Forbes Analyst's Account: Why a Traditional Value Investor is Betting on Bitcoin?

Author: Taesik Yoon, Forbes

Compiled by: Luffy, Foresight News

I still vividly remember my first trip to Las Vegas. It was just a year after I graduated from college, and my best friend gave me a free plane ticket, inviting me to join him for a few days of fun. We stayed at the Hard Rock Hotel and Casino, which had a party-like atmosphere, smaller and more intimate gaming areas than the big casinos on the Strip, and incredibly generous giveaways—an ideal place for someone my age.

Even after 27 years, that memory remains fresh. I remember playing blackjack for several hours. At first, we played at a table with a minimum bet of $10, but a streak of good luck quickly led us to increase our bets. By the end of the first two days, I had won about $1,700. However, by the third day, my luck took a nosedive. By the evening, my friend had gone from winning a few hundred dollars to losing $750. Frustrated, he decided to head back to the room to sleep early.

My situation was worse; my $1,700 profit had shrunk to just $300. But unlike my friend, I wasn't ready to quit. Losing that much money left me feeling unsatisfied, so with my remaining $300, I spotted an empty table with a minimum bet of $100 and thought, why not give it a try? Fortune smiled on me again, and in less than 20 minutes, I turned that $300 into $3,000. By the time I went home, I had won about $3,600. For a 23-year-old living in New York City in the late '90s, that was a significant amount of money.

Lessons from My First Stock Investment

I bring this up because early experiences often shape a person's perspective. For me at that time, my first trip to Las Vegas was perfect. I gambled recklessly, partly due to incredible luck and partly due to youthful ignorance. When you're young and haven't experienced much, you don't realize how reckless it is to bet $100 when your bank account only has $700.

The same goes for stock investing. My first encounter with stock investing was when I started working for Forbes, coinciding with the peak of the internet bubble in early 2000. In the six months before I joined, our department recommended stocks like eToys, VerticalNet, and Healtheon, which catered to the frenzied demand for anything internet-related, whether it was new websites or companies supporting internet infrastructure. These three stocks rose by 66%, 92%, and 99% in just three months. The biggest winner in that frenzy was Qualcomm, whose stock price skyrocketed about 2,600% in the previous year. This is not a typo.

At that time, I had saved some money and opened my first brokerage account. Timing couldn't have been worse, as it marked the beginning of a crash in internet/tech stocks. The first two stocks I bought were recommended by my department in the first three months of my job: Net Perceptions and Wind River Systems, both of which no longer exist. I can't even remember what they did. But one thing I vividly recall is holding onto them as I watched their values plummet with the market, ultimately losing 75% to 80% on those positions. This was a painful lesson that made me realize I knew nothing about stock investing and shouldn't have been involved.

Becoming a Value Investor

In the following years, things changed. I pursued the Chartered Financial Analyst (CFA) program, became a stock analyst, and gained experience searching for undervalued stocks across various industries. But the painful experience of my first stock purchases remained etched in my mind. I lost a lot of money on those two losing stocks because, like many others at the time, I was swayed by hype.

Influenced by my initial stock trading experience and the value-oriented strategy of the stock recommendation service I was involved with, I made it a point to avoid market speculation as much as possible. I studied Warren Buffett's investment philosophy, read Benjamin Graham and David Dodd's "Security Analysis" (still regarded as the bible of fundamental analysis), and began primarily buying stocks of companies that I believed were significantly undervalued based on my research. In other words, I became a thorough value investor.

This meant I sought companies with strong future cash flow potential, and I was disciplined enough to only invest when their stock prices were greatly undervalued. For example, after the stock market crashed following the September 11 attacks in 2001, our department recommended Amazon stock, which was priced at $7.48 at the time, and I bought some myself. However, less than four months later, when we advised subscribers to take profits as the stock price rose to $12.20, I did the same. (By the way, those 200 shares I bought are now worth about $880,000. Yeah, every time I think about it, it doesn't feel great.)

Overall, I had more successful investments than failures and was relatively satisfied with my financial situation, having not taken too much risk. While I regretted selling Amazon stock too early, my discipline helped me avoid dozens, if not hundreds, of failures like Kozmo.com. Never heard of Kozmo? Exactly.

