Summary
It’s hard to escape the investing phenomena that Bitcoin has become. The rapid growth of the investment in 2017 caused many people to wonder whether they should invest in Bitcoin.
In this article, we discuss whether or not it makes sense to put some money in Bitcoin. As we will discuss, I’d invite you to ask yourselves three “Why?” questions before deciding whether or not this makes sense for you.
First, we’ll discuss why you are thinking about investing in Bitcoin now, and the risks involved in putting money into investments that have recently taken off in value.
From there, we discuss why Bitcoin specifically is the investment venture of interest, particularly since there are numerous other opportunities to put money into crypto and/or blockchain technology. We’ll also discuss how Bitcoin compares and contrasts to two previous investment “bubbles”, and what they can teach us about the future of investing in blockchain.
Finally, we’ll discuss how Bitcoin fits into your overall investing strategy. There are a lot of factors to consider, and you need to take several factors into account before picking your investments. “Making a lot of money” is a dream- it’s not a strategy that you can consistently execute. We’ll talk about some of the factors you should take into account before deciding where to put your money.
(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 22, 2018.)
Introduction
Welcome, everyone. Welcome to our weekly Facebook Live broadcast, which we’re going to hold every Monday at 8 PM Eastern.
Today, I want to talk a little bit about investing strategies. You’ve probably noticed this isn’t necessarily something I cover a lot here- I like to focus my content on what I think are the very real, important decisions we need to make when it comes to how we approach money day-to-day- and even just from an emotional standpoint.
But ultimately, investing is a big part of how we handle our money, so today I wanted to cover a question today that I’ve probably fielded somewhere between twelve to fifteen or times in the past two months. And this question has to do with Bitcoin. What’s all the fuss about, should you be investing in Bitcoin? Is it a good idea for you to be putting your money into Bitcoin?
Why?
And my response to you here today is one word.
Why?
Literally. Why? I don’t necessarily mean that in a negative way. I know I sound sarcastic, but seriously: Why? Why do you want to invest in Bitcoin? And specifically, I have three different “why” questions I want to pose back to you here today. I really encourage you to think through these – both about Bitcoin specifically if that’s something you’re interested in, but also about how you manage your investments in general. These three “why” questions that I have are really important when it comes to thinking through how to approach this subject.
Question 1: Why Now?
The first question I have for you is: “Why now?” Why is Bitcoin a topic that is coming up right now?
Bitcoin is not a new thing. It’s been around for several years, and I’ve never heard anybody ask me whether or not they should be investing in Bitcoin up until mid-December 2017 or so. Like I said, I’ve probably gotten a dozen questions about this particular topic since then. I didn’t hear anyone asking about whether they should invest in Bitcoin when it was $100 to invest in June 2013. Or when it was $500 in November 2015. Or even when it was $1,000 in January 2017. Nobody asked me about it until it was over $15,000 in December 2017.
We have a natural tendency when we’re making investment decisions to want to buy when things are going up. The investment has done well, so it will continue to do so, right? And it very well could.
The problem is that just because it’s gone up before, doesn’t mean it will necessarily continue to go up in the future. And in fact, that’s a very, very dangerous assumption to make when it comes to choosing investments.
Which Investment Would You Pick?
Case in point, I had a client a few years back who had two investments with me. I don’t remember exactly what they were, that’s not necessarily the point, but we’ll call them Investment A and Investment B.
I met with the client about six months after we had invested her money into those two investments. She had some more money to invest. She wanted to put some more money into at least one of these investments. Now, Investment A had done really well over the prior six months. It had really good returns, and she made a decent amount of money off of it. On the other hand, Investment B was still a good fund, but it hadn’t really done well over the prior six months. It may have even gone down in value, I don’t remember the specific details.
Guess which investment my client wanted to put more money into, when it came to this new money she was looking to invest. I’ll give you a hint: she didn’t choose the one that hadn’t done well recently. She wanted to put more money into Investment A. It had done well, so why not put more money into it?
We naturally look at how things have done in the past and use that as the basis for our decision making when it comes to making investments.
Buy High, Sell… Low?
But there’s a problem with that.
