Why Bitcoin Doesn’t Make Sense For Defensive Investors

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Or does it?

According to Benjamin Graham’s book, The Intelligent investor, the defensive investor doesn’t like thinking about money.

Like me, I hate thinking about money. I’d rather live my life!

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Don’t like calculating all the financial minutiae? If so, then you might be a defensive investor. These types of investors love to invest passively without having to check the prices, the market, or anything!

Just set it and forget it. Maybe they will look at their asset allocation every 6-12 months.

But Bitcoin is the opposite of a defensive investor’s safe haven. It rocks and turns. It rises dramatically and falls steeply. It is a new technology and we have no idea where it will be in the next 10 to 20 years.

For us defensive investors, we keep committing cardinal sins by buying Bitcoins, but I wanted to stop feeling guilty for it. In short, I ran a test.

Backtesting 2+ Years of the Bitcoin Market

Since we are ignoring our sense for safety and putting money in bitcoin, I decided to run an experiment.

I called it, “If You Invested $100 Every Month in Bitcoin Since November 2013…” Check it out, I did it two days ago.

Ideally, I wanted to play it safe and take a page out of the “set it and forget it” investor’s style that Ramit Sethi advises for those of us who hate thinking about money. (I will Teach You to be Rich)

What were the results of this experiment?

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The Results

The principal amount increased by a total of 36.47%. Which is pretty crazy since investors would be more than glad to match the market average growth rate of 7%.

But is it safe?

Your earn $1966, but more than 90% of the time you are losing money… frightfully so.

On May 1, 2014, you have invested $1900, but ONLY have $1064 in Bitcoin.

This is a perfect example of a situation where an investor might just “freak out.”

Change that number to $300,000. That would drop to $168,000… imagine that.

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We get it, there is risk – Should we still invest?

I am not a financial advisor, so this is your choice. But, from my perspective, Bitcoin is not an investment vehicle. Although, you could allocate some of your risk-funds (the money you are ready to lose) into Bitcoin.

If you are Bitcoin user like me, then my best suggestion is to slowly buy Bitcoin. Don’t buy it all at once, because the price drops over a short time are real, but so are the gains.

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“I still want to put money into Bitcoin, what am I betting on?”

A couple strong points:

1. Bitcoin is 100 times more powerful than Google. According to Balaji SrinivasGoogle has more than 10 million servers running. If you pointed all of those at the Bitcoin Network so they were mining Bitcoin, it would only account for 1% of the network. And with banks like HSBC going offline leaving millions of customers without their finances, Bitcoin shows strength in its 7+ year track record of never going down. 

2. The market cap must either increase or hit ZERO. The current market cap is $9.8 billion. When comparing that to a global currency like the U.S. Dollar which has $1.46 trillion in circulation (150 times larger than Bitcoin), that is a minuscule amount. If cryptocurrencies become popularized all over the world and Bitcoin took even a modest percentage of that market — the market cap would have to rise dramatically because there can only be a limited number of Bitcoin produced. If Bitcoin takes a small percentage of the Global market… then who knows how high “to the moon”, a common saying among speculators and traders, really means.

3. Bitcoin has first-mover advantage. Bitcoin isn’t the first digital currency, but it is the first one built on top of the blockchain with a network far exceeding the power of the world’s 500 most powerful super computers. Also, it is hard to use. Money is being poured into the market to make Bitcoin and a few other currencies easier to use. This is essential for increasing adoption. Theoretically, infrastructure could be adapted for the other coins, but Bitcoin’s awareness level still gives it a stronghold among cryptocurrencies.

4. The underlying technology is beyond innovative. Bitcoin is not just a currency. I frankly can’t explain it better than Andreas Antonopolous, the author of Mastering Bitcoin

“Bitcoin and the concept of the internet of money that it creates are this new model for a payment network that spans the globe, that has no borders, very much like the internet, that allows you to run financial applications that are controlled by software and, rather than political rules, are controlled by mathematical rules.”

5. The Technology is far ahead of its predecessors. In short, Bitcoin provides a financial system far advanced compared to the current banking system in place. Bitcoin can transact all across the world in minutes.No exorbitant fees. It allows for escrow through rules of software instead of the human escrow organizations we must rely on. As well, it allows for  3rd world countries to hold a relatively stable currency, instead of  worthless paper currencies that have devastated many countries with hyperinflation

Conclusion

Bitcoin is not a defensive investment. I prefer that we begin transacting in Bitcoin, rather than thinking of it as an investment.

Of course, there are traders and speculators — but that is part of the game when the possible financial gain caused by having a single item becomes too large to ignore. Kind of like the California Gold Rush.

In this case, the possible upside lies behind a wonderful technology — not some golden rock we value because it looks pretty. But hey, gold has “idea” value, I can’t knock it.

Now is the time to get rich for some people, but not for all of us.

Disclaimer: I am not financial advisor. Only buy bitcoin or investments at your own risk, and if you have the money to do so. I do not advise people on investing, but merely give my point of view on Bitcoin, investment ideas, and more.

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