The overall mad rush into financial assets like stocks and crypto by retail investors, coupled with the entrance of serious institutional money, is behind its nearly eight-fold rise over the past 12 months.
Some believe the best has yet to come. Others see higher prices ahead, followed by a tremendous collapse. Who’s right and who’s wrong? Only time will tell. But trying to time Bitcoin may not be the best way to play the popular cryptocurrency.
Instead, the best approach may be to concede it’s too risky to try to “get rich” from Bitcoin and taking a cautious approach by buying a little for peace of mind.
Why? If you try to go all-in on crypto this late in the game, you stand the risk of entering a position at or near the top. The results could be disastrous to your finances. But if you buy just a little, you will see a small benefit if it works out. But your position is small enough that you won’t be ruined if the bears are right and the bubble pops.
Sure, this isn’t the most exciting way to play crypto. But if you are kicking yourself for not buying it before the pop, this may be the next best thing.
The Merits of Bitcoin as ‘Schmuck Insurance’
The phrase “schmuck insurance” may have originated in the world of mergers and acquisitions (M&A). The phrase was originally coined to describe situations where the seller of a company holds onto a small stake in the business, in case the business becomes much more valuable under new ownership. In short, a hedge for the seller to save face, in case he or she sells at too low a price.
But this phrase can also be used to rationalize owning Bitcoin. In fact, Chamath Palihapitiya has used the phrase himself back in 2019 to describe the benefits of owning it. A longtime BTC bull, the outspoken financier further added it was the “single best hedge against the traditional financial infrastructure.”
In hindsight, this has played out, to some extent. The aggressive changes in Central Banking policy in response to Covid-19 have accelerated demand for alternatives like Bitcoin. Yet, the positive impact of this on crypto prices could already be played out.
So, why still buy BTC as “schmuck insurance?” This phrase when it comes to this crypto isn’t limited to only describing it as a bet against Federal Reserve policy. You can also use it to describe a “peace of mind” approach to owning it. That is, buying it to avoid any future regrets if it ends up continuing to surge in price.
Taking the ‘Peace of Mind’ Approach
Those reading this today who do not own BTC may feel regret not going long at lower prices. But, unless you have a time machine, there’s no way to fix this. So, what’s the best alternative?
Taking a small position in Bitcoin isn’t about getting rich. It’s a move to avoid future rumination in case the crypto bulls are correct and Bitcoin continue going higher. Sure, buying this “in case it goes up” sounds more like gambling than true investing.
But, as InvestorPlace’s Mark Hake recently put it, how is buying Bitcoin, despite a lack of inherent value, any different than buying gold? Like BTC, gold derives its value from perception rather than economic reality. That is to say, there’s nothing wrong with buying it as a wager on price appreciation, even if you can’t forecast its potential upside like you can with a stock.
Now, what if the opposite happens? You buy it today, at around $57,000. But, shortly after your purchase, the bubble bursts. Prices fall 30%, 40%, maybe even 50%. You’ll be sitting on some losses. But, given the small size of your position relative to your portfolio, said losses won’t have a material impact.
The Bottom Line
The bull case for BTC makes perfect sense. Fed policy, coupled with President Joe Biden’s multi-trillion dollar spending plans, back up the claim that Bitcoin will continue to increase as rising inflation eats up the value of a dollar.
Yet, this alone hardly justifies betting the ranch at today’s prices. Even with monetary policy encouraging investment in it, the bubble could still burst. Plus, there are many less volatile ways to protect your nest egg against inflation.
However, if you regret not buying Bitcoin at lower prices, buying a little now may provide the peace of mind you need.
On the date of publication, Thomas Niel held a long position in Bitcoin. He did not hold (either directly or indirectly) any other positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.