So you want to invest in Bitcoin. Here are a few points to keep in mind:
I am a doctor, not a financial advisor
Given the chaotic assortment of Brokers, Financial Coaches, CFA, CPA, Wealth Advisors, Robo-Advisors, etc. I may or may not be better
I'm going to be honest
This information is free, and nearly everything I have learned online is also free
You're still going to find everyone online telling you to DYOR (Do Your Own Research)
OK, now we have talked about what it is, we can talk about how to get it. In the early days of bitcoin, people conducted transactions in person. There were not any global markets to trade or exchange cryptocurrencies. Today, there is a very large global industry devoted to the trade of crypto. If you are following news in America, you have probably heard of Coinbase. Coinbase was the first exchange with a large user base in America. During the 2017 bitcoin bull run, I believe there was a time when Coinbase was the most downloaded app on the Apple App store. If you are reading this from a different country, you have likely heard of Binance, which is the largest international exchange. There are MANY other exchanges. This is similar to the fact that there are many stock exchanges. If you are not following the financial markets, you may not realize that the New York Stock Exchange (NYSE) is different than the NASDAQ, and there are other stock exchanges in other countries as well. One of the crypto exchanges that I suggest is called Voyager. Voyager is a publicly traded company on the Canadian Stock Exchange. (You may be able to buy the stock in your American brokerage under the ticker VYGVF.) (And, Voyager moved to the Toronto Stock Exchange after I wrote this and before I published.)
I am not an advocate of rapidly buying and selling shares of anything--Bitcoin, Apple, or even VYGVF. There are exchanges that are designed for frequent trades. Kraken, Binance.us, Coinbase Pro and Gemini are all set up for the detailed trader, where you can see the order book, similar to how you can see it on a professional stock brokerage program like Interactive Brokers. Coinbase has high fees, but Coinbase Pro does not, so if you are going to try and do trading in crypto, you want to pay close attention to the fees. Voyager has fees that are small and hidden from the user, similar to how the RobinHood stock trading brokerage/app is set up. If you are going to buy and hold the investment for the next 5-10 years, these fees should be negligible to your gains. If you are going to trade multiple times a day or week, these fees can really add up.
As I said in the last paragraph, I suggest the best use of your investment into bitcoin is to buy and hold. Bitcoin has appreciated on average 200% annually since inception vs the $USD. This is an insane growth rate compared to all other investments over the last 12 years. If you continue to explore the crypto space, you will see people talking about HODL. HODL likely started from a typo of HOLD, although 1- no one is sure, 2- some advocate it is Hang On for Dear Life, 3- computer geeks have often made up their own nicknames for things and perhaps HODL was intentional. Regardless of its origins, HODL is here to stay, and many people who have bought bitcoin are holding and not selling (apart from a brief time trying the trading on Coinbase Pro in 2017, I have never sold any bitcoin).
The 200% annual gain is not linear. There have been, and therefore certainly may still be, dramatic price swings. When I say dramatic, I mean 5% price moves occur in 24 hours routinely, 20-30% price swings are frequent, and 80% are not impossible. You are probably reading this because you have heard of the recent gains. As I write this in April 2021, Bitcoin is up approximately 500% over the last 12 months. Obviously no one can predict the future, but one man has come up with a fairly accurate model so far. This person is a Dutch investor who goes by the name PlanB and can be found on Twitter. In March 2019, he published a stock to flow model predicting bitcoin’s price, and the model has been remarkably accurate over the last 2 years. Essentially, as the bitcoin production is cut in half, the scarcity of the flow of available bitcoin is increased, and the price increases correspondingly to the scarcity. According to his model, bitcoin will likely continue to increase in price, above $300,000, and settle back somewhere around $200,000 before the next halving. No one has a crystal ball, but another 5X from the $60,000 that we are at is nothing to sneeze at. (Aaaand I wrote this in April but am publishing in September 2021 because...Life. My actual job is an ER doc, and there's this Covid-19 Pandemic, but I digress. What I typed here came true in May 2021 when we had a correction from a peak of $64,000 down to a low of $29,000 and now a return to around $47,000.)
I believe we are seeing waves of bitcoin adoption. As I alluded to at the beginning of this, cryptocurrency is a paradigm shift. It is hard to change your thinking from what you have always known, and to accept that this new technology may be better than what we had before. I propose that technology inevitably changes our world. In 2006, a fancy phone had some predictive text messaging, but in 2007, Apple unleashed the iPhone and suddenly you had a phone that would launch a maps app and give you directions directly from a webpage you were viewing on a computer that fit in your pocket. Nowadays, you wouldn’t think of having a phone without a miniature computer inside of it. This miniature computer is much more powerful than the computers on the Space Shuttle when those were built 45 years ago. We sent men to the moon using slide rules. What I have seen during my lifetime is exponential computer growth. Ready Player One is fantasy until it’s not. Numerous companies are working on creating Virtual Reality worlds right now. Uber has disrupted taxi service. Who would have thought 20 years ago that you would pull a phone out of your pocket and pay a stranger to drive you somewhere without even pulling out your wallet? Bitcoin is the evolution of money.
