If You Can’t Beat Em…
Joining network effects.
You don’t always need to be contrarian. Sometimes trite is right. Weird libertarian crypto enthusiasts might love bitcoin. I’m one and I do. Today, I maintain my view that BTC-USD is a strong buy.
But I want to make a minimal case to bitcoin skeptics:
Buy Bitcoin
Personally, Bitcoin (BTC-USD) was my biggest winner over the past year and decade. Currencies have a network effect such that my biggest cryptocurrency exposure has always been in the biggest cryptocurrency. I had held off disclosing this investment for many years, but my involvement was inadvertently leaked by the US Marshals of all people when I was one of seventeen bidders on a block of 30,000 bitcoins in 2014 (worth $18 million at the time) that were confiscated from the Silk Road master wallet. I particularly like government auctions and have found several in the US, Asia, and Australia to offer good opportunities to bid on large blocks. Some fans of BTC are not fans of interacting with the government and the fact that I have to provide information (not to mention a deposit, typically $200k) can dissuade some participants.
In terms of sizing, my preferred exposure to fiat versus BTC is a 9:1 ratio as I mentioned in an interview,
Bitcoin is my favorite currency for 2017. I remain long Bitcoin via both purchases and mining. Bitcoin Cash could also do well as it becomes increasingly accessible next year. Ultimately, Bitcoin could make up a significant amount of the global money supply, so there is still plenty of upside. That being said, its recent combination of high volatility and high return is an aberration. Handling such a volatile asset demands sizing discipline (my view has been to hold 10% of cash in Bitcoin).
Bitcoin is money
My long-held view is that the value of cryptocurrency could ultimately be a substantial part of the world’s monetary system. Even as a partial replacement for our global money supply, it could rise substantially. It has gone up over 100x since I first diversified my cash into Bitcoin, but as a currency it is still far closer to its start line than its finish line. I like mining and simply buying BTC, but am a skeptic of many of the BTC-linked equities. Be careful — I still keep most of my cash in US dollars. Size any BTC position commensurate with your comfort with its extremely high volatility. Eventually, I expect we will see a much wider acceptance of digital currency, but these are still the early days of BTC and there is massive uncertainty.
Bitcoin and safety
What can you do to protect yourself? Pick an allocation (10% of cash for me) and sell or spend down BTC to keep it from shooting above that percentage when it is on a tear. It is quite likely that you will have opportunities to buy it back later lower. In addition, if you are able to get borrow at a decent scale and price, there are good opportunities to hedge BTC with shorts of overvalued bitcoin-related equities. There are many worthy hedges today that will go in the way of First Bitcoin Investment Trust, which was an earlier hedge,
As it becomes increasingly convenient and secure to own BTC directly through sites such as Coinbase (COIN), the need for overvalued trusts such as GBTC goes away; so too should the premium. If you must own GBTC (and again: you mustn’t), qualified accredited investors get opportunities to invest directly at NAV. That is the far better way to go. GBTC is certainly worth less (than it costs), but BITCF is actually worthless, or nearly so. Consider shorting.
Bitcoin bubble?
Is there a bitcoin bubble? I do not think so. In fact, I do not think of bitcoins as rising. Instead, all major government-backed fiat currencies are simultaneously plummeting compared to cryptocurrency in a trend that could continue for a long time. How much bitcoin should you own? At least some. Invert the question: What percentage of your money should be denominated in government-back fiat? Given the precarious nature of governments’ fiat currency, 100% strikes me as an extremist answer. Diversify into bitcoin in the hope and expectation that the decision could be as profitable over the next decade as it was in the last.
What about bitcoin skeptics?
But what if this is not your view? What would I tell someone with a deep faith in the central government and central bank to defend the long-term buying power of the US dollar with prudent fiscal and monetary policy? Buy one. I might (and do) prefer orders of magnitude more for reasons described above. But even if you’re not fully convinced, there is a network effect for the most valuable cryptocurrency. Get a Coinbase (COIN) account and buy a single bitcoin. Whatever the legitimacy of counterarguments, it is broadly accepted, has stood the test of time, and will be a ubiquitous allocation among RIAs and other conventional investors in the future. A 10% Bitcoin allocation is safer than 0%, but at least own one.
Passive investing for active investors
You are a skilled stock picker with a durable edge? Are you 100% convinced that you can beat the market? It is possible. But people are generally hyperactive at seeing patterns when they exist and when they don’t. And we’re generally overconfident. 6% of people (crosstabs reveal this to be a highly gendered group) think they could beat a grizzly bear in unarmed combat):
Grizzly bear claw:
So no matter how much you are sure about your stock picks, put $20k in a low cost tax efficient S&P 500 direct index. Save at least some of your money from yourself. Sure orders of magnitude bigger is better. But I love direct indexing and want to compound generational wealth while harvesting tax losses each day along the way. Even if you don’t love it, at least do some. Minimal effective dose is $20k. It cost you $20 of fees but they give you a $250 sign up bonus that more than pays for the fees.
Here’s how it would have worked over the past three years. You would have made $4,918.67 net of the sign up bonus and fees. Additionally, you would have harvested $4,334.60 of tax losses along the way. Depending upon your tax bracket, this could bring the total after tax wealth increase to $7,519.43. Passive investing skeptics: don’t do less than this. Once you do this much, it is reasonably likely that you’ll want to do orders of magnitude more. Add several digits and this starts to add up to real money. Mine is at Frec which is backed by Google (GOOG) (GOOGL), Meta (META), Apple (AAPL) and after their next round probably by me too.
Large cap tech stocks for cranky value investors like me
I always want to go beneath the surface, to disdain superficial observations and go deeper with serious analysis of unknown equities. Fine. But the biggest businesses in the US are also the best — growing, profitable, and not reliant on external financing so well protected from the precarious credit market. Own some. Even if it hurts to own something at high multiples. They are expensive stocks. They are also great businesses.
So what is there to do? Get them on sale indirectly. California First Leasing (CFNB) costs under $24, about $4 less than its book value which is largely US growth equities such as Google (GOOGL). I own it; you might want to too.
Another: E-L Financial (ELFIF) trades at ~59% of its book value. That book value is largely the Vanguard S&P 500 ETF (VOO) with smaller positions via E-L’s majority stake in United Corporations Limited. UCL itself trades at a 39% discount to NAV with stakes in Microsoft (MSFT), Apple (AAPL), Google (GOOGL), NVIDIA (NVDA), Amazon (AMZN), Meta (META), and Tesla (TSLA). Can I make the case for some of these names? No. But I’ve been wrong in failing to make that case. Zero is the incorrect exposure, especially when I can get it on the cheap.
Caveat
For years, skeptics have made robust arguments against bitcoin, the S&P 500, and large cap tech. I can stipulate many of them. But they’ve (in the latter case “we’ve”) been wrong. Being wrong doesn’t have to mean being poor. Hedge yourself.
Conclusion
There is a big difference between healthy skepticism and self-destructive cynicism. There’s no matter of principle at stake — even if you’re less than fully convinced, dabble a bit with some bitcoin, direct indexing, and mega cap tech equities.
TL; DR
Buy one bitcoin, direct index with $20k, and buy CFNB and ELFIF. This is a tiny fraction of what I’d do (and what I do) but it is far better than nothing and nothing can be paralyzing at an unbearable cost.
