
Of course, one thing being accepted as a store of value or medium of exchange and thereby retaining its value is one thing. To make investing in Bitcoin at current prices 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 Bitcoin's total potential supply cap is 21 million coins (over 19 million have already been mined), and the growth rate of this limited supply will decrease with each halving.
This means that the key to price increase lies in rising demand. The good news is that we continually see favorable market dynamics driving demand and adoption upward. 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 primary catalyst for Bitcoin's 66% increase ahead of the November 5 elections in the U.S. in 2024.
Starting from election day, Bitcoin's remarkable surge also corroborated this viewpoint. 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, a strong supporter of cryptocurrencies, would introduce policies that would further increase demand for Bitcoin and other tokens.
Therefore, the rate of adoption is 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 the key advantages of Bitcoin, such as its decentralized blockchain technology that allows funds to be transferred quickly and accurately worldwide at very low or even zero cost. For me, this belief stems from my views on the group of people most likely to determine Bitcoin's value in the future, rather than present circumstances. Regardless of the motivation, as long as it leads to a growing demand for Bitcoin, it will result in an increasingly unbalanced supply and demand situation. Some Bitcoin bulls even predict that by 2030, the price of Bitcoin will reach $1 million.
At that time, there were still two years until my eldest son 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 funds for my two sons' college education. Assuming they both attend a traditional four-year university and receive no financial aid, covering their higher education costs will be the largest expense my wife and I face before retirement, significantly more than our next large expense, which is our remaining mortgage.
I know that after reading this, some will find my reasons for purchasing Bitcoin utterly ridiculous. This undeniably goes against the principles I uphold as a value investor. 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, as my cryptocurrency holdings represent a small proportion of our family's total investment portfolio, and even if I lost everything, it wouldn't cause significant damage. 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.
Nevertheless, my cryptocurrency holdings are not small either. If I'm right, they will alleviate this heavy economic 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 significant gains is hard to resist.
