I’ve had family and friends ask me about Bitcoin lately. I’m not surprised as the broader media picked it up that Bitcoin reached $100,000 in price. Since people I care about wanted to know what I thought, I felt the need to provide a note about it. As always, this isn’t advice, it’s just my thoughts on it and I can change my mind at any time.
I wasn’t planning on commenting on Bitcoin or any specific crypto asset since I’m not an expert on it. For the record, I do hold positions in Bitcoin and Ethereum and have been in both since 2017. I consider my positions in Bitcoin and Ethereum as 100% speculative assets. This is important.
Where it Began
When I was a lot younger, I came across what was positioned as a digital version of gold, called E-gold back in the day. The premise was that the price of E-gold would be backed by physical gold. It was a potential “new currency” backed by gold, different than traditional fiat currencies that are backed by the faith of a country’s government. I think it was in the early 2000s when I put some of my money in E-gold.
As a young person out of college who was skeptical of “the man” and “big corporations”, having some assets in an alternative “currency” made sense. Fast forward a bit and there were other “programs” that were launched called High-Yield Investment Programs (HYIPs). These were unregistered programs that promised high yields, which were probably 25%+ back in the day. It was all sort of tied to the E-money ecosystem so I put a little money in those as well.
Fast forward a year or two, and I realized these were all probably some sort of Ponzi scheme and I got out what I had in there. I can’t fully remember, but I think I may have had some money just disappear because these “programs” just shut their doors. Lesson learned.
Exposure to Bitcoin and Ethereum
Fast forward to probably 2016-ish. I heard about Bitcoin and cryptocurrencies and I immediately thought of E-gold and the HYIP scams. In my mind at the time, I wasn’t going to touch these crypto scams. I was working at Baird, I had my MBA in Finance, I’m a CFA Charterholder, I have real institutional investment experience and I wasn’t going to fall for these types of scams again.
As I dug a little deeper, these crypto assets seemed a bit different than E-gold. There was a deeper technology attached to them, not just some random digital “thing” launched by random people. I also noticed some increased institutional interest in the assets, particularly Bitcoin and Ethereum, which at the time had a ton of assets already.
My original thesis of E-gold was that, yeah, maybe there could be a new currency or method of payment that the entire world would use some day. Maybe Bitcoin could be that new currency. Bitcoin also had a decentralized ledger that could track transactions, which sounded unique and could have practical use. The limited supply of Bitcoin also intrigued me.
For me, Bitcoin could be a big scam, it could be used by the very wealthy to hide assets, it could be used for nefarious reasons to transact outside of the traditional financial system, other smaller developing countries could use it as a backup currency to theirs, maybe the ledger system could work, maybe institutions would back it at some point, and the limited supply could be an inflationary factor to at least put a potential floor under it. For me, in aggregate, these reasons seemed to be a better case for Bitcoin than it ever did for E-gold.
So in 2017, I bought some Bitcoin, Ethereum and some other smaller crypto assets, with the biggest allocation to Bitcoin. I fully assumed these could all go to zero but I’d hold on for 10 years to see if a potential long-term speculative thesis could play out.
As Bitcoin prices started showing up on the CNBC ticker, institutional investment managers I’d speak with would talk about it, futures markets started to trade it and liquid investments were now tradable on exchanges, I had slightly more conviction in Bitcoin and Ethereum. I still thought they could go to zero, but maybe the price floor would be higher than that. Prices of Bitcoin and Ethereum were a lot higher than my purchase price so I was essentially playing with the house’s money.
Remembering the E-gold and HYIP days, the other cryptocurrencies just didn’t seem worth it to me. That was too much speculation and no real institutional interest that I could see. I wanted to just stick with the two biggest ones: Bitcoin and Ethereum. Looks like some of those smaller crypto assets may have really been scams, so my E-gold experience probably played a role in avoiding those.
As interest continued and I received questions about it professionally, I launched a Bitcoin/Ethereum strategy in 2021 at the firm I worked at. I was the first investor in it. As of this writing, I still manage the Bitcoin/Ethereum strategy for the firm I’m at.
As I saw bigger firms like BlackRock and other institutional managers get involved, I thought maybe the floor under Bitcoin could continue to move higher. Maybe it doesn’t go to zero, but maybe to $10k or something, but with a ton of price volatility. Fast forward again today, and some of the largest firms out there have Bitcoin and Ethereum ETFs. As the years passed, it was nice to see the price of Bitcoin and Ethereum move higher.
