Bill Parcells’ “You are what your record says you are” is solidly in our top 5 life maxims. Effort doesn’t matter. Intentions don’t matter. Results – your track record, essentially – is all that matters. It is a tough love sort of aphorism, but it cuts through the clutter well enough.
We have been getting numerous inquiries about bitcoin lately and were reminded that this saying also applies to investments. Bitcoin’s record has always been that of a highly volatile asset. We were writing about it back in 2013, when it went from $70 to $1,000 in less than 6 months. And we were there when it then fell to $200 in 2015.
Bitcoin’s history over the last 10 months doesn’t rhyme with that earlier record; it matches it note-for-note. From its $19,000 highs in December 2017, it is now down 80% to $3,800. Just as $1,000 in 2013 became $200 in 2015.
Maybe it’s that 80% decline, similar to past blowups, that has potential investors intrigued just now. Regardless, we have 3 pieces of advice for those considering taking a swing here.
#1. Have a defensible explanation for why you think bitcoin is worth anything at all, because without it you’ll almost certainly be shaken out by the volatility. Our logic, which we’ve used for years, goes like this:
- Bitcoin’s closest analog in the physical world is a $100 bill. Both are portable, anonymous, and have conversion mechanisms to any useful fiat currency.
- There are $1.3 trillion in $100s circulating around the world, mostly outside the US. Global demand for $100s has been growing since the Financial Crisis at a healthy clip: 8.2% annually since 2007.
- At current prices, bitcoin’s market cap is $66 billion, or 5% of all $100 bills in circulation.
- If bitcoin can grow more popular as a portable store of wealth (and in a smartphone centric world, that seems logical), it can take share from $100 bills (let alone high denomination euro notes) and grow in value.
#2. Only put in as much money as you’ve ever spent on a single meal in your life. Bitcoin is not a “percent of the portfolio” allocation. This is a “I once spent $1,000 on lunch at a Michelin 3 star restaurant, so that’s my total investment” sort of trade.
Why so little? Bitcoin trades like an out of the money option (i.e. with tremendous volatility) because that’s exactly what it is. A call on a new technology, or a put on the existing global financial system. Take your pick.
There’s also the problem right now that bitcoin’s fundamentals are pretty bad. As we recently outlined, Google search trends for “bitcoin” are still declining and wallet growth is slowing. Buying here means bucking those trends, so small position sizes are in order.
#3. Have a gameplan where you will buy your lunch-money-sized position, because bitcoin could easily trade to $1000 or less before it bottoms. Maybe it’s a third every $1000 down, or something similar. But we don’t pick bottoms. Ever.
The logical question is “Why bother with this?” and the answer goes right back to the top of this section: bitcoin’s record is clear. Small amounts of capital plus time (and a little market euphoria) have historically equaled a reasonably good return. History may repeat itself. And if it doesn’t, you are only out one nice lunch.