I am a relatively conservative and risk averse investor. As I look at the rise of Bitcoin, I often find myself thinking about one thing: risk. I am willing to speculate in some cases, and I also am willing to invest to learn more about an opportunity. I have come to feel that Bitcoin is far less speculative and more conservative than most people think.
While others get greedy and see Bitcoin as a perfect investment opportunity, I think about how investing in Bitcoin could kill my capital. Buffett rings in my mind at these times:
Rule #1 – Never lose money.
Rule #2 – Never forget rule #1.
But perhaps there is another way to think about the risk? Perhaps there is a floor? Perhaps I can apply rational thought and some second level thinking to Bitcoin. It’s time to look deeper.
First, let’s look at a quick chart:
The gains are tremendous in just one year. Investing in Bitcoin with Coinbase isn’t difficult. And, the proof is in the pudding for those who got in even in the last month or two. In short, timing has been everything. If you got in at the right time, the gains were there for you.
But what about right now? What about today? If you’re a conservative investor, is there anything to help mitigate the risk?
The First Clue That Bitcoin Might Not Completely Collapse
I used to think that Bitcoin could suddenly go to zero. I highly doubt that now, which I’ll explain in a minute. First, here’s a look at Bitcoin’s Market Cap:
The point is that the overall Bitcoin market cap is $80B. And, adoption is growing like a weed. It’s likely that more than 10 million people own some Bitcoin. There are 2.8 million people who own Bitcoin in the U.S. That means to close to 1% of all U.S. citizens own some Bitcoin. Clearly, that’s not a critical mass in terms of holdings, but it points to growing awareness.
Aunt Bessie might have heard “Bitcoin” by now. And, your next door neighbor might bring it up in passing to you at the community pool. The point is that awareness is likely significantly higher than 1% in the United States. I can’t speculate as to how many people who are aware will become buyers, or investors, or holders – but there is the rough logic that says some will.
It’s Called a Cryptocurrency for a Reason
If we think about Bitcoin being a technology for a moment, the Technology Adoption Curve takes on special meaning in relation to Bitcoin adoption:
“In the beginning, innovators are the first to get interested on new products and novelties. They even accept incomplete or defective products just for the pleasure of being the first ones to use this new product. In second place we find the early adopters, also known as visionaries or enthusiasts, who accept the risks of testing new products, but not for the pleasure of coming first but because they the potential in it. Usually, they are influencers within organizations and communities in which they participate.”
Since we are still in the early adoption phase of Bitcoin, we can realistically say that early adopters haven’t even really jumped in yet. In other words, unless an outside force comes along and crushes Bitcoin, adoption is certain to move upward. And, of course, as the technology is adopted, the value of Bitcoin increases, because the technology is the currency.
Here’s the important point: Even if Bitcoin doesn’t surge forward due to adoption, it’s still likely to maintain its value at some level. That level of value is some place above zero and perhaps well above zero. That means that I don’t see a sudden bankruptcy of Bitcoin, which is one measurement of safety.
None of this is to say that Bitcoin value will be stable, or that Bitcoin won’t be replaced eventually. But there is unlikely to be an abrupt, catastrophic drop to zero value, and that’s where I like to start as a conservative investor.
I also believe that if we think of Bitcoin as technology, the S-Curve means even better days are ahead. That’s because if only 1% of the U.S. holds Bitcoin, then there’s an ocean of opportunity… 99% haven’t adopted yet.
Even a small percentage of adoption amounts to many millions more buyers, users, and holders of Bitcoin. Inverting this logic, we have more risk mitigated. I am starting to like The Bitcoin Floor.
The Second Clue That Bitcoin Might Not Completely Collapse
I’m starting in a weird place, but stick with me. I recently caught the news that Venezuela is collapsing. This stuck out and seemed to summarize the gravity:
“I think what’s incredible is that we’re witnessing the collapse of a large, modern, wealthy country that has both a democratic and an authoritarian tradition. It’s only a few hours from the United States, and it has the world’s largest supply of crude oil. Venezuela is a powder keg, and the worst-case scenario is now civil war.”
Then, I learned about the currency collapse:
“At the beginning of the year, it took about 3,000 bolivars to buy one U.S. dollar. By Wednesday, it took almost 8,000.”
“Prices are set to rise a staggering 720% this year, according to the International Monetary Fund. The collapse of the economy and currency has driven shortages in food, medicine and basic products like toilet paper.”
Here’s why this matters. The collapse in Venezuela’s fiat currency has created a Bitcoin mining frenzy:
“Under these circumstances, a miner starts to look a lot like an ATM. Professors and college students have mined bitcoin; so, rumor has it, have politicians and police officers.”
If we add all the pieces together, Bitcoin (and other cryptocurrency) provides almost anyone with an opportunity to create money out of thin air.
Although that’s a gross exaggeration, since Bitcoin mining takes electricity, there’s still currently an opportunity to create Bitcoin money with a little bit of effort. Therefore, even if your fiat currency stops working, you can create Bitcoin and use it as a currency.
More importantly, this “money out of thin air” from mining activity means that more people will learn about Bitcoin, more people will use Bitcoin, more people will respect Bitcoin as a means of exchange. I still don’t think of Bitcoin as an “investment” in this respect, but it continues to build out The Bitcoin Floor.
Every day, it’s less and less likely that Bitcoin will go to zero. There’s evidence that economic insecurity and instability actually increases the potential of Bitcoin.
At a minimum, adoption of Bitcoin will continue on the edges and work toward the mainstream. While this might not provide a strong “Buy!” signal, it does provide us with an indication of safety in Bitcoin.
Conservative investors should not immediately run away from Bitcoin but instead take time to consider The Bitcoin Floor. While it might not be worthy of investment dollars in your portfolio, greater awareness of what it is and how it works will benefit many investors. As I’ve said to friends: It ain’t going away.
Conclusion: Conservative investors who are looking at buying Bitcoin directly, or perhaps via Grayscale Bitcoin Investment Trust (OTCQX:GBTC), or the Winklevoss Bitcoin Trust ETF (COIN) in the future, have The Bitcoin Floor working in their favor. While it’s true that The Bitcoin Floor doesn’t provide investors with a “Buy!” signal, it does provide some assurance about the future of Bitcoin and how catastrophic risk might be lower than a surface level analysis indicates.
There are also some lessons about upside potential in light of the fact that Bitcoin is inexorably intertwined with blockchain technology. As such, we can look at current Bitcoin adoption rates in the U.S. and beyond, and then apply S-Curve thinking to investment potential to the upside.
In short, it appears that every day, Bitcoin is a bit more “safe” for conservative investors although expectations should be muted with a healthy dose of realism. Bitcoin might relentlessly rise in value over time, but it’s a near certainty that there will be wild fluctuations that will not allow certain conservative investors to sleep well at night, no matter what’s happening in the long run. The Bitcoin Floor is not a place where all conservative investors will want to rest their heads.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.