By David Smith, Founder & Managing Director, Bitcoin Strategic Trading Fund 

I’m not a financial advisor and this is not financial advice.

People ask me all the time, “Hey Dave – should I buy Bitcoin? I should have bought when you told me about it years ago, when the price was a few hundred dollars. I saw recently that the price has risen to thousands of dollars per coin.”

I have a hard time answering the seemingly basic question: “Should I buy Bitcoin?”

It seems like a simple yes or no question, but people should consider a few general factors before making any investment decision, such as their:

• Current financial situation (expenses, assets, debts, investment allocation, etc.)
• Investment goals (retirement, a house, college savings, etc.)
• Risk tolerance (how comfortable are they losing this investment)

In addition to those factors, people should consider additional questions before investing in bitcoin:

• How well do I understand Bitcoin and blockchain technology?
• If Bitcoin succeeds, and is adopted by billions of people, how will the world be different?
• Do I want to see bitcoin succeed?
• In the past 12 months Bitcoin’s price has been as low as $6,000 and as high as $20,000 and everywhere in between. How will I feel if my investment value fluctuates that much or more.
• Hackers are trying to steal bitcoin. How will I ensure the security of my investment?
• How much money should I risk in bitcoin?
• How would I feel about a total loss of my investment?

Someone should consider all these things before deciding to  invest in bitcoin.

Bitcoin Investing Does Not Guaranteed Riches

I’ve noticed most people are thinking about one thing when considering investing in bitcoin – how much money are they going to make. They usually have a friend / nephew / neighbor / etc. who made a lot of money in a short time investing in bitcoin.

Some people ask me a slightly different question, “Hey Dave – what is another coin that I can buy that will make me even more money?”

In both cases people are really focusing on one thing – making a lot of money quickly. This singular focus can lead to problems for investors. 

Bitcoin is volatile – no one knows where the price is going long term and especially not short term. I don’t mean to say bitcoin investing is similar to gambling. Like gambling Bitcoin, or more generally cryptocurrency investing is a risky proposition and people are making or losing a large percentage of their investment on a daily basis. Unlike gambling though investors who understand bitcoin can make a calculated investment decision and so far have been able to substantially increase their wealth.

Looking at the past performance of bitcoin, it looks like an amazing investment. This can cause problems because no one knows how bitcoin is going to perform in the future.

There are lots of reasons a particular cryptocurrency, like bitcoin, could fail – market risk, regulatory risk, technical risk, better competitors, etc. In addition to those risks there are also risks to investors – theft, regulatory risks, cash flow challenges, peace of mind, etc.

My Strategy

I maintain my investment in cryptocurrencies because I believe the industry will continue to grow. More and more use cases will be discovered and there will be a killer app (like email for the Internet.) I believe the increased usage will drive scarcity of one or more digital currencies, which in turn will increase their value substantially from where they are today.

Could I be wrong? Absolutely! I’m prepared to lose 100% of my cryptocurrency investment. In the past I’ve weathered long downturns. In December of 2013, the price of bitcoin was around $1,300. It subsequently dropped to a low of around $170 and didn’t hit a new high until the spring of 2017. That’s a downturn of almost 4 years. Not only did I hold strong, but I continued adding to my position. A lot of people told me I was crazy and sometimes I wondered if they were right. It’s hard to continue investing while sustaining heavy losses.

I was able to keep my holdings and add to them because I had:

• A philosophical agreement, maybe even an infatuation, with the change that cryptocurrencies promise to bring to the world.
• A strong understanding of the technology
• I had a strong financial position outside of cryptocurrencies
• 13 years of investing experience
• A strong understanding of the potential price upside
• Spent over an hour reading about bitcoin every day to keep up on the latest developments.
• Belief if my bitcoin investment went to $0, I’d be OK financially.
• Belief if I sold my bitcoin investment and the price increased substantially – especially to a point of life changing money – I’d have substantial, possibly lifelong regrets.

When someone asks me “Dave should I buy bitcoin?”, I have a hard time answering their question because I don’t know how they are going to feel if they buy in and lose 30% in a week. For many people that feels horrible, and if the price drops more they feel even worse. People have a tendency to sell at these low points because of fears, doubts, financial pressures, and frustrations. It gets even worse if the price later goes up! Then they feel foolish for having gotten in, sold, and lost money, when if they would have stayed in they would have made money.

Another problem is that most people don’t stay invested. For example let’s say someone making $60K a year takes the leap and puts $10K into cryptocurrency, planning to cashout on a 5x return to quit their job and start a business. Now let’s say the value of their investment doubles – they are sitting on $20K in an asset whose price they’ve seen bounce around a lot. They are probably thinking about house payments, car payments, college tuitions, all the things that extra $10K could help with. They are thinking how they are going to feel if they lose it. It can be very stressful, cause loss of sleep, fights with spouses, friends, etc. It is hard to stick to their plan. The problem with this approach is it makes the initial investment decision complicated. It makes sense to take on a large risk for a large reward. The lower the reward, the lower the risk should be.

I know a lot of this article has talked about the challenges and downsides of investing. On the whole, people are overwhelmingly happy about their investment in cryptocurrencies. I have people tell me every day, they get a smile on their face because they heard about bitcoin. Another favorite of mine is a student who paid off their student loans and changed their investment philosophy after reading some of my articles and investing in bitcoin. By sharing my writings and talking with people, I’ve made some friends “life changing money” and that feels great.

Where to start?

The best place to start learning about Bitcoin is by reading Satoshi’s white paper. After that bitcoin.org and the bitcoin subreddit are good resources to learn more. 

If you are thinking “Should I buy bitcoin?” I hope this article has given you a starting point of things to think about before investing.

This article is an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Bio

Mr. David Smith is founder and Managing Director for the Bitcoin Strategic Trading Fund. Mr. Smith participated in the initial token sales for Simple Token, Civic, and Ethereum. Prior to focusing on full time investing Mr. Smith founded two consultancies and was the Chief Technology Officer for multiple software product startups including some blockchain products. Outside of tech and investing Smith is semi-retired. He likes to play basketball, travel, try new food, listen to podcasts, learn, read, and spend time with his 10 year old son.