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What Bitcoin Has Taught Me About Investing (BTC-USD)

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I first heard of Bitcoin (BTC-USD) in 2013. Over beers, my coworker advocated a digital currency powered by something called the blockchain. I don’t recall the price or how many Bitcoins my coworker owned. I hope he remains an owner and is reaping the rewards of his early conviction.

It is an unnecessary reminder that since 2013, Bitcoin has embarked on a staggering run – advancing ~160,000%. Throughout its rise, I have remained on the sidelines, forgoing significant potential gains.

Reflecting on my lack of involvement in Bitcoin’s success exposes lessons applicable to a broad spectrum of investing. For me, these lessons include the importance of knowing what you own, having conviction in your holdings, a willingness to not swing at every pitch, and the overall importance of keeping an open mind.

Investing is not a zero sum game. For you to win, I don’t have to lose. The Bitcoin bulls deserve their success and I’m fine remaining uninvolved. I will take my payment in the currency of lessons learned. Let’s review these lessons in greater detail.

Knowing What You Own

Peter Lynch is quoted saying “know what you own, and know why you own it.” My lack of involvement with crypto is rooted in the first part of this statement. I don’t have a clear understanding, in my mind, what it is – and would have zero ability explaining Bitcoin to a five-year-old. I have read the whitepapers, listened to podcasts, people have explained it to me – with interactions often resulting in more confusion than clarity.

The second part of Lynch’s statement is dependent on the first. If you don’t know what you own, you have no reasoning for ownership. Bitcoin is explained as a store of value and an inflation hedge. I don’t see this evident in practice; however, do not have the understanding to form an educated opinion. Without a clear understanding of the asset resulting in a sound reason for ownership, I’m fine sitting on the sidelines.

Lynch’s statement is a great gut-check for any investment with both parts of the statement needing logical answers. In regards to Bitcoin, I can’t answer the first part of the statement – having a clear understanding of the asset – so I don’t get to proceed to the second part – having a reason for owning the asset. Regardless of the asset, many investors skip the first step and rationalize the second. Not understanding what is purchased, reasons for owning are weak – such as “it’s going up” or “hedge fund manager x is allocating 1% of their portfolio.” Not sound reasoning for ownership.

Having Conviction

Conviction is perhaps the most important ingredient to successful investing – no matter the asset class. Conviction is the ability to maintain a high level of belief allowing persistence through volatility and lulls. For example, Tesla (TSLA) stock traded at a similar price in March 2014 and March 2017. High levels of conviction can help investors hold through this period and participate in subsequent growth.

Bitcoin is the beneficiary of severely convicted investors with many unwilling to sell. This conviction is rooted in a deep understanding of the asset and belief in the problems it is intended to solve. These convicted investors are able to ride the rollercoaster that is Bitcoin’s chart and have benefited mightily.

I hold an investment philosophy that if I’m unwilling to invest 100% of my portfolio into an investment, I don’t invest in the asset. This is not to say I do invest 100% into a position. The point is to operate under a framework demanding deep understanding resulting in high levels of conviction. This leads to many “no’s”, minimal activity, and a pruned portfolio. For me, Bitcoin does not pass this filter and has remained outside of my portfolio. For many, Bitcoin passes this filter in theory and in practice.

Not swinging at every pitch

Living a healthy lifestyle is as predicated on what you don’t do as what you do. For example, not smoking cigarettes improves your health. For the investor, avoiding bad investments is equally as important as making good investments.

How do you avoid bad investments? It is important to realize investing is more personal than we may think. A good investment for you might be a bad investment for me. Everyone’s strike zone is different and your strike zone is largely defined by what you understand.

Bitcoin has been an incredible investment for many. This is reflected in its price appreciation. However, Bitcoin may have been a terrible investment for me – due to my lack of understanding and conviction. Due to my naivete, my decision-making is more likely to be influenced by price action, talking heads, and FOMO. Dangerous inputs for basing decisions.

I’ve heard Warren Buffett convey the following concept… in investing, you can stand at the plate all day, look at every pitch, only swing at the ones you like, and are never at risk of striking out. There is an insane advantage that comes with being able to sit and wait. Investors can put the odds in their favor by defining a personal strike zone and waiting for pitches within that zone. Avoiding everything else leads to a better night’s sleep.

Keeping an open mind

The universe of investing is filled with countless options competing for investment dollars. Some of these options turn into quality investments, many do not. Keeping an open mind and casting a wide net is an important step in gathering quality ideas.

I like the approach of gathering as many ideas as possible. Running these ideas through an investment framework. Developing conviction in a small number – and buying and holding until the story changes.

Having the ability to change your mind is also important. Two of my most successful investments are in companies where I had a significant change in opinion towards the business – from negative to positive. Being able to move past your original judgments can open paths to quality returns.

With regards to Bitcoin – I attempt to keep an open mind and continue to learn about the asset. Although my research has not resulted in understanding or conviction I remain open to changing my opinions and investing at a later point.

Conclusion

Investing is a personal experience with the primary goal for most investors arriving at a state of financial security and independence. Investing is a quality tool to help achieve this goal; however, it is important to note that similar goals can be achieved by following different paths.

The building blocks of your path may include Bitcoin. For me, it does not. As my path continues to evolve en route towards a destination of financial independence, Bitcoin may or may not be included. That said, being mindful of the topics discussed above is likely to increase returns irrespective of Bitcoin’s involvement.

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