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Bitcoin is the Willys Jeep of the crypto world. And just like that venerated army truck, it’s fought and won some extremely important battles, helped to pave the way for its successors, and deserves our respect for all the trailblazing it’s done.
But at the same time, it’s an antique. It’s unsafe, unstable, and with each passing year, modern regulations are trying to phase it out.
There’s a classic idiom that I think applies well to Bitcoin:
Buying Bitcoin directly is just too risky for anyone trying to manage their money using asymmetric risk.
But there’s still money to be made.
So, what’s the equivalent of “selling shovels” for Bitcoin? How can you profit from Bitcoin’s (potential) rise in value while simultaneously hedging your risk?
Here are a few ways to invest in crypto without actually buying any:
Is Bitcoin a better long-term investment, then? Should you just buy and HODL?
Bitcoin’s messy short-term volatility, but staggering overall gains since 2012, have led many investors to consider a long-term investment.
After all, HODL is the unofficial creed of dedicated crypto investors.
To the uninitiated, HODL derives from a BitcoinTalk forum post in 2013, where user GameKyuubi, admittedly tipsy on whiskey, proudly declared “I AM HODLING.”
HODL eventually got its own backronym: Holding On for Dear Life.
So, is buying and HODLing still valid in 2022?
While Bitcoin had a heckuva bull run from 2012 until now, the mounting threats may indicate that it’s finally out of jet fuel. At least a few of the country’s leading advisors think so.
“In the past 5 years it is up 3,478%,” writes David Hunter, CFA, CAIA, Director of Research and Investments at CPC Advisors. “Do people really think it is going to go up another 3,478% from here? $1,324,000 per coin?”
“It just seems like the asymmetric payoff you can get when these coins are trading at pennies is no longer possible with 5 digit valuations. In fact, it looks like the payoffs might be asymmetric in the wrong direction.”
Varun Marneni, CFP, Executive VP of CPC Advisors, agrees.
Cryptocurrency has lost $1 trillion dollars since its peak,” he says. “Investors should not miscategorize crypto as a safe haven asset class.
Varun’s final word of advice is to tread carefully before you follow crypto stans into the breach.
$64,158 was the cost of Bitcoin when Odell Bekham Jr. accepted his Rams salary in Bitcoin. As of this writing, bitcoin is at $32,240, realizing a loss of 46.6% on his salary—before taxes.
A Bitcoin investment isn’t just subject to market volatility; it’s also vulnerable to some serious outside threats that could wipe out large amounts of value overnight—or even your entire portfolio.
Here are some examples to keep in mind while considering a Bitcoin investment:
Hackers and scammers stole a record $14 billion worth of crypto in 2021, according to CNBC, which is a 79% rise from 2020 levels. Mt. Gox was handling 70% of the world’s Bitcoin transactions when it was hacked in 2014—and 650,000 bitcoins have never been returned to their rightful owners.
Now, you can safeguard your crypto from hackers by storing your private keys in a cold crypto wallet, which unlike a hot crypto wallet lives entirely offline.
However, using a cold wallet introduces a whole new form of risk:
What do a USB stick, hard drive, or even a scrap of paper have in common?
They can all be lost.
Just ask James Howell, who accidentally threw away the wrong hard drive in 2013 and has been searching for it in a landfill ever since. And who can blame him for getting his hands dirty and not giving up? There’s 7,500 BTC on that hard drive now worth more than $277 million.
In total, 20% of Bitcoins are lost due to misplaced or forgotten private keys.
Increased regulation doesn’t just threaten the portfolio of traders within that country’s borders, it can send global prices tumbling.
India tried enacting anti-crypto legislation in 2018, but in 2020, the Supreme Court struck it down. This led Indian investors to “pile into the market,” according to Reuters, only for a new proposed ban to surface in 2021—one that “officials are confident in getting enacted into law.”
Russia’s central bank has also proposed a ban on crypto activity in 2022, and when China published plans for a renewed crackdown in May of 2021, Bitcoin fell $10,000 or ~25% in a matter of days.
In addition to regulatory nooses tightening, Bitcoin seems especially vulnerable to bad press. With such a speculative asset it’s hard to pinpoint exactly what’s causing the crypto crash of 2022. But what’s unfolding in El Salvador certainly isn’t helping investor perception.
In September 2021, El Salvador officially adopted Bitcoin as a second legal currency behind the USD. But El Salvador’s Bitcoin rollout “is tanking the economy—and is a mess by every measure” writes Shawn Tully in Fortune. As of the time of writing, citizens are lining up to ditch their Bitcoin before prices fall any further, and the International Monetary Fund has officially urged President Bukele to back off.
