Since I had no personal experience buying cryptocurrency, I asked bitcoin bloggers Money Corgi, Fire Millennial and George to share their experiences and knowledge of cryptocurrency with all of us in a series of guest posts.
If you’re like me, you’ve heard about bitcoin and cryptocurrency, maybe read a little about it, but haven’t actually pulled the trigger and purchased.
Here is Part 3 of a three part series exploring cryptocurrency – intended to inform, educate, and entertain.
- Part I: How Hackers Stole $12k From Me Overnight
- Part II: What is Cryptocurrency and Why I Buy It
- Part III: Why I Invest Almost 20% of My Net Worth in Cryptocurrency
I asked George to come on today and share his experiences with Bitcoin. George has been a professional poker player for the past five years and has dabbled in Bitcoin, Ether and other forms of cryptocurrency. Here is his story and why he holds 15-20% of his Net Worth in Cryptocurrency.
PS – Not invested in Bitcoin yet? Get started here with Coinbase.
What types of cryptocurrency have I bought?
I bought my first bitcoins in 2012 at ~$20 per coin. Unfortunately, I spent them immediately, and didn’t buy any more until 2015. I still hold a portfolio consisting mainly of Bitcoin, but have held Ether since 2016, and a small % of other alt-coins.
The appeal of bitcoin is the lack of centralization
The main thing that appeals to me about Bitcoin is its lack of centralization. Traditional, fiat currency is almost always subject to inflation, as central banks print more money, meaning that year on year your money decreases in value. In some less developed countries (see Argentina), this can be by as much as 20% per year!
In contrast, there will only ever be 21 million Bitcoin, all in circulation by the early 2020’s. When you decide to keep a US dollar in a savings account, you are effectively trusting the US government (and by extension, Donald Trump!), to not do anything to devalue that currency.
A war with North Korea, for example, or printing more money to service debt, could result in US dollar devaluing.
Developed countries in general do well at keeping inflation low, but there is still a degree of trust and uncertainty associated with holding their currency as an asset, and this is why people have looked to assets like gold in periods of recession or war, as it is not controlled by a central body, and there will always be a fairly constant amount.
Will bitcoin cannibalize the demand for gold?
In the future, I see bitcoin increasingly cannibalising the demand for gold, as a kind of hedge against traditional currencies, as it’s easier to use, easier to store, and has an even more constant supply.
What is bitcoin and the blockchain?
Bitcoin and other cryptocurrencies are based on an underlying technology called the blockchain. This is a revolutionary technology in its own right, and definitely worth reading more into (here and here are some good starting points).
Essentially, the blockchain paved the way for the formulation of distributed ledgers. Distributed ledgers are good!
For bitcoin, and probably for humanity as a whole. In the bitcoin case, it means that a record of every transaction ever made is stored on the bitcoin blockchain, which is stored on millions of computers around the world.
The really great thing about this if someone wanted to create a fake transaction, they would have to hack at least 51% of all computers with the blockchain on at once, which is basically impossible.
Another selling point of bitcoin is the low transaction costs
The third big selling point of bitcoin is how fast it is, and how small the transaction costs are. They are much smaller than conventional banks, and in theory if it scales effectively should remain microscopic even as the user base increases.
This leads to a lot of potential future uses for ‘micropayments’, payments which often don’t currently take place because the transaction fees are bigger than the payment itself.
So, why has bitcoin gone up so much recently?
A lot of the demand for bitcoin is fuelled by speculation of widespread adoption in the future (in the same way that Tesla, a company which has never turned a profit, is worth more than Ford.)
However, this year a successful update was made to the bitcoin network allowing it to work with higher volumes of transactions more effectively.
Furthermore, there have been rumours of positive US regulation, and more and more business are accepting it. In countries like China and Greece, people seek to use bitcoin to escape capital controls too, and Australia’s central bank has even talked of creating a bitcoin reserve.
There are reasons to be cautious with cryptocurrency
However, there is reason to be cautious with any cryptocurrency investment. Negative regulation from a large economy (China or US particularly) would seriously damage the price.
Whilst the Bitcoin blockchain itself is very secure, exchanges where you can buy and store coins can and have been hacked in the past.
