Going “All In” On Bitcoin
When An Investment Defines Your Entire Life
“No, we don’t have an exit plan”
I want to state from the outset that I am no expert on Bitcoin or Cryptocurrencies. I am fascinated by the subject but have not personally invested any money into Bitcoin. When it comes to investing my money I stick to what I understand (stocks, bonds, and real estate). If others want to invest their money into Bitcoin, I don’t have a strong opinion on whether that is a good decision other than to say if you are going to invest in anything, make sure you do your homework first.
Why Diversification Is Important
Investing all of your money on Facebook is the same as putting all of your eggs in one basket and then handing your basket over to Mark Zuckerberg.
Even if you are one of the worlds leading experts when it comes to Bitcoin, stocks or any type of investment, it pays to have a diversified investment portfolio. To illustrate the importance of diversification lets use the example of Facebook.
If you invested every penny you had in Facebook stock one year ago, you would be looking like a genius for the first 7 months of 2018. Between December 4th and July 25th Facebook stock increased by 27%. Facebook and technology stocks, in general, looked completely unstoppable.
Since July 25th Facebook stock has dropped by 35%. Worse than that, the company has been caught up in so many scandals that there appears to be an ever growing discussion on why you should delete FaceBook.
I am sure you have heard the term “don’t putt all your eggs in one basket”. Investing all of your money on Facebook is the same as putting all of your eggs in one basket and then handing your basket over to Mark Zuckerberg.
Diversification is important because we have no idea what the future holds and no ability to influence future events. Investments that appear to be flying high can quickly loom more like the Titanic. Unless you have a crystal ball, you can’t be sure which investments will take off and which investments will sink.
That is why it’s generally advised to diversify your investments in two ways.
- Diversification within an asset class. Using the Facebook example, rather than investing all your money in a single stock (Facebook) you could spread your money throughout a number of stocks, mutual funds or Index funds.
- Diversification across asset classes. No matter how many stocks you spread your money across there is always the possibility that the entire stock market will decrease in value. To help manage that risk, most investors also put some of their money in different assets such as bonds and real estate.
Diversification is important to manage your risk exposure.
The Exact Opposite Of Diversification
That is why I was fascinated by a story in the Wall Street Journal chronicling how one man bet his entire family’s future on Bitcoin.
Didi Taihuttu (who has a tattoo of Bitcoin on his left forearm) is a true believer in Bitcoin. He sees it as much more than an investment but as a movement.
Didi is not alone in feeling this way, many people buy Bitcoin because they want to be a part of what Bitcoin “represents”. When investors begin buying an asset with little to no regard for the underlying financial fundamentals of the asset they are not investing, they are speculating. This is how bubbles form.
In the summer of 2017, Didi and his wife decided they wanted to transition to living a minimalist lifestyle. So they sold their house, their business and all of their possessions. They moved into a trailer park with their two children and invested every penny they had into Bitcoin.
“Minimalism” is one of those terms that means different things to different people. I like the definition laid out by Josuha Baker who defines minimalism as “intentionally trying to live with only the things I really need.”
Minimalism can be a good thing for your finances. The less we are spending money on things that provide us with no value, the better off our finances and our life is likely to be.
If you want to sell your house and move your family into a trailer because you don’t value living in a house, that’s your choice. But if you liquidate every asset you have and put it all into a highly volatile investment like Bitcoin, you run the risk of having that choice taken away from you. If Bitcoin goes bust, you may be forced to live in that trailer even if you decide you don’t want to anymore.
There is no reason you could not sell all of your possessions and spread that money around into a number of investments that are more likely to sustain, your minimalist lifestyle in the long run. That could include Bitcoin, but should not ONLY include bitcoin.
Know When To Walk Away
“In the long term Bitcoin is going to be huge,there is no possibility it isn’t”
Didi began buying Bitcoin when the price was around $1,000 in February 2017. He continued buying until November 2017 when Bitcoin topped $9,000.
I have to assume that since he sold all of his possessions in “summer 2017” that a large share of his purchases was when prices were closer to $9,000 but that is a guess on my part.
Within a few weeks, Bitcoin prices would peak at just under $20,000.
Even if you are going “all in” on a single investment, it makes good sense to have some sort of exit strategy. For example, you could decide that if bitcoin crosses $20,000 I will sell “X%” of my holdings.
By selling even a portion of his Bitcoin holdings while prices were at an all-time high, Didi could have mitigated the risk of the impending Bitcoin crash.
But Didi truly believes Bitcoin is the wave of the future and refused to sell any of his Bitcoin. When the WSJ followed up with Didi on April 2nd, he told them that he had lost about $500,000 since Bitcoin’s peak. At the time he said this Bitcoin’s price was $7,050. As I write this, Bitcoin’s price has dipped below $3,800.
He did not seem too concerned telling the WSJ, “In the long term Bitcoin is going to be huge, there is no possibility it isn’t”.
I have no idea if in the longterm Bitcoin is going to be huge. Nobody does. You could hear people saying the exact same thing about Facebook stock a year ago. It’s going to be huge and only going to go up from here. We know how that turned out.
A year from now Bitcoin could be worth $100,000 a coin or worth less than $1. Even if cryptocurrency truly is the wave of the future, there is no guarantee that Bitcoin will be leading that future. Just because Bitcoin was first out of the gate does not mean another cryptocurrency won’t be the eventual winner.
Going back to the idea of diversification “within” an asset class. Even if you think it’s a good idea to put all your money into cryptocurrency, you should at least consider spreading some of that money around to more than one cryptocurrency.
To Didi’s credit, he has managed to earn income by building a Bitcoin brand around his story. He earns money through sponsorships with Bitcoin-related companies and gives speeches about Bitcoin. I have no idea if he is worth $10 or $10 million.
If Didi is worth millions at this moment, it is because of his endorsements, not his “all in” investment in Bitcoin. Even if Bitcoin recovers and reaches new highs within the next few years, his decision to bet his families livelihood on Bitcoin should not serve as an inspiration for others.
It’s important to separate the process from results. Just because the results were good does not mean it was a good process.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. I am not endorsing any of the products mentioned. Consult a financial professional before making any major financial decisions.