Should I buy Bitcoin?
And other more important questions
On March 17, 2023, Investor and Crypto-Evangelist Balaji Srinivasan claimed that BTC will reach 1 Million USD in 90 days or by June 15, 2023. At the time of the claim BTC was ~25K USD. Hence, he predicted a 40x rise.
So, should you buy Bitcoin?
A purely hypothetical example ⚠️
Let’s suppose, for arguments sake, that there is some truth to Balaji’s claim, and there is a non-trivial probability that BTC will reach 1M USD.
For concreteness, lets assume, that there is a
- 10% chance of this happening, and an
- 80% chance that BTC would remain the same, and a
- 10% chance that it would crash to 1/40th of its value (or about 625 USD).
⚠️To be clear, I do not think the above will happen. But let us go with these numbers, purely as an illustrative example.
Question: Should you buy BTC?
Let us suppose you decided to invest 1000 USD on March 17th. There is a 10% chance that by June 15th this becomes 40K USD, a 80% chance that this stays at 1K USD, and a 10% chance that this crashes to 25 USD.
Your expected return is ~4.8K USD, or in other words, on average, you 4.8x your money.
So, it looks like a no-brainer. You should invest all your money in BTC. In fact, you should leverage yourself by borrowing money and invest more than all your money in BTC.
Or should you?
There are two, important questions you should ask yourself with any investment:
- Question 1. How much money do you want to win?
- Question 2. How much money are you prepared to lose?
If you invest all your money in BTC, then your answer to Question 2 is 100% of what you own. If you are even more extreme and borrow to invest, then it is more than 100%.
However, most of us aren’t willing to lose so much. Personally, I’d be uncomfortable with any investment which will lose me more than (say) 10% of what I own.
If you’re not sure what your “10%” is, try and “visualize” what your life would be like if you lost (overnight) 10% (or whatever the number is for you) of everything you own; if this amount was “disposed”. For most of us, this “disposable” wealth is small, and nowhere near 100%.
Hence, “Should you buy BTC?” is the wrong question.
The real question is “How much money am I prepared to lose on a BTC investment?” (which could be a “buy” or a “sell”)
So…
Question: How much money am I prepared to lose on a BTC investment?
As I said, it mostly depends on Question 2. And then (and only then) on Question 1.
And finally, on more “conventional questions” like odds and returns.
Concluding Clarifications
Obviously, the 10%-80%-10% scenario I described above is an oversimplification. But, as I said, it was purely meant as an illustrative example.
Also, 10% odds of reaching 1M USD, seems (to me at least) overly optimistic (or depending on your point-of-view, overly pessimistic). To be honest, I do not know what the exact odds are.
Finally, crypto-enthusiast will point out that we need to apply the same arguments to conventional investments like cash, bonds, stocks and treasuries. And they are right. “Conventional” does not mean “safe” and you need to ask Question 2 with all of these. And with land and gold. And even (technically) “non financial” choices like “choosing to work at a particular company” or “choosing to marry someone” — after all your time is your money.
However, if you understood the main point of this article, you’ll understand that none of the clarifications above are really important.
The most important thing is that you give Question 2 some very serious thought.
How much money are you prepared to lose?