Specifically this year, I wanted to do some tax and estate planning and wanted to sell out of my direct exposure to Bitcoin and Ethereum on crypto exchanges and reallocate to ETFs that hold the exposure in my Roth IRA. I also wanted to get rid of the other smaller crypto assets that I held that were “airdropped” over the years and a small position in Litecoin I had since the early days. Those were all of the positions I was just going to hold for 10 years, but I wanted out of the crypto exchanges and wanted to sell those minor positions.
I wanted to get this crypto exposure into a traditional custodian with defined beneficiaries, tax deferral benefits, etc. so I wanted them in my Roth IRA. From an estate planning perspective, if something happened to me, my wife wouldn’t really have any idea how to get access to the crypto exchanges and do anything. That money could have easily disappeared if she wasn’t exactly clear how to get access to them. Plus if the prices went higher, I’d have more capital gains to worry about whenever I sold them as they were considered taxable accounts. I also wanted to easily trade the exposure alongside my other traditional assets.
For months, Bitcoin looked like it might break out of its trading range, with its previous high in the $60k-$70k range. If I was correct and it broke out higher out of the trading range, I needed to get my assets sold on the crypto exchanges, take the capital gains and get it into my tax-sheltered Roth IRA. I wanted to take the capital gains on it this year at a lower price at the time and not a higher price following a potential breakout. For personal tax purposes, I wanted to make this move this year, not in the future.
So in September of this year, I quickly sold my Bitcoin and Ethereum direct exposure in the crypto exchanges and rebought the exposure through ETFs in my preferred custodian. I feel much more comfortable about this repositioning for the long-term and for my wife’s sake from an estate planning perspective, even though I have to pay a chunk in capital gains this year.
Fast forward a little and Bitcoin did break out of its trading range and surpassed the $100,000 level. When it got up in the $90k region, I rebalanced my exposure as it hit my allocation limits and I took some profits. It was in my Roth IRA so no taxable consequences.
If history is any guide, I assume Bitcoin and Ethereum will fall 50-80% from some level. My trading strategy allows me to take advantage of it, so if it does, I’ll be prepared.
My Thoughts on Bitcoin and Ethereum
Bitcoin and Ethereum are 100% speculative assets for me personally. To me, these are technologies, not currencies, hedges on anything, or a store of value. A store of value shouldn’t fall 80%.
You can do a search on the technologies behind Bitcoin and Ethereum, I’m not going to do that here. I’m not educated enough on it to provide any real value. This is why they are speculative assets for me and I honestly wasn’t going to write about it. It’s ok though, I can’t be an expert on everything. Most of my investible assets are in things I do understand.
Like I’ve written about gold, I can’t figure out any revenues generated, cash flow, profit margins, earnings growth, valuation metrics, etc. for Bitcoin and Ethereum that I can do with traditional asset classes like equities and bonds. Unlike gold though, these are technologies that could have some value. If I had to choose, and I guess I have chosen because I have positions in Bitcoin/Ethereum and not gold directly, I personally prefer Bitcoin and Ethereum as my speculative assets of choice.
I do acknowledge that Bitcoin and Ethereum may have a higher chance of going to zero than gold does. Again, these are speculative assets for me, so I’m not overly worried about it.
As speculative assets, and really just any asset available to be bought or sold, the price of the asset will depend on the demand vs. supply of the asset. If I can’t figure out the fundamentals of an investment asset with confidence, I need to consider them speculative assets. This is why I need to treat Bitcoin and Ethereum as speculative assets and invest/trade them differently than I do traditional assets.
So, as speculative long-term assets, I have my long-term positions that I don’t trade (I’ll hold for my original 10-year hold period until 2027 then re-evaluate) and an allocation that I trade the volatility on. With the tradable position, I can potentially generate profits on the ups and downs of the price. Depending on the level of volatility, I could potentially generate profits in highly volatile markets, even if the long-term price doesn’t move higher.
Position sizing is also extremely important. I’m comfortable with the sizing of my allocation to this space, but I definitely have limits that I’m personally comfortable with.
From my perspective, I just got really lucky on the speculative bet on Bitcoin and Ethereum. I actually hate betting, and I’m not a gambler when the odds are against me, but I’d like to thank my younger self for initiating the original positions in Bitcoin and Ethereum.
I have no idea if Bitcoin or Ethereum prices will go up or down and I’m not sure many people have any strong conviction in their future prices either. I’m always skeptical on any price predictions on anything, including on traditional assets, not just speculative assets. Please do your own due diligence before investing in anything and consider not blindly believing what someone’s price prediction is.
Hopefully that provides a little context into how I think about Bitcoin and Ethereum as speculative assets. If you’re interested in digging deeper into how I think about speculative assets and how I actually trade and set position sizes on speculative assets, you can do so through my online investment education courses.