Outside The Bitcoin Echo Chamber: Here's Why I'm Not Stacking Sats

Image Credit: REUTERS/Dado Ruvic

On a chilly winter morning in 2021, I sat hunched over my laptop, scrolling through article after article, trying to decide if I should invest in Bitcoin. Bitcoin was having a moment. After three years of trading more or less flat, the cryptocurrency had quadrupled in value over the past six months, climbing from just over $9,000 per coin in July of 2020 to a peak of $40,287 on January 8th, 2021.

This wasn’t the first time I’d considered investing in Bitcoin. Three years earlier, I’d watched the first Bitcoin frenzy with more curiosity than anything else. I briefly considered chucking a few dollars in to see what happened, but I thought better of it. I didn’t have much cash to invest, and Bitcoin seemed like a fad that would pass. I felt vindicated when the bubble popped in early 2018, and many went so far as to triumphantly declare it dead and buried.

Now, I felt like I was experiencing déjà vu. Major news outlets ran story after story about Bitcoin; sites like Reddit and Twitter were awash with hype and optimism bordering on euphoria; it wasn’t uncommon to read about people doing crazy shit, like taking out mortgages, to go all-in on crypto.

Except that this time around I was intrigued.

In contrast to 2017, I did have some money available to invest. And, this price surge seemed to indicate that Bitcoin was more than a momentary trend. But how much higher would it go? Where were we on the price curve? And also: was there anything you could actually do with it?

The more I read, the few things become clear. For one, no one had any idea what was going to happen. The cryptocurrency was a new asset class that, prior to Bitcoin, had never experienced popularity on this scale. You could find proponents for a wide range of outcomes: there were people who argued that Bitcoin would replace the dollar; others argued that it was worthless and would be worth little more than pennies by the end of the year. There was no clear consensus.

And, despite lots of buzzy talk about blockchain technology and the merits of decentralized finance, there weren’t any practical uses for Bitcoin. You couldn’t really buy anything with it, and even if you could, it was impractical as a currency because it can take as much as an hour to complete a transaction. Bitcoin can handle 4–5 transactions per second; by contrast, Visa can handle up to 65,000.

Super volatile and no clear utility… got it. So, why was I thinking about buying this stuff?

For one, volatility gets a bad rap. ‘It isn’t necessarily a bad thing,’ I told myself, ‘if you have the time and stomach to ride out the highs and lows.’ I didn’t have any fixed timeline for turning a profit. I could afford to buy, hold, and wait to see how things played out.

Another argument for Bitcoin that I found compelling was that Bitcoin, similar to gold, could serve as a hedge against inflation. Here’s how a Nasdaq report put it in March 2021:

“Cryptocurrencies are designed to be a store of value, like gold, that are resistant to depreciation or inflation, unlike fiat currencies. In economic downturns, governments print money to offset the imbalance, resulting in inflation, which can quickly get out of control like it has in Argentina and Venezuela.”

Because there are a fixed number of Bitcoins in circulation (by design, there will only ever be 21 million Bitcoins), the argument is that Bitcoin is protected from devaluation in a way that traditional currencies are not. ‘Great,’ I said, ‘I can balance out my portfolio and mitigate some risk.’

Ultimately, Bitcoin’s potential was the most compelling reason to buy it.

Sure, it might tank. It might end up as #1 on a Buzzfeed listicle, published 30 years from now, titled “10 things that defined the 2020s.” But… it might not. The odds of success might be very low. No one knew for sure. But it was clear that the potential upside was incredible. The 4x price spike over the last few months showed as much, and institutional investors like Fidelity were beginning to get on board too. To me, this made Bitcoin a logical, if asymmetrical, investment.

So the bottom line was: Bitcoin was an extremely volatile speculative investment that had delivered massive returns over the last few months. If inflation spiked, or there was a major shock to the financial system, Bitcoin would retain its value. And, though it had no practical use, it might one day.

I was ready to give it a go.

How did I approach investing in Bitcoin?

With Bitcoin, this maxim seemed especially critical because I knew it could very well be worth nothing in the near future. I decided I’d buy $10,000 worth of Bitcoin, which, if it came to pass, I could stomach losing. I used Coinbase because the fees were relatively low and the interface was simple and easy to use.

This was when I made two mistakes.

I won’t lie: after weeks of research and deliberation, I was excited and eager to board the crypto hype train. I therefore tried to time the market and pick my entry point based on, in hindsight, some harebrained data points I skimmed from various articles and crypto “experts” on Twitter and Reddit. I bought $5,000 worth of Bitcoin in February 2021.

The price dropped by $10k a few weeks later. Stupid. This was an emotional decision, my somewhat understandable first mistake. Also, I outsourced too much thinking to strangers on the internet, my somewhat unforgivable second mistake.

Going forward I used dollar-cost averaging. If I can offer you one piece of advice about investing in crypto, it would be to use DCA. This means that you invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market.

Sometimes you’ll buy when the price is higher, and other times you’ll buy when it’s lower. But over the long run your average purchase price is much lower than if you had tried to time the market. This, in my opinion, is a must for something as volatile as Bitcoin.

What was my experience buying Bitcoin like?

Starting in April, I made 36 individual purchases for a total of $5,000. DCA was a low stress and low maintenance strategy. Coinbase would automatically buy BTC for me every Sunday. Because I was committed to this approach for the rest of the year, I never had to sweat about whether I should make a purchase or not based on the current price.

