People often ask me if they should invest in Bitcoin and later how to invest. I have watched a lot of friends make and lose money on Bitcoin, so I have a strong point of view. I want to share my perspective to help people understand Bitcoin as an investment. All of these numbers and concepts are my subjective opinion – with that caveat, here are my three recommendations:
First, own only what you can afford to lose. I believe there is at least a 20% chance that Bitcoin fails. And it may fail very quickly – even overnight – without much time to react. If you remember one thing from reading this post, remember not to own more bitcoin than you can afford to lose. For most people, this is 1% of your net worth.
Second, own bitcoin. I believe there is a 50% chance that one bitcoin is worth more than $1,000,000 in the next 10 years, or over 300x more than it is worth right now. The potential reward is so big that it makes sense to own some and to hold it for a long time. Even a small amount can change your life.
Third, invest with a patient and disciplined mentality. I believe there is 100% chance that bitcoin will go up and down, at times with considerable volatility. Trading actively – or even watching its price too closely – causes you to forget the long-term potential that made it a worthy investment in the first place.
I recommend these three simple steps:
- Take 1% of what you have, and buy bitcoin (all at once and at the market price)
- Carry it at cost
- Do not touch it for 10 years
This formula may sound easy, but in practice it is difficult to execute. It requires a great deal of discipline. I have given this advice to many people, but few have followed it. The ones who have followed my advice, however, had more success, even if they started later. The difference can be surprising; I have seen a number of friends buy at “expensive” prices (say, $300+ per bitcoin) and make considerably more money than others who bought at “cheap” prices (say $30 and below) but then traded along the way.
The reason I believe the steps work is because they help you manage the tricky psychology of investing in something like Bitcoin. To expand on the value of each step:
- Investing 1%, and only 1%, helps you keep a cool head. If you invest more, you put yourself in a position where the ups and downs become hard to bear. At times, especially in the beginning, you may be down by 50% or more. If you invest too much, these swings inevitably lead to panic, causing you to trade the position, selling or even buying more. You may be able to afford more than 1%, but I would stick with 1%: given how big bitcoin can be, it is enough.
- Carrying your bitcoin position at cost helps you hold your ground. If you adjust the value of your position as it goes up in price, you will feel tempted to take money off the table. Feeling that you have “too much in bitcoin” makes you worry about losing your gains, and works against the original premise of creating a multiple of your entire net worth.
- Not touching your bitcoin for 10 years helps you avoid being influenced by constantly changing sentiments about Bitcoin. It lets you remember the reason you originally invested, regardless of whether others laughing at you (which they will, when the price is down) or calling you a genius (which they will, when the price is up).
Many people will have reasons to sell along the way. After you see your position go up 10x or 20x, you may feel compelled to take your cost out, or buy a new car or house. There is nothing wrong with this, if it is important in your life. But, from an investment standpoint, I would encourage you to be careful, since trading typically leads to more trading, and eventually worse results. If you must break any of these three rules, I would highly recommend you setup a second, short term, account just for this purpose. This way, you can preserve the discipline of the 1%, carry-it-at-cost, 10-year strategy on your long term account.
If Bitcoin fails at some point and turns out to be worthless, then this strategy will disappoint. The people who sold some of their bitcoin along the way would be better off than the disciplined investor. But if you want the opportunity to turn 1% of your net worth into a multiple of what you have today, then the best thing I can advise is to buy that 1% right away and find the discipline to do nothing with it for a decade.
Thank you to Nick Shalek and Belle Casares for reading, editing and providing feedback.