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I wrote the first draft of this column in December 2021, and since then, crypto (currency, assets, securities, whatever you want to call it) has entered winter. Instead of publishing a column that pretends to have seen it coming or writing a piece that makes me look like a fool, I want to share the original draft with my own up-to-date comments. I consider it akin to responding to reviewers after submitting a manuscript to a peer-reviewed journal.
What I wrote in December 2021:
Many of the WCI readers have won the game or are well on their way to winning the game, so they can ignore crypto (or for Bitcoin maxis, Bitcoin and crypto) with their “serious money” and enjoy financial independence. Any extra return might not be worth the attention that their volatility attracts–or in the case of “stablecoins,” not worth even a hint of risk. The stock market falling 10% is a big deal. But Bitcoin and other crypto drop 10% almost every month. One can use “house money” to “buy the dip” in a disciplined manner with the goal of “wealth creation,” but their time might be more valuable than whatever absolute return they generate from following the prices.
What I wrote in July 2022:
Stablecoins DEFINITELY are not worth the yield; here is an update of what has happened in 2022: an algorithmic stablecoin TerraUSD and its sister Luna collapsed, Tether, the largest stablecoin, fell below its $1 peg, and Celsius–one of the largest crypto lenders–suspended transactions. While I bought crypto, I never used stablecoins or “crypto saving accounts.”
What I wrote in December 2021:
For those of us who are beginning our journey to financial independence (i.e., will be saving for the next 20-30 years), we should also ignore crypto until we (1) have term life and disability insurance in place and (2) max out the 401(k) employer-match, Health Savings Account, and Roth (or Traditional) IRA. Paying off debt first might have a bigger emotional and mental payoff, too. Building a personal safety net and saving habits are like installing an autopilot to financial independence.
Once the autopilot is in place, many of us ask questions on Reddit, The White Coat Investor forum, and the WCI podcast about what to do next. I buy crypto with a small portion of my additional savings for peace of mind. I will share why, but this column is not about the merits of blockchain technology and crypto. This is about how I protect my emotions, which affect my behavior and the amount of time I think about my finances.
What I wrote in July 2022:
The selfish side of me rejoices when the stock market crashes (SALE!). But I have realized I am more ambivalent about executions of hopeful limit orders on a Saturday morning (see the image below) because crypto crashes are so rapid and random. Crypto has not ruined my weekends because it has never been more than 2% of my portfolio. If it ever exceeds 2%, 2022 should be a reminder that I should sell, lock in my gains, and rebalance for my peace of mind.
What I wrote in December 2021:
I prioritize my emotional health in every aspect of my investment plan because I know I can win the game by doing so. I only own index funds because I tend to regret a lot of decisions. I do not want to think about which stocks I should have picked and when I should have bought or sold them. I just keep buying the same index funds every year and every month so that I minimize my regrets.
I am investing “actively” when I overweight certain asset classes (e.g., small-cap value stocks), but still, one of my main goals of asset allocation is to regret as little as possible in the future. I have overweighted each asset class to the point where I would not wish I had allocated more or less in hindsight. If the S&P 500 returns nothing for a decade, I hope to find solace somewhere else in my portfolio so that I can keep buying US stocks even after such historical underperformance.
People have many reasons for pessimism about our society and the world. But even if I were to think our society has declined in the past decade (and will continue to do so), I want to keep buying US stocks as long as the US economy continues to attract the best talent in the world. Medicine and biomedical research are good examples. As much as physicians want to complain about the US healthcare system, foreign medical graduates still want to practice here. Although funding for biomedical research has been woefully insufficient, American institutions still attract foreign researchers who transform their fields. No matter how much we discourage college students from pursuing medicine or research, the US will continue to have physicians and Nobel-winning laboratories.
What I wrote in July 2022:
For both crypto- and non-crypto-investors who are skeptical of the future of the US economy, here is a Warren Buffet quote: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
What I wrote in December 2021:
Speaking of discouraging medicine, many talented college students do not need our advice. They are aware that jobs in other industries (or other professions in healthcare) are better than medicine for making money. Software companies have attracted talent because they are some of the biggest companies, and vice versa. Love them or hate them, but whoever such companies recruit knows how to hack computers and our brains.