Alrighty, you’re sold! How do you get on board this train? Slowly, then all at once. At least, that is how I did it. I first heard about bitcoin when I saw an Instructable article about making a stainless steel wallet back in August 2013. I didn’t make the wallet, and thought, “this bitcoin thing is going to take some time to look into, I don’t have the time right now.” The price was around $230. The next time I heard about it was during the Silk Road dark web activity that made the news a few months later. This was the market peak around $1200. The Silk Road was a website to buy/sell illegal items, and bitcoin was used during some of these transactions. This certainly tarnished the name of bitcoin as the mainstream narrative became this asset was only/mostly used for illegal transactions. The price dropped substantially after this. It wasn’t until a few years later, in 2017, when I noticed bitcoin was trading around $4,000, that I decided it was time to devote some attention to this idea. I did what we now starting to see investment managers say today: put in 1% of your portfolio. I would argue this has its merits. If you are wrong with your investment thesis, you aren’t going to feel it. If you took away 1% of your portfolio, you might say, ‘meh.’ After all, you are probably paying your investment managers 1-2% in fees to manage your money already. So, you put in 1%. Maybe 3%. And if it goes to zero, you’re not wrecked, and you learned your lesson. If it doubles, you feel good with your decisions, and gain some confidence. Basically, this is what I did in 2017.
When 2020 hit, with the global pandemic about to start, I realized that I had been reading about bitcoin for years, had weathered the bull market of 2017, and the ‘crypto winter’ that was the bear market from 2018-19, and I knew I believed in the message. It was time to invest a sizable percentage. I expected the stock market drop that occurred in March 2020. I did not expect bitcoin to drop, and this scared me from going ‘all in.’ In hindsight, I think that both the stock market crash and the bitcoin price crash were due to a liquidity run because no one was sure what was going to happen with governments all over the world shutting down businesses and barring travel. Remarkably, both markets substantially rebounded. I think part of this rebound is due in no uncertain terms to the stimulus packages created by the US Government and Federal Reserve. I am not here to debate how right or wrong these decisions were, but they were done, and the result is a massive increase in circulating US Dollars. During 2020-1, the Federal Reserve has created approximately 33% of all $USD ever created. Look into the M1 or M2 Money supply. This money inventory was magically snapped into existence to keep the economy going during the shutdown. There cannot be zero effects from this debasement of the currency. Hard assets, aka sound money have to increase in price accordingly. Now, bitcoin has seen an uncorrelated increase. I believe that the pandemic has spurred increased attention to the idea of bitcoin. As more people understand this, more people get on board.
I propose putting a meaningful amount of your wealth into this asset class. But first, I propose investing assets that you do not need for 3-5 years. Yes, I am suggesting you invest for the long-term. Maybe for your kids. We may see another 80% drop after a 500% gain. That is hard on the stomach. Understand there is risk behind this investment decision, but in the long term, much like long-term buyers of most stocks, you are rewarded. My personal belief is that as more institutions get on board with buying bitcoin, we will see dramatic price rise during this year (2021).
What we have seen so far are nimble and bold companies buying bitcoin (Tesla, MicroStrategy). I think we are going to see traditional companies buying and holding as well. This takes time. This takes convincing the board of directors, or the investment committee time to study bitcoin, understand the hows and whys about the technology and the asset class. It also takes time to sell other positions to buy into bitcoin. I predict we will see a few market movers doing this during the second quarter of 2021 (now), and more in the third and fourth quarters. These companies are going to be fighting over an increasingly scarce supply of available coins. This drives the price higher and higher.
What do you do with it after you have purchased bitcoin? Similar to owning a stock--you hope it goes up and sell some later after it does. If you begin to explore this space, you will find people that advocate holding it forever. However, there is another advantage. You can deposit your crypto at some online wallets and earn interest on the coins you hold at that institution. I am a big fan of Celsius for this reason. You can also store your bitcoin on a paper or hardware wallet. No matter what you choose, please go slow, pay attention, and double check. If you send your bitcoin to an address that you do not control, it is GONE FOREVER. Let me repeat that, and reference my wallet address I displayed previously. If you don’t have the private key to unlock that address that you sent the bitcoin, you will never retrieve it. There is a mantra in bitcoin ‘not your keys, not your coin.’ There is a risk that if you store your bitcoin on an exchange (such as Coinbase) that the exchange could be hacked, and then your coins are gone. (This happened at the first major bitcoin exchange, Mt.Gox.) If you store your bitcoin somewhere and lose your private key, it is gone. (You can find news articles about people that have done this.) So, before you go sending your crypto paid for with your hard-earned cash, check and double check where you are sending it. When I am sending large values, I have done a test amount, wait for the confirmation, and then follow with the large sum. There is usually a fee to transmit the bitcoin (or any other crypto). You should be able to see this fee before you transmit.
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