It is also extremely volatile compared to traditional assets, so expect big swings. As much of the current price is built on speculation, any sign of failure to deliver on expectations could also result in huge sell-offs.
Why I’m still bullish on bitcoin
Personally, I am still bullish on the long term future of bitcoin, and cryptocurrency in general. We are still at a stage where the real big money, investment banks and hedge funds, cannot invest due to the lack of regulation, so there is a lot of untapped demand out there.
I am also a huge believer in the long term benefits it has over traditional assets. I maintain around 15-20% of my liquid net worth in crypto, and think this is toward the higher side of sensible for such a volatile asset.
I would counsel against anyone trying to trade short term price swings (generally impossible to out predict the market, even a developing one like crypto), and would advise more of a longer-term strategy.
Even after all of the recent price growth, the current bitcoin market cap is still only 74 billion, compared to Gold (7 trillion) and USD (27 trillion).
At this stage, I still think it is very wise for anyone with spare cash to invest to expose themselves to an asset which has more upside (room to grow) than pretty much any other in the current market. Just be prepared for some big swings along the way!
Where can I go to learn more about bitcoin?
Good Twitter Accounts to Follow; @Coindesk– Good general blockchain news- definite bias to good news though!
@AriDavidPaul, @cburniske– generally well informed people who post a lot about crypto.
Thanks to George for sharing his cryptocurrency experience with us. Follow George on Twitter here, @George_ymb.
Have you invested in Bitcoin, Ether or other forms of cryptocurrency? Why or why not?
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Good post, thanks for sharing. This topic pokes my brain for a while now but was keeping myself away because of the common wisdom of Warren Buffet (“Never Invest In Something You Don’t Understand”). Let me ask which exchange would you recommend starting with (which you think stable and secure)?
This bitcoin hype has so many warning signs, and just bad arguments. While putting a small part of your net worth into bitcoin might be a nice gamble that pays off, looking at the bitcoin subreddit I feel like for many people this is their very first “investment” they are willing to make. Not some condo to rent out, not an index fund, but crypto internet gold.
– Yes it’s limited in supply, but so is gold and gold returns over the last 100 years are roughly 0%. So I guess you have to hope we’re at the start, not end, of the crypto gold rush.
– While bitcoin is in limited supply, crypto currency is not. Head over to coincap.io to see the hundreds of others, and there will be many more before 2017 is over.
– It’s not an investment, it’s a speculation. Investments produce things, like rent, royalties, dividends. Bitcoins don’t generate anything.
– The fact that Tesla is worth more than Ford is based on the hundreds of thousands of cars they are about to sell to customers and the consequent ginormous profits that come with that. Bitcoin intrinsically will never “turn a profit”.
– While transaction cost in the US are high (2% credit card fees), in many part of the world they are negligible (pennies for a debit card transaction).
– Being able to control the money supply for a country is a good thing, when used wisely. Pumping money into the US economy in 2008 saved the country from a 1930s style great depression. The fact that some 3rd world countries print way too much money doesn’t mean the concept is broken.
– Whenever I talk to crypto currency fans, they quickly talk about it’s tax avoidance benefits. If cheating the IRS is in your top 10 reasons something is awesome, that should tell you something.
– You can’t spend it anywhere your mom would shop. This will very much hinder adoption. But more importantly, people who own bitcoin prefer not to spend it, because they hope for a rise in value.
I think a version of crypto currency might the future, the technology IS super exciting! But I don’t see why it would be any of the coins currently on the market. A G20 government created version has a much higher likelihood of success for widespread adoption.
That said, I might be wrong and putting 10% of your net worth in something this revolutionary is a nice hedge against that. But I fear for the “all-in” crowd who might be looking at becoming this generation’s beanie baby story.
I think your opinion is well thought out, but may I provide a counter argument to each in order of your hypens?
To start, I’d say I see it gaining value even if it isn’t used for easy cash purchases, but simple for it’s ability to be digital cash and a store of value. Digital cash doesn’t even have to be easy to spend (though it’d be nice) since it’s the only one of it’s kind. There is no digital cash alternative as trusted as bitcoin.
