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My thoughts on investing in crypto and bitcoin

Uncategorized Jan 13, 2021

Some of my friends were asking me all sorts of questions. And I've read many posts on places like Reddit (yeah, I know). Here's a summary of my reactions to these questions and posts:

“Bitcoin is pure speculation”: I think I would agree with that. But the question then becomes: what is your risk/reward ratio? You can only lose 100% of your money, but the potential upside in my opinion is quite large (there’s an ‘asymmetric risk’). I think bitcoin is currently on its way to become digital gold. Gold has a market cap of about 10 trillion USD, bitcoin ‘only’ a bit more than 600 billion. So if bitcoin does become digital gold, having superior characteristics compared to gold, it still has a long way to go and it could appreciate 15x if gold’s market cap remains unchanged. Multiple wealthy people (example: Raoul Pal) are actually moving away from gold and into bitcoin. Also worth reading The Bitcoin Standard to get more background information about gold as money versus government money. If bitcoin doesn’t just become digital gold, but even acts as a reserve currency at some point in time, which could happen, but I will say the probability is likely low for now, then you could look at all the money in the world that would need to become bitcoinized, which is about 80 trillion USD. Which would make bitcoin go up 133x. There are many more use cases for bitcoin (see ARK Invest’s whitepapers about bitcoin), but I suppose these are the largest ones with regards to potential market cap. So basically I think the risk is relatively low (which sounds weird because it’s potentially 100%) but the potential reward is high.

“Bitcoin is like a lottery, it’s gambling”: if that’s what you think, you should not be investing in bitcoin and first would need to study it closer. Knowledge is power. I think the potential of bitcoin is its so-called ‘expected value’. Poker players will understand that. Let’s say bitcoin has a 50% chance of becoming digital gold. If it does, it’s worth 10 trillion USD. Then the expected value is 50% x 10 trillion USD = 5 trillion USD. So if you believe those numbers to be accurate, the expected value would mean you think bitcoin can appreciate about 8x.

“Bitcoin is too expensive”: depends, see above. But also keep in mind three things that people often forget. First: don’t look at the actual price per bitcoin; look at its market cap. Bitcoin at $32.500 is more expensive than Apple at $130, because currently there are about 18,5 million bitcoin, but Apple has about 17 billion shares outstanding. Market cap = price multipled by shares. So Apple has a market cap of about 2.2 trillion USD, bitcoin 600 billion USD. Second: you don’t need to buy one entire bitcoin, you can buy 1 dollar of bitcoin if you’d like. Bitcoin is divided into 100 million ‘satoshis’ which are like cents from a dollar. And third: the answer to risk of position sizing (I believe Robert Breedlove said that; interesting guy). Basically means: if you want to be exposed to some risk, but not a lot, the answer lies in the percentage of your portfolio that you’d like to allocate to bitcoin. If you want some risk, but not a lot, maybe do 1%. If you want more, maybe do 10%. Whatever you feel comfortable with.

“People say negative things about bitcoin”: depends who you talk to. In general what I see is people talk negatively about bitcoin because they don’t understand it (and have never tried to understand it). They’ll say it’s a bubble, because it’s ‘so expensive’. Of course I’m inside the bitcoin rabbithole and I’m aware of that, but I do see many smart people, way smart than me, with quite a bit of money, stepping into the realms of bitcoin. And I’ll say it again: knowledge is power. If you’ve never tried to understand bitcoin, I don’t think you can really say anything useful about it, good or bad. If you want one very very good bitcoin critic, listen to Dave Lee on Investing. He’s probably the smartest YouTuber I know and has a very deep understanding of bitcoin and its potential. But even he, without owning any bitcoin I believe, says he’s bullish in the medium term (say 5-10 years). After that time period, he believes bitcoin could become too dangerous for governments (because if bitcoin is ‘only’ digital gold, that’s not a big problem, but if it tries to become a reserve currency, then it will be a legitimate threat to the monetary system as we know it. By the way: I’ve got a playlist on my YouTube channel with some solid videos about bitcoin (and I don’t mean my own xD).

“You can take risks, you’re young”: yeah I do think that’s important to note as well. As Kevin from Meet Kevin said in a video today: think about what phase you’re in. Are you building your wealth or are you trying to live off your wealth? Personally I’m in the building phase. Which is also one of the reasons I couldn’t care less about dividend stocks. I’d rather have growth stocks to be able to build quickly. At some point that will change, but probably not for the next 20 years. Because yeah, if you’re 60 years old, I understand you don’t necessarily want bitcoin. I understand you then want dividend stocks.

General: just make sure you’re educated about your options and then make a decision. I don’t care which path you choose, as long as you know which paths there are. Doesn’t just relate to bitcoin, but also to stocks, your career, etc.

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