In the long run, the stock market is driven by earnings growth, and earnings tend to grow when talented individuals create value for the society. Some who flocked to software companies, such as Facebook and Square (aka Meta and Block, respectively), are joining projects related to layer-1 or -2 blockchain protocols, decentralized finance (DeFi), non-fungible tokens (NFTs), and the metaverse. Venture capital firms that invested in household-name companies have poured more than $27 billion into such “Web3” projects in 2021. Most of the projects will probably fail. Many observers have compared the influx of cash into crypto with the Dotcom bubble.
What I wrote in July 2022:
In 2022, the bubble popped. Software companies and crypto are in a bigger drawdown than the broader market (Meta, Netflix, and Zoom are now value companies). People discovered that some of the “talented individuals” can also be good charlatans, gamblers, and scammers (as hinted by Sam Bankman-Fried, the founder and CEO of crypto exchange FTX). Many VC firms will continue to lose money, and most projects will fail for good reasons (as per someone who said many “no’s”). Buffett is right again when he said, “only when the tide goes out, do you discover who’s been swimming naked.”
What I wrote in December 2021:
But some also note that many of the grandiose predictions about the internet during the Dotcom bubble were not wrong but just too early. Although we cannot envision the use cases for the crypto-related projects (such as DeFi), when I reflect on what talented people have achieved writing codes for the internet, I want to bet on what a new generation of talent will figure out for crypto and Web3. I do not know which, but some projects, such as those based on Ethereum, could become a sizable part of the US economy because talented people are improving the technology, starting interesting ventures, writing about it, and believing in it.
What I wrote in July 2022:
Because I share some of the optimism, I am comfortable buying crypto even though I cannot address the following concerns. (1) A common argument against the Dotcom bubble comparison is that the internet was still useful at the time, but crypto still is not. (2) Will the “talented individuals” and crypto be our generation’s Isaac Newton and alchemy? (3) Bitcoin, Ethereum, or another blockchain may survive and become useful for “Web2” companies, financial firms, or the music industry; however, “another blockchain” may not exist yet.
What I wrote in December 2021:
I do not mean that I trust the crypto-related projects to solve the problems on the internet or in the financial industry. I do not look forward to the society where my children’s friends are living in the metaverse (no way I let my children spend any time in it!) If all the metaverse-related projects fail, I will not only rejoice but also not feel any economic pain. But if the metaverse becomes a trillion-dollar industry, I do not want to regret that I did not invest in it.
After more than a year of skepticism, I made my first purchase in May 2021 because of crypto’s potential for positive returns in the next 20-30 years. When the price of Bitcoin dropped by half in May, enough people believed in it to not panic and sell. If anything, they bought more. The same applies for Ether. With less than 5% of my new savings, I will keep buying a basket of cryptocurrencies, little by little, even if their prices, which seem to be correlated to one another, could fall 80% between now and when this column is published. My purchases are mostly automated so that I am not tempted to “time the market.” My small allocation to crypto will not move the needle in terms of how soon I can be financially independent. But at the very least, buying crypto will not significantly delay my financial independence if it prevents me from envy and greed.
What I wrote in July 2022:
If you do not own crypto, how you are behaving as an investor in the current S&P 500 bear market should be a litmus test for whether you should own crypto in the future. Bitcoin, Ether, and other crypto fell below their 2020 levels because enough people were afraid and sold. They could fall more because they have no “intrinsic value.” Thus, even in the “intermediate case” in which crypto’s returns are 2-3x that of equities, Big ERN does not think crypto is attractive due to its volatility and correlation with stocks.
But I am passing the test, and I do not see a reason to change my thesis: some smart people will figure out some useful things with crypto, and I do not want my FOMO to affect other aspects of my financial plan. I have not sold any crypto, though I am reluctant to buy crypto other than the mega-cap crypto (i.e., Bitcoin, Ether, and maybe Solana) during this crypto winter. Even though I try to buy a “basket” of crypto, it feels more like stock-picking than buying the whole market, and I can only tolerate buying the new lows with the mega-cap crypto. Hopefully, more diversified and value-oriented crypto investment products become available. Until then, I am going to stay the course with my allocation to crypto and have some fun with ridiculously hopeful limit orders to make myself feel better.
Is now the time to buy crypto? Would you be getting them on sale? Or will it just continue to fall into irrelevance? Comment below!
Why I’m Still Buying Tulip Bulbs
Surely my tulip bulbs are due for an upswing soon. There are no fundamentals to support my flower bulbs, but they are way below their historic inflation-adjusted peak and I kept buying as they decreased in price four hundred years ago. Reversion to the mean suggests I will be very, very rich sometime soon.