As the weeks went by, I watched the value of my crypto “wallet” slowly rise. Bitcoin reached just over $61,000 per coin in March, before dropping precipitously back down to $31,000 in July. This was a time of pants-shitting terror. At that point, I was ready for the floor to fall out and to lose everything.

However, I stuck to my guns, and watched Bitcoin bounce back over the next few months, eventually peaking at an all time high of $68,990 in November. This, in contrast to the summer, was a time of pants-shitting joy. I felt heady, like I’d cracked some sort of code. At the peak, I was up nearly 50% on my initial investment. Opening the Coinbase app felt nice.

And then, of course, the music stopped.

Why I stopped investing in Bitcoin… for now

In 2022, inflation became an unavoidable topic. February’s consumer price index showed an increase of 0.6% in January and an annual inflation rate of 7.5%, much higher than expected, and the largest increase since 1982. The Fed’s long-anticipated interest rate hikes were on the horizon. Meanwhile, it began to look like Russia might do the unthinkable and invade Ukraine.

This, I thought, was crypto’s moment.

This was what the technology had been invented for. Rampant inflation, the outbreak of war, wild swings in markets around the world: people would want a secure store of value — digital gold in a chaotic and turbulent world.

But the boom has not arrived. The price of Bitcoin is down 10% over the last month. Ethereum, the second most popular cryptocurrency, is down 15%. Aside from a spike immediately following the invasion of Ukraine, trading volume has stayed relatively flat, meaning that people are not rushing to convert their dollars into Bitcoin.

And as opposed to acting like digital gold, Bitcoin’s correlation with the stock market has reached record highs, meaning that Bitcoin is behaving more like an index fund than an investment safe haven.

What’s happening with Bitcoin?

There are several theories. TechCrunch’s Kay Khemani suggests that:

“Bitcoin ‘whales’ are known for their ability to manipulate prices by selling or buying in large quantities, meaning that bitcoin can be dictated by speculative forces, not solely the money-supply rule. Another key consideration is regulation: Bitcoin and other cryptocurrencies are still at the mercy of regulators and wildly varying laws across jurisdictions. Anti-competitive laws and shortsighted regulations could significantly hamper the adoption of the underlying technology, potentially depreciating the asset’s price further. All this is to say one thing: It’s far too early to be making judgments on bitcoin being an effective hedge.”

If Bitcoin isn’t a safe harbor for investments during inflation and moves in line with broader economic conditions and indices, how was it unique? Was it time to revisit the assumptions I made when I started investing?

At the beginning of the year, I turned off automatic BTC purchases in Coinbase. My return (so far) is -19%. I don’t have any plans to buy additional Bitcoin, and my investing journey over the last year has left me less enthusiastic than when I started. Why is this?

First, Bitcoin has so far failed to act as a hedge against inflation and political and economic instability. Professor Nicholas Nassim Taleb has pointed out that Bitcoin actually dropped further than the stock market in March 2020, and mirrored the market’s recovery following massive injections of cash throughout 2020 and 2021.

It seems, like me, people were stuck at home, forgoing vacations and restaurants, with extra money to spend. Some of that money went into things like cryptocurrency (and GameStop, but that’s a story for another day).

A second contributing factor to Bitcoin’s diminished appeal is that it has yet to make progress towards becoming an actual currency. In fact, it remains pretty much useless, other than as a vehicle for speculative investment. As time goes on this makes Bitcoin’s longevity more dubious to me. If we can’t actually do anything with this stuff then what is the point of it? Sure, gold and diamonds have no objective value either, but at least you can wear them.

If Bitcoin (and other cryptocurrencies) are just insanely volatile speculative assets with no utility, then what’s the point?

To me, Bitcoin looks overvalued and overhyped. And if I have a choice between investing in a useless digital token and a company with products and people that deliver actual value, why would I pick the former?

What’s next for Bitcoin?

Please allow me to be the first to tell you that I may be wrong. This is a nascent technology and it’s still early days. I’ve also focused on Bitcoin in this article because that’s what my experience has been with, but there are thousands of cryptocurrencies in circulation. Many are attempting to address Bitcoin’s shortcomings as a currency and may hold more promise for practical application in the short term.

All to say, Bitcoin (or some other cryptocurrency) may indeed replace the dollar someday. Maybe my grandkids will be taunting me, decades hence, with an article I wrote on some archaic site called Medium expressing skepticism about the world’s reserve currency. Only time will tell. While we wait, here are three questions that I have:

1. How will the ongoing struggle against inflation impact the price of Bitcoin? Bitcoin does not seem insulated from the effects of inflation, as previously theorized, and it would stand to reason that its value will be dragged down.

   
   

2. Will the price of Bitcoin continue to rise when the US and other governments are not injecting trillions of dollars into the financial system? It seems clear that people around the world used the excess disposable income to buy cryptocurrency. With the end of stimulus checks and a resurgence in travel and restaurant spending, will we continue to see the level of demand for crypto that we have over the last two years?

   
   

3. Will anyone develop a practical use for Bitcoin? It’s been suggested that cryptocurrencies will be the money of the metaverse. Will we finally see a “place” where we can use Bitcoin?

However, let me be clear: I’m not selling my Bitcoin. I see them as a lottery ticket, though nothing more. But, if it turns out I bought a winner, then maybe my grandkids will mix some gratitude in with the taunts.