Bitcoin: My Best and Worst Investment

In late 2013, where were you? I was at my laptop anxiously refreshing my browser and looking for signs of a cleared wire transfer to Japan.

I was trying to buy some new-fangled currency called “Bitcoin”. Back in 2013 you may have heard of it, and if you hadn’t, then you surely have now. Bitcoin has now become the plat-du-jour with an out-of-control bandwagon careering up a dizzying climb in price.

We all know how the story has gone recently, and many of us can solemnly shake our head at how we think the story will unfold. Most believe that the end of this tale will feature cataclysmic loss and a crash more spectacularly fiery than the Hindenburg.

But what were things like on the cryptocurrency scene in 2013?

Early Days of Bitcoin

In the early days of Bitcoin it was really quite hard to get your hands on the currency. There was no Coinbase and the US Government was doing its best to make it extremely hard to acquire Bitcoins. I’m not sure whether this was due to concern about taxation issues, or Bitcoin’s reputation as the go-to medium of transfer for drug dealers and money launderers, but there were no well-established US exchanges like there are now.

The advice at the time on various forums seems incredible to us now, but one favored method was to find someone with Bitcoins and setup a private transaction. I even saw advice where you could do this through Craigslist and arrange a meeting at a Starbucks with wifi, agree a price, and provide your public key address to enable to transfer. This gives you an idea of how niche the currency was at that point, and had it stayed with private transactions, then we would not have seen the explosive growth we have.

Mt.GOX

At that time the other significant method to obtain Bitcoins was through an exchange called Mt. GOX. This was a marketplace where buyers and sellers of Bitcoins could come together, and a market-clearing price would emerge. The key problem? It was domiciled in Japan!

In September 2013 I opened an account on Mt. GOX and attempted to fund it.

This was a problem, you could not use US credit cards, and a US Paypal account would not work. I tried a couple of workarounds including an online wallet transfer, but I can confirm that money laundering rules work! Funding this account was an issue.

The only remaining solution was wiring some money directly to a Japanese bank account. You can imagine that I was not crazy about this solution, so I continued my research, and I did a lot of reading around Bitcoin, including the original paper (that I can recommend), and improved my understanding of the Blockchain. I became convinced that I wanted to test out the new technology and so took the plunge and wired $200 to Japan.

First Purchase

I can’t remember whether the transaction really took as long as a week to clear, or whether I just imagined it took that long. But there is no doubt there were many days of anxious waiting before BTC 1.6 appeared in my Mt.GOX account. I had entered the market at BTC 1 = $124.

Over the previous twelve months, Bitcoin had risen rapidly and more than doubled in price, and during this period had experienced booms and crashes, so I knew I was riding a buckin’ bronco of an investment. But whilst $200 was not insignificant, nobody was going to end up hungry or on the street if I lost it all. So, I thought I would cling on and see where this led. I could never have imagined…

Boom and Bust

Over the next few months into 2014 I was awestruck how fast the value climbed; first $200, then $300, $400, $500 and finally cresting $1000 for one Bitcoin! My initial investment was doubling, trebling, quadrupling (you get the idea). Soon my BTC 1.6 was worth $1,600 from an initial $200 investment.

This remarkable market run was pretty much overlooked by the mainstream press. I don’t recall many/any(?) articles or news items of any substance on Bitcoin’s extraordinary rise in value over 2013/14. However, I felt like a bigshot. The investment maxim – Be Early, and Be Right – was clearly written by me at this time.

But in February 2014, when Bitcoin was worth $945, Mt.GOX suspended trading. My account was unavailable. The website simply showed a holding screen that talked about “Technical Issues” and then months later replaced with notes about administration and bankruptcy proceedings. Subsequently it emerged that 850,000 Bitcoins were stolen, worth $450m at the time. These coins are now worth $16Bn!

It’s still not clear whether the collapse of Mt.GOX was the result of hacking, fraud, or sheer incompetence and mis-management. It doesn’t really matter to me, I lost my BTC 1.6 with no prospect of recovery, but I did gain some wisdom.

Security

The cryptocurrency area is rife with predatory schemes. Many trading platforms were established with the goal of embezzling funds, and many rival cryptocurrencies were started with a singular aim to pump and dump. i.e. lure in seed investors to ramp up the price with demand, only for the founders to sellout their stake for highly inflated sums.

The mistake I made with Mt.GOX was not moving my coins to a secure wallet that was under my control. By retaining them in the account, they were not cryptographically secure. In a way, this is the difference between holding money at the bank, or putting it in a secure safe in your home. Clearly mainstream banks in the US are established organizations with oversight and safety nets, but in Bitcoin space Mt.GOX was the Cactus Gulch Bank of the Wild West.

It was a sobering experience full of “what-ifs” and personal recriminations.

It was almost three years before I decided to dip my toe in the cryptocurrency pond again.

Second Purchase

Over the intervening years, I had been monitoring the Bitcoin market and playing with some market signals derived from Google search analytics. With the advent of more established mainstream exchanges like Coinbase there was no doubt that Bitcoin was becoming more established. It had also seen huge ups and down over that period. Perhaps not by the standards we have seen in the last few months, but by any measure of investment volatility, this thing was crazy!

So I bought in at about BTC 1 = $1030 in late 2016. I had licked my wounds from the Mt.GOX episode but I did not have the stomach for another sickening loss, so I limited my investment to a very modest amount.

We all know what happened next.

Bitcoin went up like a rocket, and so did my second investment. However given the small sum, I have not made a life-changing amount of money and will have to stick to my day job.

So I would add one more aspect to the investment maxim – Be Early, Be Right, and Go Large!

What Did I Learn?

Recently I sold my original stake amount and now I just have the pure profit invested in cryptocurrencies. This means I’m now playing with house money and anything I make is pure profit. I have the security of knowing that unlike my first experience I can’t lose my original investment.

I’ve also diversified to a couple of different coins. There are hundreds of types of cryptocurrencies in existence, but very few (none?) are reputable, so the chance of choosing the next hot one is quite low. There is also significant idiosyncratic risk from a single currency. You are exposed to deficiencies in the core code and potential “forks” where the coins can lose value through the community arguing about the future development paths.

Finally, I never keep my coins on the trading platform, I always transfer them out to my own wallet where I control the private key. I really should get a hardware wallet and take my coins offline completely, but as with everything I have to balance risk and convenience, my time has value.

This article was republished with permission from actuaryonfire.com.