Warren Buffet once said, “Our favorite holding period is forever.” On the same topic, he also advised investors,
If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.
In other words, there is no better outlook than a long-term one for investors, especially in IRAs.
Way back in late 2017, we were pointing out the benefits of bitcoin IRA investments while its price headed up to its (modest in hindsight) peak of $19,200. Many who bought bitcoin then were likely rattled when the BTC slumped to just over $3,000 a few months later.
We maintained business as usual. In the meantime, the mainstream media and Wall Street banks erected tombstones for the crypto market. We saw countless comparisons to the Dutch tulip mania of the 1630s (the go-to comparison for financial bubbles).
Then something neither Wall Street nor the mainstream media anticipated happened.
Cryptocurrencies survived. And just like those Dutch tulips, crypto bloomed again.
It’s deja vu all over again
This year, bitcoin more than tripled its 2017 all-time high. On the way up, we saw more than a few white-shoe brokerages and investment houses walking back their scorn. Everyone from Ally Bank to America’s oldest bank, BNY Mellon, Visa and Paypal, world’s biggest asset manager Blackrock — there’s just too many to list — announced their crypto and blockchain plans.
Most notably Jamie Dimon, CEO of JP Morgan, who called bitcoin a fraud, “worse than tulip bulbs,” and predicted “someone is going to get killed.” Yes, that same JPMorgan Chase announced an actively-managed bitcoin fund this year. (Yes, Dimon is still CEO.)
Bitcoin began moving sideways after hitting $65,000, and analysts said a breakout either way looked equally likely. Along with many others, we fully expected increasing institutional adoption (and associated buying) to increase the price.
Then, the unthinkable happened.
Bitcoin’s price dropped from about $56,000 (April 20th) all the way to $30,681 (May 19). Now, this was a massive blow to the market, wiping out billions of dollars of value, sending the world’s crypto market cap below $2 trillion. Collateral damage struck nearly everywhere, with Ethereum and the other so-called altcoins getting crushed as well. Panic reigned in exchanges, some of which suffered outages, which increased the panic. There’s been plenty of finger pointing. For a lot of crypto investors, the losses were stunning.
But why? Investors who bought Bitcoin at $19,200 in 2017 and held onto it throughout the tumult now find themselves with a roughly 100% gain after three and a half years, even while the market is deep in the red. Keep in mind, that’s people who bought at the last peak and held.
A lot of people, it turns out, can’t do that.
Are you gambling, or are you investing?
This, according to CoinDesk’s Chief Insights Columnist David Morris, is what separates the speculator from the investor.
Speculators look for short-term gains. They tend to trade more frequently, have a more highly-focused portfolio, use more margin, and profit based on turnover. For all these reasons, they also have a tendency to panic and sell.
Chainalysis released a report concluding that retail traders alone sold this week, not institutions. Bloomberg reported that huge leveraged positions (50-100X) being liquidated by, again, retail investors poured fuel on the fire that temporarily wiped out $500 billion of bitcoin’s market cap.
Morris cites Barstool Sports CEO Dave Portnoy as his emblematic speculator. After buying crypto last year at $11,500 and holding for a whole week, Portnoy bought back just two weeks ago, at $48,000.
Here’s Morris’s description of what we’re calling speculators:
Day traders bet on short-term changes in asset prices. Short-term trading momentum, these days, is usually driven by changes in sentiment more than by real changes in market conditions. As a day trader, you don’t care what a piece of news truly means, or even, ultimately, whether it’s true. You just care about guessing the next ten thousand traders’ reaction to it and positioning yourself to profit from it.
Investors research and study and hunt for valuable assets to buy in cold blood. They pay less attention to short-term moves, build more diversified portfolios, and, guess what they tend to do when prices go down?
Let’s ask Warren Buffet again…
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?
If we unpack this Zen koan from the Oracle of Omaha, what do we learn?
Sure, it seems counterintuitive to celebrate a roller-coaster plunge in bitcoin’s price. Unless you want to buy more. For a very short while, investors were able to buy bitcoin for less than half its most recent all-time high.
Now: is that a disaster? Or is that an opportunity?
It’s deja vu all over again, again
Amusingly enough, Morris points out that 2017’s tombstones are being dusted off and erected once again ‑ even as crypto’s infrastructure looks more robust than any other market. Even as crypto’s institutional and government adoption are higher than ever. Even as a record number of people in America own crypto.
As always, it’s unclear why the sell-off happened, when it will stop and what the new price range will look like. It could bounce back to $50,000, or it could fall to November 2019’s levels below $20,000. This is what the speculator panic is about. Our Buffet-minded HODLer is barely paying attention, save for one important part (opportunity).
Look, sure there’s disappointment among those who bought at $65,000 and a perhaps-understandable eagerness to just sell right now at any price. These are people who learned crypto is not for them. They took a very short ride on the volatility roller-coaster, got sick, and got off.
But what if they held on? How long will that disappointment last if they clenched their jaws and held onto their crypto?
We’ve seen multiple credible analysts calling for $100,000 bitcoin this year, and some still believe there are chances BTC will inch towards it before the year ends. Given what we’ve seen from bitcoin so far, not to mention the overall state of the global economy, a $120,000 price target within a few years seems reasonable.
Investors are already seeing the stupendous price drop as an equally historic opportunity to buy the dip. (That’s probably why the price is already over 30% above the week’s low.)
This is the group that Morris believes will book gains over long stretches of time, while skittish short-term speculators wonder what happened to their money.