In 2015, my firm Validea hired a technology consultant who was also building a company utilizing blockchain technology. At the time, the consultant suggested, “You know, you should take a few hundred dollars and buy some Bitcoin and just let it sit for 20 years.”
Whether or not that was sound investment advice will require another 15 years of waiting. But there’s a story I want to tell about how cautiously tiptoeing into a relatively unknown investment helped save the life of someone I had never met that lived across the globe.
Value In The Eye Of The Beholder
When the consultant first told me about Bitcoin it seemed highly speculative and suspect. Buying a “Bit” “Coin” – a digital asset not backed up by any cash flow stream or profits from a hard asset (i.e. corporate profits or cash flows from a real estate investment), was hard to wrap my head around. Even as recently as this year, legendary investor Warren Buffett said, “Cryptocurrencies basically have no value” and “You can’t do anything with it except sell it to somebody else.”
I am a loyal follower of investing tenets that make sense and stand the test of time, like those of legendary investors like Peter Lynch, Warren Buffett, Joel Greenblatt and Ben Graham: Buy what you know, seek out value, find a margin of safety, understand the power of compounding, stay disciplined and optimistic. These have served long-term investors well.
Buffett’s comment regarding Bitcoin that “you can’t do anything with it except sell it to somebody else” resonates strongly, since the price of a bitcoin is only determined by the value another person is willing to pay for it. However, if enough people believe there is value then there is a possibility that value will emerge. After all, investor sentiment can create value in the equities market, sometimes without underlying fundamentals to support it.
What is Bitcoin?
In 2015, I began slowly and gradually allocating funds to Bitcoin by way of dollar cost averaging ($50 or $100 a month). A small investment, since at the time I didn’t totally understand the concept of Bitcoin, but the investment helped me learn more about its features.
In a nutshell, Bitcoin represents digital assets that can be used to transfer and/or possibly store value with the following supposed advantages:
- Decentralized – no government or central organization controls Bitcoin. Instead, it is recorded on a decentralized network called the Blockchain.
- Limited issuance – Unlike fait currencies (which are government-issued), there is a limited on the amount of bitcoin that can be created (21 million total). It is accomplished through a process called “mining”, where servers complete complex formulas to verify transactions on the blockchain and by solving them they get issued new Bitcoin from the network.
- Usage –Bitcoin can be used for transactions or to store value. Some people consider Bitcoin “digital gold”.
- Frictionless movement – As long as both parties in a transaction have Bitcoin addresses, it can be transferred in a matter of seconds. A party can send one, many or part of a bitcoin to another person, and the transfers are recorded on the Blockchain.
- Uncorrelated Asset – since the value of Bitcoin is not tied to any traditional asset like stocks, bonds, real estate or commodities, some argue that it can provide diversification benefits.
My small investments in Bitcoin increased in value with time as its price rose from around $250 to close to $20,000 per Bitcoin (at its peak). But, as we are all painfully aware, that rises quickly can fall just as quickly. The following chart, shows that from early 2018 to mid-2019, the price fell from nearly $20K to less than $3,000— a more than 85% loss. Currently, the price is around $11K per bitcoin.
|USD Spot Price at Transaction
|USD Total (inclusive of fees)
My first few investments in Bitcoin, which were recorded on the Blockchain at around $244 per Bitcoin
The investments in Bitcoin worked out financially, at least so far, but I have enough experience to know that there was more luck than skill involved.
But there was one upside I never expected.
The Phone Call
On Monday November 12th, 2018 at around 7:30 in the morning, my wife, who happened to be off that day, received a call from a former co-worker of nearly 15 years. They had become good friends, but hadn’t been in close contact for some time, so the call that morning surprised her. She answered the call. Her friend was a ‘salt of the earth’ kind of person who was kind, trustworthy and hard working. His family had come to the U.S. from Southeast Asia, and he was a respected family man, a saver, investor, and the type of person that rarely asks for others help.
Until that cold Monday morning.
He asked my wife if she knew anyone who owned Bitcoin. She didn’t have to look very far.
The friend explained that his uncle, who lived in a Southeast Asian country, needed a critical medical procedure immediately, and there was no way for the family to access the necessary funds in time. The doctors would not perform the surgery without receiving payment ahead of time but, unfortunately, wire-transferring funds to that part of the world is cumbersome, expensive, and takes time. And the family didn’t have time.
I was unsure at first. It almost sounded like the garden-variety scams —a call from a desperate family member wrongly arrested and sitting in a Turkish jail in need of bail money. But this was different. The person was a family friend, a former colleague, a professional and a conservative investor and saver. A lack of money was not the issue. Ease of transfer was the issue, and he needed to get a payment across the globe as quickly as possible to save his uncle’s life.
The next day, I transferred bitcoin to a Bitcoin address provided by my wife’s friend.
|USD Spot Price at Transaction
|Sent XX BTC to XX Bitcoin Address
That Friday, November 16th, my wife’s friend showed up at our house to reimburse me for the entire amount, and told me that the procedure was a success and his uncle was doing well. I repurchased the bitcoin I had sent (and was able to buy more since the price had effectively dropped from around $6300 to $5555).
|USD Spot Price at Transaction
|Bought XX BTC for XX USD
Lessons In Investing & Beyond
The point here is not to start buying up bitcoin or dive into crypto currency investing. Caution is in order when dabbling with any asset that exhibits the kind of volatility we’ve seen in Bitcoin.
I understood the risks from the outset, especially since I didn’t have a firm understanding of the Bitcoin concept and how it all worked, but the investment helped me learn about some of the arguments both for and against crypto currencies like Bitcoin.
The real takeaway here is the life lesson: People can do a lot of things with their money and investments, but rarely do we get a chance to impact someone’s life in the way my family did that day. For us, the opportunity came from a willingness to take risk on a concept that was new and nebulous. Add a bit of luck, and the rewards far outweighed any increase in value. The biggest reward came in the form of helping a trusted friend whose uncle was in a life-and-death bind.
There’s no better payoff than that.
Photo: Copyright: 123rf.com / grigoriy123
Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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