Bitcoin Investment and How to Avoid the Trade that Brings Humility

It has become one of Hollywood’s most famous scenes.

Michael Douglas as the ruthless corporate raider Gordon Gekko, addressing shareholders of loss-making Teldar Paper in the movie Wall Street:

“Greed, for lack of a better word, is good.

“Greed is right. Greed works.

“Greed clarifies, cuts through, and captures the essence of evolutionary spirit.

“Greed, in all of its forms, greed for life, for money, for love, knowledge, has marked the upward surge of mankind.

“And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”

History did mark Gekko’s words, and they were wrong.

Twenty years later, the greed of Wall Street brought us the global financial crisis which nearly destroyed not just the US economy, but every economy in the world.

Where there is easy money to be made, one of the hardest things to do is keep greed under control.

It is the human condition to want more.

‘We’re all just one trade away from humility’

Which brings me to bitcoin and its obvious attraction for those who chase easy money.

In 2017 the price of bitcoin skyrocketed 2,000 per cent to more than $24,000.

Over the last month the wild ride has reversed somewhat, with (at the time or writing) bitcoin trading at a still astonishing $14,000.

A mere 1,500 per cent gain from the start of January last year!

No wonder an increasing number of people want a piece of the action, even if wise investing veterans such as Warren Buffett are warning it will only end one way. In tears.

A less well-remembered line from the movie Wall Street involves Gekko’s equally ruthless sidekick, Bud Fox, played by Charlie Sheen.

Fox was a brash, young, up-and-comer in the wheeling and dealing of the investment world, and one of his co-workers, Marv, tried to give him some sage advice.

“We’re all just one trade away from humility,” said Marv.

So, if the pull of the bitcoin rollercoaster is too strong to resist, how do you avoid the trade that brings humility (i.e. you lose everything)?

Investment basics still apply to bitcoin

A good starting point is to remember the basics of sound investing.

For a start, do not put all your eggs in one basket.

A well-diversified portfolio across a number of asset classes is rule “101” for making money and keeping it in the long term.

For example, while one asset such as shares may be falling, another, such as bonds or property may be rising.

Secondly, speculative investments, which is what bitcoin is at the moment, should only be a small part of your portfolio.

No more than say, 10 per cent.

And the reason is simple.

Speculation is where the highest risk is, on both sides of the ledger, because speculative investments tend to be very volatile.

There is a risk you could make a fortune, which those who owned bitcoin before January last year have done (at least so far).

But there is also a risk you could lose a fortune, which those who have bought bitcoin over the last few weeks may have already discovered.

Thirdly, do your research and try and get a handle on the real value of your investments.

To borrow two examples from the share market, there is a strong case to argue that Macquarie Bank at $103 is better value than Myer at 64 cents.

Price does not equal value, either good or bad.

So, my question for anyone planning to buy bitcoin as an investment is, “what is the intrinsic value of bitcoin?”

If you cannot answer that then you are a gambler, not an investor.

And lastly, invest for the long term.

Yes, you can get lucky and find yourself in the right place at the right time with an investment that quickly shoots the lights out, as bitcoin did last year.

For most people though, the secret to long lasting wealth is to get rich slow, not get rich quick.

Quality investments with a sustained, and sustainable, upward momentum over a long period of time.

It is far too early to say if bitcoin is one of those.

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