Also, my great, great, several more greats ancestors are due to make a killing when Beanie Babies, GameStop, and cryptocurrency go back above their previous peak prices.
Paging descendants of Sir Isaac Newton to tell me how their South Sea Company stock is doing.
Just in case people don’t get that reference, here’s something I wrote on it a few weeks ago. Yay for history (and obscure references)!
https://www.whitecoatinvestor.com/financial-wayback-machine/
Sadly not great.
Enough of the crypto shilling on here! This is supposed to be a financial advice website and here you are, week after week, publishing either neutral or pro-crypto pieces. No financial advisor with a fiduciary duty to their client would ever recommend crypto. It is a scam. Point blank. Might as well start telling people to start taking 5% of their income to the casino. Given the utter absence of crypto critics being invited to author columns on here, I’m beginning to the Dahle might have a conflict of interest involving crypto.
Crypto has become a big topic of conversation in the finance world. It’s not something we’re going to ignore. Most of what Jim has written on crypto has not been “neutral or pro-crypto.” He’s taken a consistent line on it saying he thinks it’s a bad idea. If you’re saying WCI is shilling crypto, you clearly haven’t been reading what we’ve been writing.
Exactly, I have never heard Jim promote or speak highly of crypto. He’s the opposite. He’s always said if you don’t understand the investment… then don’t put money in it. period.
Do your research, Nick.
Nick, You have a narrow minded view. There are opportunities everywhere to invest and I think it’s great to socialize opportunities. I have done will with digital assets and while we are in a strong capitulation and consolidation I expect these will have another run and good opportunity to make money again. Like anything with investing. You have to understand how the asset class works if you want to make money.
Tim, crypto isn’t an “asset class.” It isn’t an asset at all and has no underlying value. And if you understood “the way it works” then you should understand it is a Ponzi scheme and the only way to make money is to get in early and get out before the scheme collapses. Willfully participating in a Ponzi scheme is not an investment strategy.
“crypto isn’t an “asset class.” It isn’t an asset at all and has no underlying value.”
The same thing can be said about the US dollar–the only thing that makes it valuable is that millions of people believe that it has value. The only intrinsic value that it holds is the ability to pay your taxes to the US federal government. (note: I have never owned crypto, but I wouldn’t completely rule out it’s value in the future)
That’s not a terrible value to have given that it is my largest expense (about 1/3 of my annual earnings).
In some ways, I applaud the courage of the author’s desire to present his original thoughts from December. I am concerned, however, that he is dismissing the very valid counterarguments he raised at the end of the dotcom bubble section. He states: “I do not see a reason to change my thesis: some smart people will figure out some useful things with crypto, and I do not want my FOMO to affect other aspects of my financial plan.” Let’s flesh out those concerns:
Even if we assume some smart people someday figure out some useful things with crypto, how do you know that the stuff you are buying now has anything to do with those future applications? You don’t. Your concern (3) aligns with WCI’s Bitcoin is the AOL of crypto article, that there is a high likelihood the “coins” behind these future killer apps have not yet been invented. Or maybe they have, but you aren’t buying them because you are sticking to the mega-cap crypto since the alt-coins feel too risky for you. I would submit that it is currently a fool’s errand for you to “bet on what a new generation of talent will figure out for crypto and Web3.” You are not an angel investor or venture capitalist with hundreds of millions and a team of full-time analysts trying to find the Sergey Brin or Jeff Bezos of crypto. What you are doing seems closer to buying Powerball tickets every week. It’s a limited analogy because the tickets are good for only one drawing whereas your coins could hit it big in the future, but the underlying logic is a bit too similar to me:
The lotto enthusiast argument: “No one won the powerball the last five drawings. People who bought tickets ahead of those drawings lost their ‘investment.’ Some people stopped buying tickets because they lost confidence the powerball will pay off for them. But look at all the people who kept buying! They believe in the powerball enough to not only keep buying, but to buy more. Someday, the powerball will make a small group of people very wealthy. They will be so wealthy that they will make a mere physician like me seem poor. I don’t want to miss out and become part of the non-powerball underclass. Clearly, the only logical thing to do is to continue my disciplined strategy of regular powerball ticket purchases.”
I will admit that the expected return on a crypto purchase is better than a lottery ticket, but such speculation resembles lottery purchases much more than it resembles investing.
Thanks for pushing me to respond more to the counterargument that I raised at the end (and for reading the column!)