And the problem is that if that’s the way you’re making your investment decisions, that’s a really, really good way to lock yourself into buying investments when they’re priced high and selling them when they’re low. We know intuitively that we want to buy investments when they’re low, and sell them when they’re high. That’s how we make money of them. We want to choose things that have done well because they might continue to do well, and they might….
But what if they don’t? If these investments have done well up until this point and then they don’t do well – and there’s a decent chance that they actually might not – you’re creating a structure for yourself to invest at high prices and then lose out when the investment falls in price.
We don’t know what Bitcoin is going to do tomorrow. We don’t know if it’s going to get more expensive or less expensive to invest in. But the point is buying it just because it’s gone up lately is really, really dangerous. Because if you do this consistently, you’re really setting yourself up to buy investments when they’re high and sell them when they’re low. Which we know isn’t what we’re supposed to do, but ultimately this is just a bias that we have. We want to invest in things that have done well, because they might continue to do well. But we can’t assume that.
Question 2: Why Bitcoin Specifically?
The second why question I have for you is: Why Bitcoin specifically?
And full disclosure here: I am not a technology expert. I’m a finance guy- that’s my area of expertise, but technology really isn’t. If you have some more technical questions about how any of the information below works, I’d be happy to connect you to some people in my network who can tell you more about this.
The key takeaway here: there’s a difference between Bitcoin itself and the technology behind it, which is called blockchain technology. It’s a very real technology that’s here to stay, and it has value.
Can Tulips Teach Us About Bitcoin?
I’ve heard some people describe Bitcoin as a “speculative bubble”, or even I’ve seen a reference to Bitcoin as a “tulip bubble”. The “tulip bubble” reference is a very specific one, that I think is worth digging into a bit. Is Bitcoin the next “tulip bubble”?
And my answer to that is no, for reasons that we will discuss. But before we get to why, we need to talk about what we mean by “tulip bubble”.
This actually goes back to the 1600’s in Europe. The very first investment bubble that existed had to do with buying tulip bulbs (i.e., the bulbs that you plant in the ground to grow tulips). Tulips aren’t native to Europe, apparently. Traders brought them into Europe in the 1600’s, and people really liked them for some reason. To the point where there wasn’t a big supply, but everybody wanted them, so prices went up. A lot.
Not only did prices go up due to supply and demand, but people started to game the system. Some investment-savvy people at the time asked, “what if we were able to buy up a lot of tulip bulbs and try to sell them off at higher prices later?”
The price of tulips in Europe at this time went very, very high. To the point where the price of a tulip bulb was many times the annual income for most people.
The problem is that this price spike wasn’t actually based on anything. There was no value behind it. The price was based purely on the whims of the ongoing fad of the day. So eventually, after a relatively short amount of time, people got sick of tulips, and the price of the tulip went down to basically nothing. People who “invested” at the top lost just about everything.
There’s a Better Comparison
This what I’ve been seeing people compare Bitcoin to today. And I really don’t think that’s the right comparison to make. Because of the underlying blockchain technology, which is something that has actual value and I think is here to stay. The value of Bitcoin is not based on nothing. It’s something that has some inherent value to it.
But I do think it has some “bubble-like” qualities. The comparison that I’d actually make isn’t to this “tulip bubble”, but rather what happened to the United States in the technology industry during the 1990’s and early 2000’s.
This was the dawn of the internet. Tech startups, companies that produced computers and internet-related technology, were popping up left and right. A lot of new technology stocks hit the market during this time, which everybody wanted to buy into because the internet was the “new big thing”. And most of the startup companies didn’t make it. Some of them did – and the ones that made it are the companies that have done really well, like Amazon and Google. But as a whole, ultimately prices went up so high, some companies started to fail, and there was a price crash. Prices in the technology industry came down in the early 2000’s.
The Next Netscape?
And I think that this really is a much better comparison to what’s happening to Bitcoin today. Let me ask you this: at the beginning of the tech boom in the 1990s, when all of these startups were launching and tech stock prices were going up and up and up, what was the first big, new technology stock back in the mid 1990s? Google started a little bit later as did some of the other names you might guess, but the biggest technology stock, the one that everybody was talking about and quickly went up in price, was Netscape.
