“On October 26, 2012 I bought 100 Bitcoins for $1017 USD. As of November 28th, 2017, they are worth almost exactly $1,000,000 USD.”
Of late, I have been getting an increasing number of folks asking for my opinion on cryptocurrencies. The above line (cribbed and slightly modified from Lucas’ opening below) would be the ideal way to begin my response. If only it were true.
Sadly it is not. Polar bears know more about astrophysics than I know about cryptocurrencies. They probably know more about cryptocurrencies, too.
As luck would have it, the most recent person to ask about this is my pal Lucas. He reached out a couple of weeks ago and, after I suggested he’d get a more useful response from a polar bear, he began to share a bit about what he had learned and what he was doing.
I know Lucas as the website manager who keeps jlcollinsnh.com up and running behind the scenes and as a genuinely brilliant guy who thinks things through carefully. So I asked him to write this guest post.
I could tell he knew his cryptocurrency stuff. What I didn’t know was, could he write? Turns out, he can. Clearly and very entertainingly. Enjoy!
How to Invest in Bitcoin like Benjamin Graham
On October 26, 2012 I bought 100 Bitcoins for $1017 USD on the recommendation of our lead developer at the web firm where I worked. As of November 28th, 2017, my Bitcoins are worth almost exactly $1,000,000 USD.
At least, that’s what I wish I could tell you about the first time I heard about Bitcoin. The truth is the same as thousands of other techno geeks. I heard about Bitcoin in 2011, thought it was a cool idea that appealed to my libertarian tendencies and then promptly did nothing about it for 6 years.
You may have been hearing about Bitcoin a lot lately. If you haven’t you will soon. November 27th Bitcoin was on the front page of the NYT website as the price touched $10,000 per Bitcoin for the first time. New Crypto-Millionaires are being minted every day. CNBC runs round-the-clock BTC and ETH tickers just like they do for all the other big asset classes. The Chicago Mercantile Exchange is launching a Bitcoin futures trading platform in early December and NASDAQ is launching one in early 2018. Bitcoin is adding $10 Billion dollars a DAY to it’s market cap. The mania is just getting started.
Because I am now bought in to cryptocurrencies (really this time), jlcollins asked me to write an article detailing for his readers how you too could place a small bet on what many are calling the future of money.
Before we start, lets be crystal clear on this: This is the riskiest investment you will ever make. There are no rules. There are no regulations. There is no FDIC. There are no do-overs. There are no courts. There are no laws. Market manipulation is rampant. Malware on your computer steals your coins. Scams con thousands of people daily.
You have been warned.
Am I qualified to give this investing advice? Why should you trust me?
I’m not. You shouldn’t. Do your own research.
That said, I have spent several hundred hours studying this space and I’m happy to share what I have learned. I’ll also provide a bunch of links to better resources at the end, all written by people much more knowledgeable than I.
What we’ll cover:
- If you should consider speculating on Bitcoin and other cryptocurrencies
- Our speculating strategy
- How to do it, nut’s and bolts
- Why this is generally a stupid idea
What we will NOT cover:
- How Bitcoin works. How cryptocurrencies work.
- Why cryptocurrencies are the future of money and the internet 3.0
- What are cryptocurrency Wallets and how to use them
- Bitcoin mining
- Anything related to Day Trading
Who should consider speculating on Bitcoin?
My ideal hypothetical investor for cryptocurrencies has already maxed out their tax protected retirement accounts for the year, already saves over 50% of their income, already has a 6 month life-emergency fund, is already well on their way down the Simple Path to Wealth or is firmly FI with lots of cushion to play with. Furthermore, this ideal speculator is comfortable being an early adopter of technologies and is willing put up with quite a bit of inconvenience and headache to make it happen.
Finally, and most importantly, our ideal crypto-speculator has to have all of the above in order to also have a 100% emotionally detached, iron stomach, this-is-monopoly-money attitude towards the bet.
Who should not invest in cryptocurrencies?
If this money you are considering betting means ANYTHING to you walk away now. If you have any debt, forget about it. If you are not tech savvy or willing to spend time learning wait another year – more friendly tools are coming. If you don’t have the stomach to watch your investment plummet 50% or 75% in a few seconds don’t bet. Be honest with yourself.
Now for the big red WARNINGS:
- Is this a bubble?
- Are cryptocurrencies a scam?
- Many are, yes.
- Will it crash?
- Is it risky?
- Only slightly more so than credit default swaps, leveraged high frequency bot trading, and russian roulette.
- Will you lose money?
- Will this keep you up at night?
- See the rules above.
- Is the IRS ok with this?
- Not really.
- Is the SEC ok with this?
- Not really.
- Warren Buffett said Bitcoin is a pyramid scheme.
- He might be right, you should listen to him.
What is our investment strategy?
Value investing. Buy and hold. Just because we are speculating on Cryptocurrency doesn’t mean we are not still jlcollinnhistas at heart. My long term bet on Bitcoin and cryptocurrencies in general is simple: There is a small but real chance that Bitcoin (and a handful of other cryptocurrencies) are the future gold, the future of all finance, the future of all money, and the future of the very internet. Obviously that is a LOT of value. Clearly cryptocurencies haven’t captured even a tiny fraction of that value yet. If true, this means cryptocurrencies on the whole are undervalued on a fundamental basis and thus a good buy-and-hold value investment (That’s a stretch, I know).
