To investors,
Financial markets can be crazy at times. The complexity of an economy makes it nearly impossible to predict what will happen in the short and long-term. Humans are really bad at dealing with uncertainty, specifically when there is a dopamine-driven feedback loop of volatile price movements thrown in their face every few minutes.
Let’s use bitcoin as an example. On at least 6 occasions last year, the digital asset fell in price more than 20%. There was a 50% drawdown in approximately 95 days, which was the 4th time in 4 years that bitcoin had fallen by 50% or more. To say that bitcoin’s US dollar exchange price is volatile would be an understatement. There are few financial assets that compare.
This volatility in price is mirrored by wild swings in investor sentiment in the market. During January 2021, Bitcoin crossed $38,000 for the first time in history. The Fear and Greed Index registered at extreme greed. In January of 2022, Bitcoin crossed below $38,000 and the Fear and Greed Index registered at extreme fear.
This is a great example of wild swings in sentiment. The price of the asset is the exact same, but the difference of one year (and the direction of the asset’s movement) led to very different beliefs about the future.
This is top of mind right now because we are watching the complexity of financial markets play out related to bitcoin. The Federal Reserve spent the last two years flooding the market with cheap capital, which pushed investors further out on the risk curve. Wall Street funds and institutional investors adopted bitcoin as an inflation hedge asset. Public companies started to put bitcoin on their balance sheet. The price of bitcoin pushed higher as inflation raged on.
Now that the Federal Reserve is talking a tough game, including increasing interest rates and tapering quantitative easing, the price of bitcoin and other risk assets have fallen significantly. The anticipation of more expensive capital, and ultimately lower inflation growth year-over-year, has investors scrambling to gain more exposure to value investments.
Simultaneous to the Fed-related speculation, there is a geopolitical game theory playing out involving bitcoin. China has taken an abrasive stance towards bitcoin miners and investors. This led to a massive migration out of China, which can be seen in on-chain metrics and the global hash rate measurements. Elected officials in the United States continue to propose legislation that would create high friction for companies, investors, and miners. El Salvador has leapt onto the global stage by embracing bitcoin in a major way. They are buying bitcoin, building bitcoin ATM networks, launching bitcoin software products, creating a bitcoin city, and raising capital through a bitcoin-backed municipal bond.
The various approaches of China, United States, and El Salvador have been playing out for months. A new entrant to the global game theory is Russia. Their central bank has taken a fairly adversarial position to the industry, including a proposed ban on crypto trading and mining. It appears that Russian President Vladimir Putin disagrees with the central bank and has reportedly signaled his support for a proposal from the Finance Ministry that would allow crypto mining and trading, but in a heavily regulated manner.
Price volatility. Sentiment swings to the extreme. Some countries embracing bitcoin. Other countries attacking bitcoin. The Fed saying one thing, but doing another. There is uncertainty in the market. No one knows what is going to happen. It is easy to be fearful. It is easy to get distracted. The world is moving fast. How can you possibly keep up?
Well, maybe you don’t have to try. The beauty of taking a long-term approach to investing is that you can live a less stressful life. You are able to do the work to identify secular, multi-decade trends and allocate capital accordingly. Barring some significant invalidation of the thesis, a long-term investor can then focus on dollar cost averaging into the investment over time.
MicroStrategy’s Michael Saylor was on UpOnlyTV yesterday and he clearly articulated his bitcoin strategy. Cobie, one of the hosts of the show, asked him “Is you strategy, you just don't give a shit, you're buying Bitcoin no matter what?” to which Saylor answered “yeah.” This may seem crazy to the ill-informed eye, but the conversation evolved to unpack this even further. Michael Saylor explicitly explained that he would periodically buy the tops of bitcoin price cycles, along with buying bottoms.
When you are dollar cost averaging, it is impossible to know whether you are buying the top or the bottom. But if you have a long-term view, you don’t care. You simply continue to convert your currency into the asset of choice. Regardless of what is happening in the world, a long-term bitcoin investor will continue to simply dollar cost average. Geopolitics? Noise. Fed decisions? Noise. Wall Street adoption? Noise. Sentiment? Noise. Price? Noise.
The key to generating outsized returns over decades is to ignore the noise. Focus is a superpower. You lead a less stressful life. You don’t get distracted. As Warren Buffett once said, “our favorite holding period is forever.” Many investors in modern markets could benefit from understanding this advantage. Hope each of you has a great day.
I’ll talk to you tomorrow.
-Pomp
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