I still hold other alt-coins because (1) it’s what my plan says and (2) it’s better to hold a basket than just a few. I bought alt-coins as well as mega-cap coins in previous crashes, but with the most recent one, I don’t have the fortitude to buy more alt-coins until the prices settle down a bit (on relative terms). EVEN THEN, none of them might be the future of crypto and Web3. I can’t analyze individual crypto, nor do I want to–just as with individual stocks. While I have 0 individual stocks, I own individual crypto in similar fashion as RWM’s Crypto Index because they aren’t part of my index funds. They’ll keep updating the Index, so I’m going to try being disciplined (thank goodness I had no Luna).
It’s always nice to see alternative viewpoints. And it’s hilarious to see someone call Jim Dahle a shill for crypto XD
I’m not sure anyone can be much more anti-crypto than me. I guess if you’re shorting it maybe. Pretty funny criticism though isn’t it?
Jim, have you ever had a crypto skeptic on your website or podcast? You’ve had plenty of crypto shills and conmen, but I don’t see any articles or podcast episodes featuring skeptics. I understand you say you don’t personally invest in crypto, but you are still more than generous in offering your platform to crypto shills encouraging your readers and listeners to invest more of their hard earned income in a Ponzi scheme.
The door is open. It’s easy to apply.
https://www.whitecoatinvestor.com/contact/guest-post-policy/
https://www.whitecoatinvestor.com/podcast-guest-policy/
I think it’s interesting that the debate in these comments sections has shifted from whether BTC etc is a good investment to whether we should be talking about it at all.
I spend nearly third of the column on all the things that one should do before buying crypto, if at all, and why I buy index funds. I even try to dissuade one from buying crypto at the end if they don’t have the risk tolerance. In his newsletter, WCI shares links from other bloggers who also write about crypto. Should he not share links from those shills either?
This article is under the white coat investor banner so it definitely seems like something you would approve of to the casual reader. Only regular readers who’ve read your other stuff know that you are anti-crypto. When I saw the article title I thought it might be a parody or a misplaced April fools article.
The few that clink on the hyperlinks would have seen that they link to WCI’s columns on crypto (with appraisal that is at best, lukewarm).
The article writer seems reasonable, and the allocation to cryptocurrency is minimal, but I still think cryptocurrency is a terrible choice for money. I think most are better served (and definitely better entertained) by withdrawing their cryptocurrency “investments” and taking those amounts to a casino.
Many cryptocurrency advocates comment that fiat currency has little intrinsic value similar to fiat currency; however, those advocates ignore the clear religious analogies that apply to fiat currency and cryptocurrency. When you present fiat currency to someone in exchange for a good or service, that is essentially an act of capitalistic communion.
“Do you accept this otherwise worthless piece of woven fabric that I have as having value for your good or service?”
“Yes.”
That is not significantly different from a wafer being presented and:
“The Body of Christ.”
“Amen.”
Therefore, my first and primary argument against cryptocurrency is that when the value of something relies entirely on faith and belief, a strong “god” or “gods” is necessary, and cryptocurrency does not have one. Well, perhaps there is a “god of tweets and memes” and perhaps it is Elon Musk for cryptocurrency. When it comes to “currency gods,” I would choose Mars over memes, though.
My second argument is who is involved in cryptocurrency. I am not referring to who has the largest account balances. I am referring to who is the largest number of participants.
By far, most cryptocurrency investors are low-income, and most are in developing world countries. Nigeria leads the world in cryptocurrency ownership with 42% of its population owning cryptocurrency. All of the top countries by highest percentage of ownership are a list of developing-world countries:
https://www.statista.com/topics/7705/cryptocurrency-adoption-among-consumers/
It is also probably not a coincidence that approximately 42% of Nigerians live in poverty:
https://www.premiumtimesng.com/business/business-news/520849-number-of-poor-people-in-nigeria-to-reach-95-million-in-2022-world-bank.html
In the United States, 42% of cryptocurrency investors have a household income of $50k or less. 76% of US cryptocurrency investors have household incomes of less than $100k.
https://www.bloomberg.com/news/articles/2022-07-07/crypto-collapse-threatens-to-leave-black-hispanic-investors-further-behind
There tends to be a wealth-building “gravity.” Simply put, the rich tend to make choices and pursue opportunities that make them relatively richer (or at least allow them to remain rich), and the poor tend to make choices and pursue opportunities that make them relatively poorer. There will always be outliers – e.g., cryptocurrency appeals to Elon Musk’s libertarian fetishes and his enjoyment of financial spectacle).