Think of it like this. If you could go back in time to the 90’s and buy stock in Amazon, Apple, and Google (yes, even before the IPO) for pennies or dollars a share would you? Of course. Those 3 companies have captured a huge percentage of the value created by the internet world and will continue to for years. A small investment then, if held until 2017, would have comfortably made you a multi-millionaire. When you invest in cryptocurrency in 2017, know you are buying into the internet right about here:
You have a chance right now to buy an extremely early, out-sized, chunk of the future economy. To me, that is worth a small bet.
Why this is a really stupid idea.
The risk of course is that you went back in time and bought stock in Pets.com, WebVan, and GeoCities and watched them go to zero after the .com crash. We have absolutely no guarantee that is not exactly what we are doing here. There is no doubt in my mind, cryptocurrencies and blockchain technology are going to change the world as dramatically as the internet has but we have no idea which ones will win yet.
If you really want to invest in cryptocurrencies please make this article your STARTING point. Do your own research, read about the underlying technologies and truly understand them. Read counter arguments. Make no mistake, if you jump in head first just to get in on the mania you WILL be the guy at the poker table who doesn’t know he is the one getting taken.
Ok you are sold. How do you invest?
Go to Coinbase.com.* Think of Coinbase as the E-trade of Cryptocurrency. They will take your dollars and give you cryptocurrency. They are extremely user friendly but you do pay fees for that convenience. They are the most reputable exchange available to US citizens. They (are attempting to) comply with KYC/AML regulations. That’s bank speak for trying to be in the good graces of the IRS and SEC (and you better believe the IRS is coming for Bitcoin).
Signing up for an account* with them is very straight forward. You will need to take several identity verification steps before you can fund your account. You’ll have the option of purchasing cryptocurrency with a Credit Card (and a painful 4% fee) or connecting a bank account and purchasing via ACH transfer for a more reasonable but still high 1.5% fee. They also markup the spot price by a few points.
*Note from jlcollins: If you use these links to sign up for a Coinbase account you will receive a $10 sign-up bonus when you fund your account. Lucas will also receive a $10 bonus for referring you. Win-win, in my view.
What is my recommended portfolio?
- 45% Bitcoin (BTC)
- 45% Ethereum (ETH)
- 10% Litecoin (LTC)
- Do I have to buy a whole Bitcoin for $10,000?
- No Bitcoins are infinitely divisible, you can buy any fractional amount you want.
- I thought Bitcoin was totally decentralized, why do I have to trust Coinbase?
- It is, once your are IN the ecosystem you need never touch another bank or exchange again if you don’t want to. But before that, you have to find someone or some company willing to take your USD and give you Bitcoins in return.
- What are Ethereum and Litecoin, and why didn’t you even mention those?!?!
- Good, you are paying attention. I meant it when I said do your own research.
- Isn’t this plan counter to everything jlcollins has taught us about investing?
- I’m sold on the idea, but I want to Index invest in Cryptocurrencies
- Stay tuned. Dozens of funds like this are coming in 2018
- Do I have to pay taxes on my gains?
- No one knows yet. Probably.
- Update: The IRS has published a “guidance letter” on Cryptocurrency. Take it however you want.
- Is Coinbase secure?
- Not really. Again, do more reading. Learn about storing your own coins. A centralized exchange like Coinbase is just another third party that Bitcoin is supposed to do away with.
- Can I cash out for fiat currency (USD) whenever I want?
- Theoretically, yes. If there is a good old fashioned bank run on the exchanges (like Coinbase) to sell out of Bitcoin, definitely not.
(Keep in mind even these are just a tiny jumping off point in a massive complicated new ecosystem)
The three key concepts you have to really internalize before you can comfortably read anything about bitcoin or blockchain technology are:
1. What is a Hashing Algorithm (video)
2. Public Key Cryptography (video) I had to watch this one several times before it “clicked”
3. Digital Signatures (video) combine #1 and #2 to make the Blockchain possible.
After you’ve groked those, this is the best article I’ve found so far that explains how Bitcoin works from first principles.
If those make your head spin and your eyes glaze over, you might be a little early for your investing adventure in cryptocurrencies. Wait another year or two and friendly tools that allow you to “set it and forget it” for crypto-investing will be common place. In the meantime, here is some great non-technical stuff that looks at the broader landscape and implications of blockchain technology.
jlcollins’ take on all this?
It is the wild, wild west. Fortunes will be (and have been) made. And lost. As always, I’ll let VTSAX do the heavy lifting in keeping and building my wealth. But I might, just maybe, free up a few dollars and give this a shot. If I do, I’ll immediately treat that money as already lost.
Your comments and a Free Simple Path to Wealth audio book
Lucas has graciously agreed to field your cryptocurrency comments and questions. To make it more interesting, Audible has provided a free copy of my audio book – The Simple Path to Wealth – to give away. It will go to whomever writes the most interesting, insightful and entertaining comment on this post. Lucas is the judge and, reading his post, my bet is humor will help.
Over the past couple of years several of my favorite bloggers have come out with T-Shirts. Some are pretty cool and I own a couple myself.
More and more I’ve been encouraged to create and offer a jlcollinsnh version. I’ve resisted mainly because I haven’t any compelling ideas for one and my blog doesn’t have an interesting name or logo that would lend itself to coming up with one.
That said, one suggestion is…
On the front:
On the back:
The Simple Path to Wealth
Go, or no go?
Take this simple survey and tell me what you think:
Do you have a cool idea for a jlcollinsnh.com T-Shirt? Describe it in the comments. If it comes to pass, you’ll get one free.