First Encounter with Cryptocurrency

Given all this, you might be surprised that I started investing in Bitcoin a few years ago. After all, many would say Bitcoin is a classic speculative asset, something that risk-averse value investors like me would typically avoid. It doesn't produce anything and has no earnings.

However, that didn't stop me from first getting involved with Bitcoin at the end of 2020. I bought 500 shares of Grayscale Bitcoin Trust (GBTC), which at the time was almost the only option for investing in Bitcoin through a fund. Since then, I've steadily increased my investment base by continuously adding to my GBTC position, as well as Grayscale's newly launched Ethereum Trust (ETHE) and another Bitcoin exchange-traded fund (ETF)—the Bitwise Bitcoin ETF (BITB).

Some might point out that, based on the timing of my purchases and the prices of the underlying cryptocurrencies (Bitcoin and Ethereum) then and now, these investments have performed well overall, which might lead me to develop a bias similar to my first gambling experience in Las Vegas. But it hasn't always been that way. In fact, during the terrible year of 2022, my holdings plummeted over 80% from their cost basis. In dollar terms, this was the most significant paper loss I had ever experienced on an investment.

For many, this would be enough to give up entirely and never look back. But I did the opposite and continued to add to my positions as the market declined. Later, I did something I rarely do: I bought in during an upswing. Take my BITB position, for example; this fund was only established earlier this year after the SEC approved Bitcoin ETFs. When I bought BITB in mid-January, Bitcoin was trading at about $43,000, significantly higher than the price (around $28,000) when I last added to my Bitcoin position through GBTC.

Reasons for Holding Cryptocurrency

So, why would I, a self-proclaimed old-school value investor who has avoided speculation for over twenty years, continue to increase my investment in an asset I believe has no intrinsic value? The answer is simple: my sons believe it has value.

In 2020, during the COVID-19 pandemic, my eldest son had just started first grade and asked me if I had any Bitcoin. Despite various social distancing measures in place, he heard a classmate bragging about how much money his dad made from Bitcoin, so he wanted to know if I had any. I told him I didn't and dismissed Bitcoin as worthless. Even so, he still wanted to buy some, and he was only 6 years old at the time.

That was when I realized that Bitcoin had been around longer than my two sons. This meant that throughout their upbringing, Bitcoin has always existed. More importantly, it has always held value for them. Since then, this notion has become increasingly entrenched. In fact, my now 10-year-old son checks the price of GBTC almost daily; he owns 10 shares, which he bought with his saved allowance over the years. For him, he would rather hold these than cash. I also feel that my increasing ownership of Bitcoin reinforces his belief that it has real value (even though he was the catalyst for my entry into cryptocurrency investing).

Currently, my generation and the previous one may have accumulated the most wealth. I believe this is one of the main reasons why gold prices soared to record highs last year. We view gold as a safe-haven asset that retains value and hedges against inflation because it has played that role throughout our lives. But the gold my eldest son knows is the necklace he wears around his neck. The gold chain he wears was bought by his grandfather about 40 years ago, for the same reason my son now holds Bitcoin: because, to him, gold has always had value and will continue to do so. Unfortunately, my father is no longer with us. Once our generation is gone, it will be our children who decide what is valuable and what is not.

Some might argue that comparing Bitcoin to gold is unfair because gold is a tangible asset with intrinsic value in various technological and industrial applications. But to be honest, the portion of gold used for these industrial purposes accounts for only about 7% of the total mined. The rest of the mined gold is used to make jewelry, coins, and bars. I believe the reason gold used for jewelry is favored is not only because it is beautiful but also because people perceive it as scarce. This is also a significant reason why gold is widely regarded as a store of value. More importantly, throughout my life, the value of gold has never fallen below its intrinsic value.

The same goes for my sons and Bitcoin; we are all products of our time. I grew up in a world largely reliant on analog signals. I associate value with tangible things. Music and movies were distributed through physical media like cassette tapes, VHS tapes, CDs, and DVDs. Heck, I'm old enough to remember 8-track tapes and Betamax. My sons have no idea what those things are. For them, streaming from the cloud is as natural as it was for me and my friends to rent tapes from Blockbuster. They belong to the digital generation, where everything emerges from nothing. Since the people most likely to determine Bitcoin's value in the future don't need (or even want) it to have a physical form, Bitcoin doesn't need to exist physically.

