The Bitcoin experiment is over!
18 Oct, 2020
If you have been following my blog for a while you might remember that back in 2017, three long years ago when the world was more normal, Jonny bought some Bitcoin. Actually, “some” Bitcoin is a bit misleading because to be more precise he bought “a bit” of a Bitcoin. He had been following its evolution for a couple of years and had been wanting to buy Bitcoin for a long time, in fact, he would have done as much, if I didn’t always scoff at the idea as being far too speculative.
When he first floated the idea it sounded interesting, yet complicated - which was ironic because Bitcoin was trying to simplify our international banking systems. Then over the last couple of years, it has since started to sound downright speculative and have become incredibly complicated as the world seemed to go a little cray-cray for Bitcoin.
It’s usually me who does all of the form filling and subsequent investing into run of the mill, boring, unexciting, yet very productive investments like: KiwiSaver, Index Funds, ETF’s
But it’s Jonny who follows tech innovations in our house and to be perfectly honest, unless he installs the latest tech on my computer or phone, most of it passes me by. I don’t watch much telly anymore and I’m not ashamed to say that the main reason is that I struggle to work the remote! But with Bitcoin, although Jonny had done a proper deep dive into it, I had also learned a bit about it myself so was vaguely familiar with digital wallets and Blockchain and what they were on about. He really wanted to give it a go, so, we eventually agreed that this was not an investment as such, but a risky and speculative opportunity worth checking out! *
* I’m getting a lot of questions via email at the moment about “how to talk to your partner about money” so the thing to note here is that after a good discussion of the pro’s/con’s and implications, we both agreed on this investment together and that if we couldn’t reach agreement then he would not have done it!
I really don’t like it when I hear first-time investors saying things like “I’m going to have a play at investing” or “I won’t put in any more money than I can afford to lose”. Because the way I invest (KiwiSaver/Index Funds/ETF’s) I have NO intention of losing our money and I’m trying to grow our wealth, not lose it! I understand the things I am investing in and I understand that we have very long term investment goals that while they might wobble up and down, over time they go up.
BUT, with Bitcoin, I was prepared to make an exception, we both knew that the $1,000 he put into it could disappear in a cloud of “0” and “1” (binary code - that’s as geeky as I can get).
Now to his credit, he WAS telling me back in 2015 that we should buy Bitcoin and had we done so, well things might have turned out differently, but hey ho, we didn’t! He made his move between October and December 2017 and over 11 transactions he put in $1000. Looking back he timed the market perfectly for the first transaction, buying just before it had it’s biggest climb in late 2017. But between mid October and late December the price per coin really started to rise. And rise. And rise. And each time he made a purchase he received fewer Bitcoin for his NZD. Still, he more than doubled our money at one point! Hindsight is wonderful for showing up this kind of stuff:
Bitcoin transactions between October - December 2017. When dollar cost averaging goes wrong. Graph Source: coindesk.com
Around the time he bought his Bitcoin and for the next six months it was in the news all the time, heck, even the guys down at my work were talking about it. People were ploughing money into Bitcoin, not because they were all for a new decentralised banking system, but so they could make a fast buck. And to be fair, Jonny didn’t want to miss out on that either and when he doubled his money I think there was a tinge of regret that he only had $1,000 in... My tinge of regret is that we didn’t sell right at that point.
All the while people who have been around the block a few times, people like:
Mary Holm, Martin Hawes, Scott Pape and Warren Buffet were saying things along the lines of “yeah, take a deep breath you lot, we’ve not seen Bitcoin before, but we’ve seen this type of thing before and all honesty folks, you are wasting your time…”
And I completely agreed with them.
So why did he/we buy it?
Imagine if this WAS the start of a whole new way of money? A way that made making transactions from person to person fast, paperless, effortless and free where we could use Bitcoin instead of the NZD when buying our groceries or even our house? The possibilities! The potential!
Imagine getting in on the ground floor of that! That would be awesome. We too were caught up in the hype.
