Why I still buy crypto

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By Francis Bayes, WCI columnist

I wrote the first draft of this column in December 2021, and since then crypto (currency, assets, securities, whatever you want to call it) has entered the winter. Instead of publishing a column that seems to have seen it coming or writing a piece that makes me look like a fool, I will share the original draft with my own updated comments (in italics). I consider it like responding to reviewers after submitting a manuscript to a peer-reviewed journal.

Should you buy crypto in the first place?

Many of the WCI readers have won the game or are well on their way to winning the game, so they can ignore crypto (or for Bitcoin maxis, Bitcoin and crypto) with their “serious money” and enjoy financial independence. Any extra return may not be worth the attention that their volatility attracts – or in the case of “stablecoins”, not even worth a hint of risk. The stock market falls 10% is a big deal. But Bitcoin and other cryptocurrencies fall 10% almost every month. One can use “house money” to “buy dip” in a disciplined way with the goal of “creating wealth”, but their time can be more valuable than the absolute return they generate from following prices.

Stablecoins are DEFINITELY not worth the return; here’s an update on what happened in 2022: an algorithmic stablecoin TerraUSD and its sister Luna collapsed, Tether, the largest stable coin, fell under the $ 1 stick, and Celsius – one of the largest lenders – suspended transactions. While buying crypto, I never used stack coins or “crypto savings accounts.”

For those of us who begin our journey towards financial independence (ie want to save for the next 20-30 years), we should also ignore crypto until we (1) have life and disability insurance in place and (2) max. out 401 (k) employer match, health savings account and Roth (or traditional) IRA. Paying down debt first can also have a greater emotional and mental payoff. Building a personal safety net and savings habits is like installing an autopilot for financial independence.

Once the autopilot is in place, many of us ask questions on Reddit, the White Coat Investor Forum, and the WCI podcast about what to do next. I buy crypto with a small part of my extra savings for security. I want to share why, but this column is not about the benefits of blockchain technology and crypto. This is about how I protect my emotions, which affect my behavior and how long I think about my finances.

The selfish side of me rejoices when the stock market crashes (SALE!). But I have realized that I am more ambivalent when it comes to executions of hopeful border orders on a Saturday morning (see photo below) because cryptocurrencies are so fast and random. Crypto has not ruined my weekends because it has never been more than 2% of my portfolio. If it ever exceeds 2%, 2022 should be a reminder that I should sell, lock in my gains and rebalance to have peace of mind.

I prioritize my emotional health in all aspects of my investment plan because I know I can win the game by doing so. I only own index funds because I tend to regret many decisions. I do not want to think about which shares I should have chosen and when I should have bought or sold them. I just keep buying the same index funds every year and every month so I minimize my regrets.

I invest “actively” when I overweight certain asset classes (eg small-cap value stocks), but still one of my main goals with asset allocation is to regret as little as possible in the future. I have overweighted each asset class to a point where I would not wish I had allocated more or less in retrospect. If the S&P 500 does not give back in a decade, I hope to find comfort elsewhere in my portfolio so that I can continue to buy US stocks even after such a historic underperformance.

People have many reasons for pessimism about our society and the world. But even if I were to believe that our society has declined in the last decade (and will continue to do so), I will continue to buy US stocks as long as the US economy continues to attract the best talent in the world. Medicine and biomedical research are good examples. As much as doctors want to complain about the US health care system, foreign medical graduates still want to practice here. Although funding for biomedical research has been woefully inadequate, US institutions still attract foreign researchers who are transforming their fields. No matter how much we discourage students from pursuing medicine or research, the United States will continue to have doctors and Nobel laureates.

For both crypto and non-crypto investors who are skeptical of the future of the US economy, here is a Warren Buffet quote: “In the 20th century, the United States endured two world wars and other traumatic and costly military conflicts; depression; a dozen recessions and financial panic; oil shock; an influenza epidemic; and resignation of a disgraced president. Nevertheless, the Dow rose from 66 to 11,497. ”

Does Crypto have its own Dotcom bubble?

When it comes to discouraging medicine, many talented students do not need our advice. They are aware that working in other industries (or other health care professions) is better than medicine to make money. Software companies have attracted talent because they are some of the largest companies, and vice versa. Love them or hate them, but anyone who recruits such companies knows how to hack computers and our brains.