Be Prepared to Lose Everything

That said, the cryptocurrency market still has many unknowns and is highly risky. Most importantly, the number of cryptocurrencies needs to be reduced by about 99.9%. To compare with gold, there are 94 metals on the periodic table, but only three are genuinely regarded and accepted as stores of value: gold, silver, and platinum. In contrast, there are about 270 cryptocurrencies traded on popular exchanges like Coinbase, while the total number of cryptocurrencies in the global market approaches 18,000!

All my cryptocurrency holdings are concentrated in Bitcoin, with only a small allocation to Ethereum. In my view, these two currencies have the most legitimacy in the public eye and have become deeply integrated into people's worldviews; they are likely to become the gold and silver of our current global digital economy. I suspect that the vast majority of the remaining cryptocurrencies will eventually follow the path of Kozmo.com.

However, to invest in cryptocurrency, one must be prepared for the risk of the entire market going to zero. That's why if you plan to invest, it's best to use money you can afford to lose. I am no longer the naive young person in my early twenties who didn't understand the consequences of foolish financial decisions and naively thought I could get rich overnight by diving into the internet boom. I am well aware of the risks I am taking with these investments. But I also know that the vast majority of the investment portfolio I have built for my family over the years is still invested in value stocks.

Continuous Adoption is Key

Of course, for something to be accepted as a store of value or medium of exchange and thus retain its value, it must have sufficient reasons to believe that its price will continue to rise.

This largely depends on supply and demand. The supply side is known and quite favorable, as the total potential supply of Bitcoin is capped at 21 million coins (over 19 million have already been mined), and the rate of growth of this limited supply decreases with each halving.

This means that the key to rising prices lies in increasing demand. The good news is that we are continually seeing favorable market dynamics that drive up demand and adoption rates. The most significant event is the approval and launch of numerous Bitcoin ETFs in January 2024, which I mentioned earlier. In my view, this will be a major catalyst for Bitcoin's 66% increase leading up to the U.S. elections on November 5.

Starting from election day, Bitcoin's impressive rally has also confirmed this view. Bitcoin's price recently broke the $100,000 mark for the first time. This surge was driven by market expectations that the soon-to-be-elected Donald Trump is a strong supporter of cryptocurrencies, and people anticipate he will implement policies that further increase demand for Bitcoin and other tokens.

Therefore, adoption rates are key. Most importantly, purchasing Bitcoin must be based on the belief that demand will continue to rise. For some, this is because they loudly promote Bitcoin's key advantages, such as its decentralized blockchain technology, which allows funds to be transferred quickly and accurately across the globe at very low or even zero cost. For me, this belief stems from my view of the group of people most likely to determine Bitcoin's value in the future, rather than the present. Regardless of the motivation, as long as this leads to increasing demand for Bitcoin, it will create an ever-widening imbalance between supply and demand. Some Bitcoin bulls even predict that by 2030, Bitcoin's price will reach $1 million.

By then, my eldest son will be two years away from graduating high school. Why is this important? Because my purpose in investing in Bitcoin is not to get rich overnight. It is part of my financial planning, which involves funding my two sons' college education. Assuming they both attend a traditional four-year university without any financial aid, paying for their higher education will become the largest expense for my wife and me before retirement, far exceeding our next largest expense, which is the remaining mortgage balance.

I know that as you read this, some may find my reasons for buying Bitcoin utterly ridiculous. This indeed contradicts the principles I uphold as a value investor, and that is undeniable. If I'm wrong, this will be the most expensive lesson my eldest son and I have ever learned. But it won't lead to my financial ruin, as my cryptocurrency holdings represent a small portion of our family's total investment portfolio, and even if they all went to zero, it wouldn't cause significant damage. This should not jeopardize our ability to pay for our children's education, as, like many families, we have been making more traditional investments for their higher education.

However, my cryptocurrency holdings are not insignificant, and if I'm right, they will lighten this heavy financial burden. I may no longer be that carefree gambler from my youth. But even for an old-school value investor like me, the potential for such enormous returns is hard to resist.