As time went on I would get regular updates from Jonny of where the price was at and it fluctuated wildly from $7,500 when he started buying in, up to its peak of $24,000 and as I write this it’s at about $17,000NZD. The price still goes all over the place and commentators are still trying to work out WHY. Over time Jonny told me Bitcoin was evolving and what people were predicting would happen next and I enjoyed hearing him be so engaged with it. But then as the months went on he started to look at it less and less and the whole industry that had cropped up around Bitcoin and the huge number of new cryptocurrencies that started springing up, started to get more and more complicated. I completely lost interest at about this point, but you can read more about it here in this Forbes article written back in March 2020 where they document the evolution of Bitcoin: Bitcoin’s Magic Is Fading, And That’s A Good Thing
Then the systems and companies that you use to access your Bitcoin started to change and evolve too, governments got interested (something to do with a little matter of money laundering and dodgy practices) and it just got really complicated - not the decentralised peer-to-peer payment network that we had signed up for. At one point we thought, “well, we might as well just use our Bitcoin to actually BUY something”, but no can do, New World wouldn’t accept it for my groceries and nobody else would either, so at the start of 2020 Jonny decided to cash out.
Cashing Out
Cashing out of such a speculative investment is always a nerve-wracking time. It’s when you finally find out if you actually CAN. But using his incrediblylongandcomplicatedpasswordthatwasactuallyjustareallylongsentence
he logged into his Bitcoin wallet and he did sell, cashing out his original $1,000 in early 2020, leaving the wildly fluctuating profits in there. Then finally, just this last week, after having to sign up to yet another company to sell his remaining Bitcoin, because the company he had bought his Bitcoin through had shut their doors, he turned his cryptocurrency back into good old NZD, thus ending a three-year speculation into Bitcoin!
So, how did he do?
Here’s my rough math of how the numbers worked out:
Initial purchase amount: $1,000
Less selling fees: $8.79
Total received in Jan 2020: $991.21
When he cashed out his remaining balance in October 2020 after selling fees (which had really gone up) of $14.30 he ended up with $154.51. So, all up, after three full years he came out with $1,145.72. Plus, he will need to pay tax on his $145.72 profit, so we can deduct a further $25.50 for tax.
So, the GRAND TOTAL after three years was… $1,120.22, just a $120.22 return. And a giant load of hassle!
Well, THAT sucks.
A Comparison
Now as a comparison I couldn’t help but wonder what could have happened to that $1,000 if we had done something else with it instead, like, oh, I don’t know, invest it in one of my incredibly boring, unexciting, yet very productive investments instead? So, using Sharesight I created a dummy portfolio and I ran some numbers.
If back on October 12th 2017 I had invested $1,000 in the Smartshares NZ Top 50 ETF then today, after fund charges, with dividends reinvested and after tax of 17.5% I would have $1,418.63, that is an 18% return.
Dummy portfolio in Sharesight showing an 18% return.
It was a bit of fun on the side
As an exercise it was well worth it, not for the money we made because it was sod all, but for the entertainment value and the education we gained and I found it interesting to watch a whole industry be created around something brand new. I’m not saying for a minute I understand the complexities of cryptocurrency, but it’s quite remarkable how humans can just magic something up and then worship it, don’t you think?
And while that’s worked out for things like gold, silver and the New Zealand housing market, for Bitcoin, yeah/nah, not so much, not for me at least.
As I get a bit older I just can’t help but become a bit more objective. Thankfully! Jonny too has had some time to reflect and as he was laying out this blog post and reading through what I have written he said to me, “the more I look at it, the more I think, what the f**k was I thinking?!”
And when the next ‘sure thing’ rolls around, as it inevitably will, I’ll once again watch with keen interest as group mania once again takes over and I’ll keep in mind the words I read of John C. Bogle in The Little Book of Common Sense Investing when he said:
“Don’t think that you know more than the market; no one does. And don’t act on insights that you think are your own but are usually shared by millions of others” (pg 264).
John C. Bogle also said:
“No matter what happens, stick to your program. Think long term. Patience and consistency are the most valuable assets for the intelligent investor. Stay the course” (pg 265).
And that is why, when he put $1,000 into Bitcoin back in October 2017, I also put $1,000 into our NZ Top 50 fund.
Stay the course!