In the long run, the stock market is driven by earnings growth, and earnings tend to grow when talented individuals create value for society. Someone who flocked to software companies, such as Facebook and Square (also called Meta and Block, respectively), joins projects related to layer-1 or -2 blockchain protocols, decentralized finance (DeFi), non-fungible tokens (NFT) and the metaverse . Venture capital firms that have invested in well-known companies have invested more than $ 27 billion in such “Web3” projects by 2021. Most projects are likely to fail. Many observers have compared the influx of cash to crypto with the Dotcom bubble.

In 2022, the bubble burst. Software companies and crypto are in a larger decline than the wider market (Meta, Netflix and Zoom are now value companies). People discovered that some of the “talented individuals” can also be good charlatans, gamblers and scammers (as suggested by Sam Bankman-Fried, founder and CEO of the crypto exchange FTX). Many VC companies will continue to lose money, and most projects will fail for good reasons (according to some who said many “no”). Buffett is right again when he said: “only when the tide goes out, you discover who has swum naked.”

But some also note that many of the grandiose predictions about the internet during the Dotcom bubble were not wrong, but only premature. Although we can not imagine the use cases for the crypto-related projects (as DeFi), when I reflect on what talented people have achieved by writing codes for the internet, I will focus on what a new generation of talent will find out from crypto- and Web3. I do not know which, but some projects, such as those based on Ethereum, can become a significant part of the US economy because talented people improve the technology, start interesting ventures, write about it and believe in it.

Because I share some of the optimism, I am comfortable buying crypto even though I can not address the following concerns. (1) A common argument against the Dotcom bubble comparison is that the internet was still useful at the time, but crypto is still not. (2) Will the “talented individuals” and the crypto be our generation’s Isaac Newton and alchemy? (3) Bitcoin, Ethereum or another blockchain may survive and be useful to “Web2” companies, financial firms or the music industry; However, “another blockchain” may not yet exist.

Why I bought Crypto; Should you?

I do not believe that I trust the crypto-related projects to solve the problems on the internet or in the financial industry. I do not look forward to the society where my children’s friends live in the metaverse (no way I let my children spend time in it!) If all the metaverse related projects fail, I will not only enjoy, but also not feel any financial pain. But if the metaverse becomes a trillion-dollar industry, I will not regret not investing in it.

After more than a year of skepticism, I made my first purchase in May 2021 due to crypto’s potential for positive returns over the next 20-30 years. When the price of Bitcoin fell by half in May, there were enough people who believed in it not to panic and sell. If anything, they bought more. The same goes for Ether. With less than 5% of my new savings, I will continue to buy a basket of cryptocurrencies, little by little, although their prices, which appear to be correlated with each other, may fall 80% between now and when this column published. My purchases are mostly automated so I am not tempted to “time the market.” My small allocation to crypto will not move the needle in relation to how quickly I can become financially independent. But at least the purchase of crypto will not significantly delay my financial independence if it prevents me from envy and greed.

If you do not own a crypto, how you behave as an investor in the current S&P 500 bear market should be a litmus test for whether you should own a crypto in the future. Bitcoin, Ether and other crypto fell below 2020 levels because enough people were scared and sold. They can fall more because they have no “intrinsic value”. So even in the “intermediate case” where crypto returns are 2-3 times higher than stocks, Big ERN does not think crypto is attractive due to the volatility and correlation with stocks.

But I pass the test, and I see no reason to change my dissertation: some smart people will find out some useful things about crypto, and I do not want my FOMO to affect other aspects of my financial plan. I have not sold any crypto, although I am reluctant to buy crypto other than mega-cap crypto (ie Bitcoin, Ether and maybe Solana) during this crypto winter. Even though I’m trying to buy a “basket” of crypto, it feels more like stock picking than buying the whole market, and I can only tolerate buying the new lowest prices with mega-cap crypto. Hopefully, more diversified and value-oriented crypto-investment products will become available. Until then, I’ll stay the course with my allocation to crypto and have fun with ridiculously hopeful border orders to make me feel better.

Is it time to buy crypto now? Do you want to get them on sale? Or will it just continue to fall into irrelevance? Comment below!