Judging by this week’s stagnant prices, one could assess that these two opposing forces—the media shredding Bitcoin and President Bukele refusing to back down—could be evening out investor perception.
But when one exists without the other, the cryptocurrency market can plummet. When Tesla announced they’d no longer accept Bitcoin, for example, values tumbled by 12%.
Mark Zuckerberg thinks we’ll all be in the metaverse within the next five to ten years. And while investors are already seeing vast opportunities in virtual real estate and NFTs, the one asset that doesn’t seem to have a place waiting in the metaverse is Bitcoin.
Ethereum powers NFTs. Cardano uses proof-of-stake to make smart contracts more eco-friendly. Companies like Meta, Walmart, and others are developing their own proprietary stablecoins to use as stores of value.
So where does that leave Bitcoin?
With high power consumption and limited practical uses, it appears that Bitcoin might be too old-fashioned for the metaverse. And as more investors realize this, they might start converting their BTC to more future-proof cryptos.
Whether or not Bitcoin is a good investment depends on your personal definition of what makes an investment “good.”
Most investors would define a “good” investment as one that follows an asymmetric risk profile where the potential rewards outweigh the risk.
By that definition, let’s look at some examples of good and bad investments.
Scooping up shares of a high-yield S&P 500 index fund like the Vanguard 500 Index Fund ETF (VOO) is widely considered a good investment.
VOO makes up the backbone of many low- to mid-risk portfolios because it presents us with a pretty clear example of asymmetric risk. The diverse fund has a low expense ratio (0.03%), high float, and has generated consistent returns of around 14%.
By contrast, gambling in Vegas is a bad investment. Even though all the gambling I ever did was to turn $100 into $150 on the poker table, generating a 50% return in five minutes, it was still a bad investment. Statistically, gamblers in Vegas win less than 40% of the time—and since I have the poker skills of a blind dog, my personal chances were even lower.
So where does that leave Bitcoin?
Well, Bitcoin certainly has no issues in the potential returns department. Barring the explosive short-term performance of Shiba Inu, Bitcoin is the fastest appreciating asset of the decade, with average annualized returns of around 200% since 2012.
Sure, the granddaddy of digital currency has had its ups and downs. But let’s give it a score of “very high” in the potential returns category for now.
But the risks… Hoo, boy.
The problem with Bitcoin isn’t that the risk is high; it’s that the risk is incalculable.
You see, in order to assess the risk of a potential investment, you have to look at the data. Stocks and pieces of real estate give us plenty of ammo in this regard, including but not limited to:
So whether it’s a retail trader’s homemade formula or a hedge fund’s sophisticated AI-driven algorithm, this data fills in the gaps to help investors predict the likelihood of good performance—and therefore the risk—involved in an investment.
Bitcoin, by contrast, gives us so little to chew on. Instead, it is upheld by demand and demand alone—and as a metric, investor demand is just too fickle and transient to predict.
Who can accurately predict and model when perceptions of a particular asset or trend will change? Who could’ve predicted that Elon Musk’s SNL appearance would instantly wipe 24% off the value of DOGE?
That’s why it’s impossible to fit Bitcoin into an asymmetric risk profile. The digital asset is so volatile and unpredictable, with so little tangible data upholding its value, that the risk can’t even be properly assessed.
And without certainty that it’s a good investment, we have to assume otherwise:
Despite the performance, Bitcoin simply isn’t a good investment on paper.
At the same time, it’s hard not to feel FOMO when everyone knows someone who’s gotten silly-rich just by buying Bitcoin at the right time. So even if it’s hard to justify on paper, isn’t the chance at gaining sky-high returns worth the risk?
Still no, and here are two reasons why:
In short, Bitcoin’s volatility—and its shortness of factors dictating its market value—make it too hard to predict, and thus not a fit for an asymmetric risk profile where the house (you) always wins.
When Bitcoin is down, they say “buy the dip.”
When Bitcoin is up, they say “it’ll keep going up.”
There never seems to be a bad time to invest in Bitcoin – which implies that no matter how you look at it, Bitcoin is a good investment.
After all, the OG crypto’s performance numbers are undeniable. Despite the recent crash, Bitcoin is still valued at $37,760.90 today, compared to $3,891.31 just three years ago.
Does that mean it’s finally time to hop aboard? What are the risks, and are they worth it?
Is Bitcoin a good investment in 2022?