Last weekend I went out to dinner with a couple friends of mine.  They are my “go to” party friends that I call up when I just want to blow off some steam after a long week at work.  Neither of them are in finance which is precisely why I like hanging out with them when I want to unplug from the industry.

As soon as I walked into the Japanese restaurant where we met I was greeted with this conversation:

Friend #1: “Jay! You’re finally here.  Bro, you gotta teach me about investing.  I bought this bitcoin thing at around 6k and I have no idea what is going on but I’m making all this money…should I sell it now?  I need you to tell me what to do here…you’re the finance guy….”

Friend #2: “Dude…don’t sell it yet. Just hang onto it.  My wife actually wanted me to sell it back at 3k.  She kept nagging and nagging but I was too lazy to get it off my cold storage key.  Thank GOD I didn’t listen to her.  See…you should never listen to your wife…”

Friend #1: “But the price is SUPER volatile. It’s crazy.  I can’t believe it’s over 16k right now.  I just made 10 grand doing NOTHING and I’m afraid it’s going to crash soon…”

Friend #2: “Bro…trust me…it’s NOT going to crash. I’ll tell you why…these crypto exchanges can’t even handle the number of transactions that are going through right now.  They simply cannot process the volume of orders.  So even if people WANTED to sell…they just simply CAN’T.  And that’s the beauty of it…the price will always be supported this way….”

I couldn’t believe my f*$king ears.  I promptly order a large bottle of sake and started hammering down shots…

I love my friends but boy is this cryptocurrency stuff madness right now. In truth, I’ve spent the last few months trying to wrap my head around this whole thing and have been going back and forth about the whole thing, multiple times.

 

Bitcoin Price, Source: Bloomberg

I don’t even like sitting down and writing this to be honest because I feel like even talking about crypto in and of itself is a form of capitulating.  It’s the only thing anyone talks about these days…it’s a classic case of the the shoe shine guy giving you stock tips…screaming bubble!

A few weeks ago, I spoke about capitulation.  When I first embarked on this crypto discovery journey I was a staunch fundamentalist and veered strongly to the side of “bitcoin is bull$hit” making the classic error of broad stroking a fad (or asset class) without doing any work to support my view.  

But as time went on, and the more I researched it (and met people like my two friends who are making money hand over fist in crypto) I slowly began to question my position.  

Never before in my entire career as an investor have I see such divide when it comes to crypto.  On the one hand you have some of the greatest financial minds in history calling it a “bubble.”  (Luminaries such as Seth Klarman, Warren Buffett, Howard Marks and Jamie Dimon…all people I admire and respect…have all expressed their skepticism) Then on the other hand you have some of the smartest guys in Silicon Valley and the world calling it “the future”.  

And slowly but sure, as is the case with anything that involves making “easy money” the FOMO (fear of missing out) started to set in for me.

The more and more I researched crypto, the further I got pulled into the vortex.

The more and more “idiot” friends I met who were making money by doing zero work, the more I began to question my own source code and moral fiber as an investor and question if I am really just a grumpy old curmudgeon stuck in his ways.

Maybe I’m an investing snob who is just bitter because I know that investing is a LOT of hard work and the returns that people are seeing are not sustainable over the long term.

Maybe I’m just bitter because I first heard about Bitcoin way ahead of the masses back in 2012 when I first met Barry Silbert in Silicon Valley and tried to buy it only to have failed not once (when it was at $12) but TWICE (I had another opportunity at $300).

Maybe I’m old fashioned and think that you need to work for your money and that unearned wealth (like trust funds) are the greatest threat to one’s personal growth than anything else in the entire world.

Or…maybe I’m just WRONG.

To be fair to my friends and anyone else out there trading crypto…they’ve made a LOT of money doing virtually nothing and riding this wave.  And at the end of the day their bank account affirms that they are “winning”. So are they wrong??

Does crypto exhibit all the signs of a bubble right now?  Yes.

Will the majority of ICO’s go to zero?  Yes

Can you still make money despite it being a crazy volatile bubbly market?  Absolutely

So what do I plan to do now?

After researching cryptocurrencies diligently for several months now and still not being able to formulate an educated investing framework around it, I’ve finally devised my personal plan on how to deal with this current nonsense.

These crypto assets may very well still be underpriced and appreciate in the future due to new market participants.

In fact, one of the largest arguments for owning bitcoin is the fact that institutional money has not fully gotten involved and when they do the proverbial floodgates will open lifting the underlying  prices to the moon.

In truth, I honestly don’t have the bandwidth to keep up with all the crypto chatter and hype.  I’ve spent hours a day for the last few months researching this stuff and while it is a fun distraction, it is pulling me away from my real work.

So here is my approach, and in no way shape or form should this be misconstrued as investment advice to my readers. I’m simply just telling you what I’ve decided to do.  

I believe any Bitcoin or cryptocurrency bet should be asymmetric. What does that mean? In plain english that means limited downside and potentially massive upside.

Most cryptocurrencies and ICOs  right now are outright scams which will go to zero.  Even the really good ICOs which have solid founders with a great idea will have little chance of success.  It’s like angel investing but even worse.  So be extremely careful of what you buy.

Don’t invest more than you can afford to lose.  There WILL be very high volatility, and some seriously scary negative headlines in the future.

The largest hurdle each investor must jump over is how much is too much to lose?

I have fairly low risk tolerance (3 kids now). So the greatest I can stand to lose on something that I don’t fully understand and quite frankly has zero fundamental behind…it is pretty low.

I’ll probably buy a small amount and “let it ride”.  I won’t trade it cause I don’t have the bandwidth and if it goes to $1mm per coin, will I regret not buying more?

As a human being with emotions = yes.

As a fundamental investor = no.

FOMO is a dangerous thing and it’s even harder for career finance dbags like myself to wrap our heads around.  It’s easy to be hoity toity about the whole thing and commentate with a holier than thou attitude but it’s harder to sit here watching everyone get rich without even trying.  

But let’s not forget, this is not just the case with crypto.  You could make that same argument for FANG stocks, or US equities or even XIV right now.  The “everything bubble” continues to grow  and nothing, not even global interest rate hikes (which actually happened this week but no one seemed to notice since they were probably just watching bitcoin) seems to be able to calm this party down.  

Just make sure you have a plan b.  When $hit hits the fan and you are “long and wrong”…you’ll only have yourself to blame.