Some of you probably don’t even remember what Netscape is, because it’s not around anymore. Netscape was one of the first main internet browsers that competed with America Online back in the early days of the internet. This was the stock that everybody was excited about. The introduction of Netscape stock was huge, the price went up astronomically in value, and a couple of years later, AOL bought Netscape for a fraction of what it was worth, and the browser has long been defunct.
There are Other Crypto Investment Opportunities
I think that this sort of frame of reference is a really good one. I’d encourage you to think about Bitcoin and other crypto investment opportunities in this context.
I would suspect that all of these blockchain “firms” that you’re seeing launch right now, I’d expect that about 15% or so of them will succeed and actually make it (and the ones that do may do very well, just like Google and Amazon did back in the 90’s). Unfortunately, we don’t know which ones those are.
And, at least as of this recording, there’s no such thing as a “blockchain or crypto mutual fund”, or at least one that I have a lot of faith in. That may well come along in time, but right now there’s no way to buy into this phenomena as a whole right now. You’d essentially need to pick and choose from one venture to another, or don’t do it at all.
Ultimately, if I think that 15% of them will succeed, means that you might have an 85% chance of losing everything, if you choose to invest in one that fails.
Should I Invest in Bitcoin?
To answer the actual question, “Should I invest in Bitcoin?”, my answer is: if you have the capacity to invest in something with that level of risk – if you’re ok with investing in something that risky – then I’d say sure… but only with some “fun money”. I wouldn’t invest anything that you’re relying on, just in case it doesn’t work out.
Before you invest in one of these companies, I’d ask yourself: “What would happen if this investment went to zero?” What happens if you literally lose the entire investment?
If you’re comfortable with taking that risk with a little bit of money here and there, then go for it. I encourage people to invest a little bit of money into specific investments that interest them… but only with “fun money”. Don’t do your serious investing in these sorts of products.
However, I have one caveat to this.
Watch out for scams. These crypto or blockchain investment ventures aren’t (yet) regulated in the same way that other investments are. The SEC has started to crack down on this, but I’ve seen several “opportunities” that have been advertised that I would bet just about everything are scams. There isn’t the regulatory structure in place behind these sorts of products to enforce these investments.
So, I’d be very careful. Make sure that if you do invest in something like this, that it’s legitimate and only with money that you’d be comfortable with losing entirely.
Question 3: Why Do You Think Bitcoin is The Right Investment (For You)?
But, there’s one more “why” question that we need to answer: why do you think it’s the right investment for you?
Does it fit with your investing plan? Does it fit with your investing philosophy, or is it just a fad that you’ve heard about and are looking to get in on.
“Making a lot of money” isn’t an investing plan. That’s not how you should be framing this decision, at least on it’s own. There’s a lot more that you need to take into account. How you invest is important, too.
How do you want your money to serve you? What exactly is it that you’re looking for from your investments? Are you primarily looking for your investment to grow over time? Or, are you looking for something that’s going to grow really quickly and then sell it off before it crashes? Or, would you rather have an investment that will pay you some sort of income stream? A lot of investments can do this for you.
How much risk do you like to take? I know a few people who almost get ill thinking about their investments dropping in value. Bitcoin is probably not the right thing for that person. You have to be comfortable taking risk in order to pursue this venture.
And finally, what are you investing for? Is this for something longer term like retirement, or something you’re looking to spend in a few years?
You Need A Strategy
You need to know the answers to these questions before you and actually pick the right kind of investment.
And frankly, this goes beyond Bitcoin. It certainly applies here, but all of your investments, you should have a strategy in place. So, while Bitcoin or any of the other crypto investments out there could be the right thing for a little bit of your money, you need to make sure it fits in with the rest of what you’re trying to do. And don’t risk your entire investment strategy for something that doesn’t entirely fit.
I hope this was helpful in terms of talking about Bitcoin. We broadcast one of these videos every Monday at 8 PM Eastern, and I typically base these on questions that come in. So, if you have a topic you’d like to hear about for ten to fifteen minutes or so, go ahead and leave a comment on this video or send me an email. I’d be happy to add your question to the queue. Thanks so much everyone, have a great day!