Bitcoin for the Hyper Conservative Investor

Here is a conversation with a close friend of mine: “I’m just an average guy, living a simple life”. Our thread below. In poker, he’d basically wait and only play with pocket kings or aces. To say he likes playing it safe is an understatement. But even for someone who summarizes his days as “wake up, jerk off, go to work, buy sneakers”, I’m sure he wouldn’t mind a few more dollars saved. So this is for all those who consider themselves regular folk who are just trying to make it to tomorrow.

Volatility is a big reality of Bitcoin. And a very valid concern. There is an investment strategy called “Getting Off Zero” coined by Anthony Pompliano. “Getting off Zero” means using Bitcoin’s volatility to your advantage.

I created a two simple spreadsheets that compare a portfolio without Bitcoin against one that added Bitcoin. Both portfolios assume a starting amount of $100. I pulled the stock growth based on the most favourable NASDAQ gains across the past 5 years which yielded 19% gain year over year. These gains are highlighted in teal in the charts below. 19% is pretty sweet!

This Traditional Portfolio is your standard 100% stock-based portfolio over 5 years. The assumed 19% Year of Year growth rate referenced above is in teal. Your $100 becomes $238. That’s highlighted in yellow. Pretty straight forward and not too shabby.

The Getting Off Zero portfolio above adds Bitcoin into the portfolio by converting 5% of your stock to Bitcoin. That change is highlighted in green. The total starting amount is still $100. The stock gains are still 19% just like in the first example except the start amount is $95 instead of $100. The stock only piece of this portfolio yields $226 after 5 years. That is highlighted in grey. In the bottom left you’ll see proposed outcomes for Bitcoin prices ranging from “Failure” at $0 to “Best” at $150,000. Those numbers are in bold. The model assumes the price will fall within this range within 5 years. It is a fair and realistic range that accounts for the best and the worst cases.

The orange highlights in the bottom right are the Bitcoin Only results. The yellow highlights in the bottom right are the sum of the Bitcoin Only results plus the Stock results giving you your net totals in each corresponding scenario.

Now let’s compare the two outcomes. The Standard Portfolio is in blue. The Get off Zero Bitcoin Portfolio is in orange. All numbers drawn from the original two charts. The green is the percentage gain from allocating 5% to Bitcoin. Before getting mesmerized by 147% gains let’s keep it down to earth as this piece is written for the conservative that are too scared of the volatility.

The Failure case here leaves you at -5% in 5 years. That equates to $12. That is the scenario of everything gone wrong with Bitcoin and it goes to $0. For the hyper-conservative investor, a -5% loss may be too much to risk. And if that is true for you, before writing it off Bitcoin you may want to consider a simpler solution: reduce the Bitcoin allocation from 5% to 1-2%. Here’s why.

There is a concept called Asymmetrical Risk & Reward. That means weighing the potential gains against the losses. Silicon Valley VC’s make billions off this concept. For a Venture Capitalist that translates to investing $1M into a startup knowing that 90% of the time it will fail, but one time that startup will be worth $1B. Understanding asymmetrical risk is easy. Applying it to real life is hard. This is because humans are genetically risk-averse. We like survival.

The example I provided above is simply using $100. Add three zeroes on these numbers and all of a sudden the differential is a downpayment on a home mortgage. Picking Bitcoin suddenly becomes a life changing decision for the best. Put another way, going with a 5% allocation on a $100,000 portfolio at best buys your way into a house. And at worst you lose out on a used Honda Civic.

So to go back to the beginning…

This is how you approach the challenge of investing in something that might be $2 to $20,000 tomorrow. In terms of the when to invest… I’ll leave that for the next post.

I made the spreadsheet publicly accessible if you’d like to play with the numbers or verify my formulas. Here’s the link. Please let me know if you see disagree or have anything to add to my calculations or explanation.

Thinking about a better way