I would suggest that if you want to build wealth and preserve it, you will probably benefit more from the practices of (most of) the rich rather than those of the poor.
I have other reasons (both economic and fundamental) for why cryptocurrency should be avoided, and I would imagine that many here have their own laundry lists of reasons, but these are my top 2:
1. A valuation that relies solely on faith and belief requires “strong gods,” and cryptocurrency has none.
2. Duplicating the financial practices of relatively poor people is unlikely to lead to wealth.
I think crypto is terrible money as well! I have no belief in crypto like Dogecoin. If Bitcoin weren’t the biggest crypto and didn’t have the first-mover advantage, I wouldn’t buy it either (I buy less of it than I buy ether). But I buy crypto because I place value on people working on crypto projects.
Re your second point, maybe if I weren’t a medical student and had higher income and/or net worth, I wouldn’t be buying crypto either. At least I know that I could still reach FI even if I forgo the compound growth of additional 2% of VTI in my portfolio.
A very astute article outlining a mature and rational approach to crypto. Kudos to the author.
A lot of what you hear about crypto (both on WCI and elsewhere) is semi- to totally ignorant noise. What is happening now in the crypto space is very similar to what happened in the dot-com bust. A few internet companies with good use cases started growing big-time in the early ’90s, then other companies with reasonable ideas jumped in and started growing like crazy, and, in the terminal phase, all kinds of idiotic ideas attracted money and investment. When rationality returned at the turn of the century, they all lost a ton of money and some of the reasonable ideas and most of the idiotic ideas disappeared entirely. Once the junk was cleared out, what remained grew very well.
I think that the crypto space is going through something similar at this point. I was fortunate to have bought into crypto in early 2020 (a 1%-level investment) just before the bitcoin halving and had some very nice gains in the subsequent run-up. I started getting a bit nervous earlier this year, a combination of 1) growing worry that people pushing crypto lending/staking with returns of 20%+ and multi-million dollar NFTs with picture of bored apes signaled excessive market froth and 2) reading articles by intelligent and well-informed analysts in the field who were raising questions about the overall infrastructure of the crypto space (stability of stablecoins, integrity of the financial pipelines between the cryptoverse and the real world, issues related to asset custody, etc.). Fortunately, I sold the bulk of my crypto at that point and have watched as things corrected. With bitcoin holding pretty well at $20K and ether at $1K, I’m starting to slowly get back into the market with the goal of getting back to a 1-2%-level investment (OK Jim, speculation!).
I think that bitcoin has a use case as a digital store of value that is not beholden to any government or central bank and is easily transportable to anyplace in the world. I don’t think it has any potential to be an actual currency because the bitcoin blockchain is too slow (I’ve had transfers and purchases/sales take upwards of 20-30 minutes to execute). I think that there is a use case for ether as a smart contract platform, and there will eventually be some token or tokens operating at some level in the cryptoverse with a blockchain fast enough to allow crypto to actually be used as a form of currency. The vast majority of the other tokens and NFTs will go bust and disappear like most of the bad internet ideas went away in the dot-com bust. Bitcoin and ether will probably still be with us for the medium to long term; it’s only a question as to what the valuation will be. I’d bet that they will end up being higher than they are today, although it is certainly possible that they will visit significantly lower levels along the way (providing a buying opportunity). Remember that Amazon lost over 90% of its value in the dot-com bust, and it eventually came back much stronger; my hunch is that something similar will happen with bitcoin as well.
I’m amazed at all the people attacking the author of this article and of WCI. We are talking about someone who stated in the article a 2% allocation in their investment plan. 2%. Let me say again, 2%. If he was talking about a significant portion of his wealth then fine, complain. I think having multiple sources of income is much smarter, even if it’s a small allocation, than just relying on the Stock and bond market. Historically being in the stock market has been a great idea but that doesn’t have to always be true. And what If you retire the stock market drops significantly and you don’t have other means of investment. I for one am for multiple sources of income/investment instead of hoping stocks and bonds can continue their growth. If crypto goes to zero, he hasn’t lost much of his net worth. If it goes the other way (which I suspect it’ll do) he’ll be doing much better than those complaining. While it’s a relatively newer thing, it’s still been around for over 10 years.
dude, excellent article and yes I agree with Rad that 2% is very reasonable to speculate and scratch an itch. who care if you can’t calculate the future value of the stuff and it goes to 0 in the future. if it scratches that itch and you don’t play with the rest of your portfolio and meet your financial goals, have at it hoss!
I myself would never do crypto, but it’s my money 
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