-Yes investors do believe it’s the beginning of the rush. For many of the points below and many more I’m sure you’ve heard. If it is simply used as a store of value to protect against a depression a little more, it could easily double in price. <– this is speculation though and I agree. The gamble (like all investments, there are no grantees) is that networks have value, and the larger the network the more stronger it is (see facebook) so if bitcoin grows as a store of value it can go way up. I'm not saying bitcoin is better than gold, but as a digital currency it has pros/cons to its storage and transportablility over gold.
– Good point. Currently at least, what bitcoin has going for it is it's decentralized and thus not susceptible to hacking (not all crypto's are), and it has the most tried and true tech. The blockchain is the oldest and it's been hit with every hack attempt in teh world. No one has forged a bitcoin. Individuals and exchanges have been hacked in the past and that will never change, banks are still hacked and I'm sure you're aware of equifax, but you can't forge a bitcoin.
–While I agree with the speculation aspect, I disagree that it doesn't produce anything. Facebook doesn't produce anything really, but it provides the vast network needed for a user need. And that gives it value. Try and start up your own bitcoin copy in your basement and see how many people care. And this network for bitcoin is large, growing, and most importantly the most secure network ever created due to it's decentralization. It takes a lot of energy to secure this network and can't be done for free, which is more proof of money going into a system to generate a commodity. So while it's speculation, there is a value in the secure network.
–Same with gold/silver/etc. This isn't a stock. Bitcoin actually has more use than gold in some cases due to reasons stated above. But it's a fair point.
– With bitcoin you can send $XX dollars from anypoint in the world to any point in the world for less than a buck. that's not a percent fee. Try and send $1M from the US to England and back 10 times. See how much is left using banks and see how much is left using bitcoin, even with bitcoin volatility you'd still be way up. Assuming a wire fee of 2% you'd have (0.98)^20=0.67 or 67% of your money left over after doing that guaranteed. With bitcoin you doubtfully wouldn't lose than much and might even gain. It also would be tremendously faster to do this with bitcoin that wire transfers. I'm not saying bitcoin will replace everything and banks will die, but bitcoin has it's uses that can't be replicated.
–I think it's good the US can control it's money. I think it's good there's a decentralized option to hedge your USD to as well. Same with gold. Diversification of assets is always a good thing and an extra asset class is always nice.
–Even if bitcoin was taxed every time, I still think it has use. While currently I suppose IRS tax cheating could be considered a perk, I think it's a detractor in the long run for bitcoin.
–See above. It doesn't need to be spent everywhere to have value. You don't walk into stores with gold. You could, but you'd probably drastically overpay for the item if you did. The merchant will take it, but he's not gonna give you the fairest deal. Plus walking around with gold isn't smart. But this doesn't mean gold doesn't have value. Bitcoin can have value without mass adoption. If it does ever achieve mass adoption as you describe it'd need to drastically increase it's transaction rates and avoid harsh gov regulation and I see that being like 1-5% likely. But if that happened, a bitcoin would be worth a small fortune.
Thanks Dom for the reply, I appreciate you going in to each of these arguments separately.
I generally agree with your comparison to gold. And bitcoin is similar to gold in many ways, but that feels like something bad, not good. Gold’s track record for making money in the last 100 years is awful, with the exception of a few rollercoaster years, which you would have had to time perfectly.
I also love the idea of a distributed ledger, but I’m just not sure if the problem it is solving is large enough. The million dollar hypothetical might be expensive, but is rare. Large firms generally let their money sit overseas to avoid taxation, not wire fees. If you and I could design a new world economic system, we’d probably choose a single cryptocurrency that everyone can use without worrying about borders. But I highly doubt we’ll ever see a willingness for people/governments to move over. Also, the US still hasn’t adopted the metric system…
Facebook does “produce” something very valuable: access to eyeballs in an extremely targeted way. It increases marketing ROI around the world, dramatically. Bitcoin could help companies save on transaction fees and avoid some fraud related expenses, but that probably limits its upside to a few percentage points on a company ledger.
I think there is a place for bitcoin, but I can’t figure out what a “reasonable market cap” is.
