Can you stomach a loss of 70–80% if the price continues to go down?
If your answers are “yes” and you have the mental fortitude of a Buddhist monk, then you might do well in the world of crypto.
Let me share the story of Tim Draper
Billionaire VC investor Tim Draper has been investing in tech companies for a couple of decades now — including Tesla and SpaceX. A few years ago, he started his due diligence on bitcoin as a potential investment. He was intrigued for some of the same reasons a lot of us are. Here’s what he wrote in a blog post:
“The obvious uses for bitcoin are 1) having a currency that is accepted everywhere without any government friction or interference, 2) a stored value solution that doesn’t require a holder to keep a room full of metals and art, and 3) a frictionless currency that can move automatically based on a contract without the usual drag that comes from regulations that need to be interpreted by a lawyer or an accountant.”
When the government seized thousands of bitcoins from the Silk Road bust (a platform where drugs were sold in exchange for btc), 36,000 bitcoins were put up for bid.
Tim Draper, the highest bidder, payed $632 for 36,000 bitcoins. This means he dropped $22.7 million dollars to buy all that btc. Some estimates put it lower than that (around $17 million USD) — but you get the point. It was a big bet!
The bitcoin price was around $600 at that time, so while the bid was a bit high, it made sense. But then between June 2014 and 2016, the price dropped significantly. It went from $600 to $190, which means Tim lost more than half of his money — something like $15million USD.
Just imagine his situation. You just drop $20m on a bunch of digital coins and then you lose more than half that money in a few months.
That’s a lot to stomach.
As far as I know, Tim didn’t sell any of his bitcoin during this downturn. The price didn’t move back up towards his initial position until late 2016, where it spiked up past $700, and then back down. He had to wait two years to get back to the price he bid at.
Fast forward to 2017 — bitcoin’s price soars past 1,000, 5,000, 10,000…and it breaks all expectations and gets up to $20k at the peak. Tim’s $20 million worth of btc turns into more than $700 hundred million btc. That’s quite the return.
If he would have listened to his friends or hesitated back in 2015 and sold at a loss…well, that would have been a real shame, and he would have missed out on making hundreds of millions of dollars. While not all of us are seasoned tech investors, at minimum we should consider the emotional/mental fortitude that is necessary to push through such losses. Draper is a great example of “going all in” and not turning back.
And whether or not bitcoin is cheap is a different question — that’s something you need to decide based on your fundamental analysis, and based on your tolerance for risk.