Investing in the stock market – i.e., U.S. economy – seems volatile and slow at times. Should we be looking to Bitcoin and other speculative investments to increase our rate of return?
First question: What is Bitcoin? Bitcoin is digital money. It’s a store of value.
Second question: Should we ignore Bitcoin altogether, observe from the sidelines, dabble, or go all-in?
Ground rule #1: Pursuing quick wealth is never a wise or sustainable choice. Therefore, if you are looking for Bitcoin to quickly increase your net worth, and hoping it doubles, triples, or 10Xs in a short period of time, that would not be wise.
That said, Bitcoin has been around for over 15 years (the World Wide Web is only 35 years old). Some governments accept it as legal currency, while others have outlawed it. The U.S. government, among others, is closely scrutinizing it.
Despite the attention it receives, one of the biggest obstacles to widespread use is that very few retailers accept Bitcoin as payment, making it unlikely to replace the U.S. dollar (as a medium of exchange) anytime soon.
Many governments are proposing regulations, meaning they want to keep close tabs on Bitcoin and tax it. In this author’s opinion, Bitcoin isn’t going away. What about Ethereum, Dogecoin, and the 2.4 million other cryptocurrencies?! Much could be said here, but I do believe there is “one ring to rule them all” – Bitcoin.
My Experience With Bitcoin
I first heard of Bitcoin in December 2011. My wife and I were hosting a Christmas party at our house. Two highly intelligent gentlemen from my church were having a very heated discussion about this new digital currency. One was a young PhD student – a really brilliant guy, but quirky and awkward; the other, an extraordinarily successful and convincing hedge fund manager who at age 30 was already a multimillionaire.
The hedge fund manager was vehement that Bitcoin was a fad, going nowhere, a waste of money, and that worldwide governments would squash it, because they couldn’t tax it. The PhD student was adamant the other way and gave a compelling argument in favor of Bitcoin.
I agreed with Mr. Hedge fund, dismissed the Bitcoin concept, and didn’t think about it twice.
The PhD student is now retired in his late 30s, and we figure made more than $19 million off his initial investment – assuming he sold at its peak; an extremely tricky thing to time. Nonetheless, he is retired.
Trust me when I tell you I have done the math a thousand times that if I had just “invested” $1,000 into Bitcoin when it was trading at $4.25 in December 2011, I would have made about $17 million at Bitcoin’s peak price (had I sold at the peak).
A $5,000 investment would’ve turned into $86 million, and if I had invested $25,000 – highly unlikely, I’d be looking at a whopping $433 million. Fun, interesting, and somewhat depressing to run those “what-if” scenarios.
However, predicting winners before they are known, such as Bitcoin, Apple, Google, Microsoft, or NVidia, is difficult. An added difficulty is committing significant capital to these investments in the first place (when these investments are not widely known). And lastly, it would require a Herculean effort to hold onto these investments through massive drawdowns (often 80-90% drawdowns) – and then know just when to sell!
People occasionally get lucky, but consistent long-term luck is rare. That’s why I’m such a big believer in diversification and dollar-cost-averaging.
A Small Bitcoin Investment
Our director of wealth management, Mike Earl, did purchase one Bitcoin back in 2013 as an experiment. He learned of Bitcoin through a podcast on Austrian economics. He sold just 30 days later for a 27% gain (he turned $640 into $819).
He patted himself on the back for turning a quick, handsome profit; but if he still held that one Bitcoin today, his annualized rate of return would be 53% (cumulative return of 8,174%).
So, can you predict this? Not likely. Timing markets is difficult. Most people who saw Bitcoin double or triple sold early on. Go ahead and Google “Bitcoin Pizza Day” for a real doozy of a sold-too-soon story.
I do have a small amount of Bitcoin. Do I wish I had invested more earlier and bought 100 Bitcoins for me, and 10 for each of my kids? Of course. Should I take out a HELOC on my home and invest $300,000 into Bitcoin right now? Probably not.
In our wealth management practice, where we are working with large sums of money every day and helping people with their financial and tax planning, we’re frequently asked about Bitcoin and other speculative investments. Here’s our take: Bitcoin isn’t going anywhere, but it’s volatile. You’d be foolish to use leverage to purchase it.
If you’re curious about Bitcoin, have extra funds, are aggressively paying off debt, saving and investing a minimum of 20-25% of your gross income, and have years left before retirement, go ahead, and put some money into Bitcoin – but do so with caution.
HODL (Hold on for Dear Life)
This is a term you’ll see when you research Bitcoin. If you start purchasing Bitcoin, you become extremely reluctant to sell. In fact, I’ve never sold any of my Bitcoin. Members on our team who own way more Bitcoin than I do haven’t sold either.
It’s a long game, and we all suspect Bitcoin will increase in value even though there will be ups and downs. As we like to say, we wouldn’t be surprised if Bitcoin went up to $500,000 or down to $500.
A wise sage from my church has told me more than a few times to “never presume on the future.” What does that mean in relation to growing wealth? The time-tested, peace-inducing way to grow wealth is to live on less than you make, save, invest wisely, have good advisors, be patient, educate yourself, and over time, good things will happen.
Is Speculation OK?
Should we speculate with some of our dollars? I would argue yes – if you can afford the worst-case scenario of your investment going to zero. I’ve speculated on a handful of investments over the years, including land, businesses, and Bitcoin, and guess what? Some increased in value, and others were losers.
Back to the Stock Market
Investing in the stock market – i.e., U.S. economy – seems volatile at times. Should we be looking to Bitcoin and other speculative investments?
Here is my perspective after 22 years of business ownership and investing. If you believe in the U.S. economy, which includes over 4,000 publicly held companies and more than 30 million privately held ones, it’s safe to assume that these businesses will continue to innovate, grow, and make money.
Whether it’s your own small business or large companies like Target, Costco, or Home Depot, the goal is always the same: to provide goods and services that people want to buy. If this drive for profitability continues, the U.S. stock market has a very high chance of rewarding those who save, invest, and stay the course.
Don’t believe me? Just look at historical charts. Despite numerous crises – natural and manufactured – the U.S. economy has shown resilience and created substantial wealth for shareholders who HODL.
Final Thoughts
Last words of advice that we give all our clients: If you can afford it and you’re interested in it, get into Bitcoin – but don’t gamble with your family’s financial future. Like a casino player hoping to beat the house, many investors have lost fortunes by chasing quick riches.
If you can handle the extreme volatility and are comfortable with losing it all, Bitcoin is an interesting, fun, and speculative play. Just be prepared for the rollercoaster!
Until next time...
Disclaimer: The Wealth Group is a Securities and Exchange Registered Investment Advisor. No content contained herein should be construed as an offer for investment advice or an offer for the purchase or sale of any security, insurance or other investment product. Investments involve the risk of loss, including loss of principal. Please consult with a qualified financial, tax or legal professional before implementing any strategy presented here. Data presented here is obtained from believed reliable sources, but cannot be guaranteed as to completeness or accuracy.
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