A few questions if you don’t mind: Do you think there are some indicators that show that mass adoption is around the corner? Are you invested in alt-coins as well to hedge your bet? When you talk to other bitcoin owners, do they go all in? Do they own other investments?
Basically we both agree on most of it, just to different extremes. I’m more optimistic about everything you’re saying and you vice-versa. And no one has any clue what a reasonable market cap is and any technical analysis you see on it is bogus garbage and don’t believe otherwise. Some price estimates are clever, but no one knows a damn thing. See: Speculation
-I don’t think mass adoption is around the corner, but I do believe networks like this can’t help but grow based on touching more and more people. The number of bitcoin searches goes up and up. Exchange users are going up and up. Transaction volumes. Everything. Is it the fury of mass speculation? Or is it all the obvious signs of something greater? I don’t know, but most people I know feel like they’d kick themselves too hard for missing out. Which leads to your next questions…
Yes I’m invested in alt-coins as well, for different reasons. Ethereum I like because I believe it has a disruptive role, but not one that’s as crazy as bitcoin. This isn’t a currency, it is more like oil to run smart contracts. Imagine a global computer that could act as escrow and perform contracts with trust between two parties who don’t trust each other, all without a middle man. Basically, a lot of legitimate companies may use it to reduce their companies infrastructure but maintain the same functions. It’s real complicated stuff, but it checks out honestly after doing my homework. Look into the Ethereum Alliance to see all the real companies working with it to see how well it implements into their businesses. Imagine a decentralized windows if you will, all on a computer that never goes down.
After that, I don’t believe in any alt-coins, but I own some anyways. If I had $X in BTC, then I have $X+5% in ETH. And I own Litecoin and Ripple as a hedge and OMG as a practically penny stock by at roughly 5% of $X for each each. (OMG Is an application that woudl run on Ethereum, these are ICO’s and super risky and most are scams, beware). Just ballpark numbers off top of my head.
No crypto buyers I know go all in. Retirement plan first, no debt second, stocks / ETFs / etc third, saving for a mortgage 4th, and crypto 5th with a little extra you have coming in. These are all people who are out of college at least a couple years up to about 35 years old.
That said, I read a lot about crypto-land online and most investors I feel are young and these young people can’t afford anything close total investment wise as someone with an established career. Then there are others who are going all-in in scary ways but there are degenerates in all markets.
If you want the basics though. It’s not a scam. It isn’t a con or ponzi scheme. It could go up, wayyyy up, down, or wayyyy down. Don’t invest more than you’re willing to lose and have a balanced asset portfolio. And if you invest don’t let the volatility scare you into panic selling. You knew what it was when you bought it so don’t acted shocked when you get it. Any alt coin other than the ones I mentioned range from cool ideas that are technically impossible even with blockchains, are cool ideas that just need too much other stuff to work and are too risky for me, are bad ideas, and lastly some are outright scams. Be smart.
Oh, I also own bitcoin cash, but I got it for free after the hard fork. Imagine a stock split (it’s a good comparison but it’s not the same at all btw), so I got extra coins for free and the world decided they were worth something so lucky me. If I didn’t get them for free I’d probably invest $X in bitcoin and 0.1$X to 0.2$X in bitcoin cash.
I can’t put my finger on it, but bitcoin and cryptocurrency scare me, lol. I guess I just need to learn moorland be more informed. But regular investing scared me for years, too, until I finally bit the bullet.
Aside from the hype. I’m a little confused on the difference between investing in other types of currency (peso, yen, etc.) and investing in bitcoin. I know you might be able to turn a quick profit, but is it a sustainable investment?
Leo Lessard says
There is a lot of misunderstanding that I have. When asked to Binance the question: If my investment in XRP goes up and BTC goes down, does my balance increase in value or decrease? The response what that XRP is based on BTC pricing. Yes, I can buy more XRP than I can BTC, but it seems that they are all connected and it really doesn’t matter. Even the exchanges lists your balance in USD and BTC. Why move on to the ALT coins when it doesn’t really matter? Shouldn’t you just invest in BTC and hang on for the ride?