So this blog post is about an experiment I am trying. For years I have heard about cryptocurrency and Bitcoin. It has fascinated me. On one hand it is essentially nothing – the answer to incredibly complex calculations. On the other hand, what is money? Currency all involves some level of abstraction. With stocks you buy a portion of a real thing: if you own shares of Apple, then in a way, you own a tiny piece of that really popular store at the mall, of the office space and distribution chain that backs it all up. But what does a thousand dollars of cash give you? It only has value if people will exchange it for value, which is also true of Bitcoin.
Bitcoin’s Price is Variable – and That is a Good Thing
Then I started looking at the historical price of Bitcoin. And I noticed something. Unlike normal currency (called fiat currency by those involved in cryptocurrency) the value is highly variable. With government backed money, the value gradually declines; that’s called inflation. But the value of cryptocurrency changes, much like the stock market.
I began to wonder – is there a way to profit from this. Reliably. Not just pure gambling, buy a bunch when you think it is low, hope it goes up, then sell. Of course any strategy will boil down to that, but is there a strategy that can formalize it, take out the emotion, and allow an investor to grind out returns?
Now, investing in Bitcoin isn’t that hard, but it does require some effort. You need to find a place to buy bitcoin. This is called an exchange. One thing about exchanges – you are sending them money. Your money. Your fiat currency. So you definitely want to have a measure of confidence in the exchange. These exchanges charge fees, of course, so check out the fees to make sure they are competitive. And you want to make sure they are easily accessible, maybe even with a smartphone app.
After much research I settled on Binance (CLICK HERE – if you use my referral link, we both save on trades). I like their app, they offer two factor authentication, and they have a variety of ways to fund our account. I used Interac e-transfer- essentially I emailed them the money. For me, this was better than giving direct access to my bank account. (Most exchanges will ask for account access, and this is helpful for larger transactions. Maybe I will get there at some point, but for now I wanted to limit any risk). Fair warning – the process of getting verified is a pain at all exchanges – you generally have to send copies of your ID. This is because these are essentially banks, and in many places are regulated in the same way. Once this is done though, trading is pretty simple.
Another thing to know about are ‘wallets’. Bitcoin doesn’t have cash in the usual sense, but it can be withdrawn, either to a physical wallet (essentially a special thumb drive) or a virtual one (an app). The advantage of this is you can carry it with you, or even sell or give away your bitcoin. In that way it is like cash – you can actually carry it with you. Note that withdrawing your Bitcoin from the exchange to your wallet will often involve a fee, so some may want to leave it in the exchange. It also makes it easier to trade.
Then I took the plunge – I transferred $1,000 to Binance. Why $1000? I wanted any growth to feel real. If I double my money, and I only have $20 in, then I have $40. That’s nice, but what about if I double $1000? As you can tell, I am very optimistic, and genuinely believe my investment will get bigger.
Some of this comes from reading Nassim Taleb, the author of The Black Swan, Antifragile, and Skin In The Game. Great books. One thing Taleb stresses over and over again is the idea of asymmetric risk. Take risks that have more upside than downside. More specifically, take risks with a known maximum downside, but a potentially unlimited upside. Over the years Bitcoin has increased in value tremendously. At one point a single Bitcoin was worth $65 USD. The all-time high was $20,089. Today it stands at $8,900. For various reasons (to be covered in future posts) many are optimistic that the value could increase greatly, well beyond past highs.
So my $1000 could go, at worst, to $0. That is hugely unlikely, but I suppose theoretically possible. A more realistic downside is that it goes down, and re-stabilizes at a lower level. But my $1000 could also end up worth well more than $2000. There are some – radical – theories that it Bitcoin could approach $100,000 per coin, which would make my investment worth over $11,000. My upside is definitely more than my downside.
I wish I had jumped in earlier. In February 2017 one Bitcoin was worth about $1000. If you had known where it was going, how much would you have bought? Now, my plan isn’t to just ‘buy and hold’. I know that is the mantra for stock market investors, including the great Warren Buffet. But I have a different plan. I am going to test it out before offering it to my readers. It may be a premium product if it works. (By the way, if you haven’t signed up for premium membership – check it out HERE. More detailed content, guides, and e-books are yours if you join)
BTW – I am writing this the morning after putting in my $1000. It is now worth $1024. A 2% return, overnight. I don’t know what the future brings, but this is exciting.
