Something I hear all the time from friends is “Yeah, I know I should probably buy some Bitcoin but I think the price is too high, it’s going to crash and when it does I’ll buy then.” Spoiler alert, they never buy. Given Bitcoin’s price volatility over the years I can hardly blame someone who hasn’t really paid attention to the asset for getting nervous about making the investment. If you haven’t done the work to understand the asset, it probably seems like an asinine investment. As is the case with most things in life, investing in Bitcoin is more about psychology than anything else.
Wild price swings are great for headlines and big red arrows on charts however, I want to make the case in this article that over time, the price volatility is nothing to worry about in fact, it is the thing that will in all likelihood, create life changing wealth for those who play the game.
It is important to note that Bitcoin is not a get rich quick type of investment. This strategy will only work for investors that have a low time preference and are willing to hold on to the asset for a period of time that could approach 5–10 years. All those overnight millions and lambos did not materialize in one day, sure, there are some traders that have hit grand slams but I’m going to let you in on a little secret, you or I will never do that. Sorry, it’s just math. If you want make it, you are going to have so have some patience.
Alright, so how does this work? Well, while learning about Bitcoin, what it is, and why it is important can be a journey that takes months if not years for some, this aspect of the asset is pretty straight forward. What I’m talking about is something called Compound Annual Growth Rate or CAGR. The definition of CAGR is the mean annual growth rate of an investment over a specified period of time longer than one year. Admittedly before Bitcoin, I never got really excited about figuring out CAGR…just didn’t interest me. I feel pretty confident in saying when I lay this out for you, you are going to get pretty excited about CAGR too. Bitcoin’s CAGR over the past 11+ years if over 200%…you read that right, 200%
When you hear Bitcoiners say “Do the math” or “You haven’t done the work” in most cases this is part of what they are referring to. Let’s take a $15,000 investment and play this out over 5 years at a 200% CAGR. Any guesses where you end up after 5 years with a $15,000 investment? Take a second and think about it…alright let’s run through the numbers.
Year 1 $15,000 @ 200% = $45,000
Year 2 $45,000 @ 200% = $135,000
Year 3 $135,000 @ 200% = $405,000
Year 4 $405,000 @ 200% = $1,200,000
Year 5 $1,485,000 @ 200% = $3,650,000
I rounded the numbers, forgive me, but I hope you get the point a $15,000 Investment in Bitcoin at a 200% CAGR will after 5 years be worth $3,650,000! That is INSANE! Where else on planet Earth is that possible??? Outside of starting your own business, which I am a huge fan of assuming you think you can beat 200% which if you can’t, just buy Bitcoin, I don’t know where else normal people can create this kind of wealth.
Now, just because Bitcoin’s CAGR has averaged 200% over the past decade plus does not mean it will continue to do so. This number includes the massive growth that happened in the first couple of years with the asset so you would be fair in saying the 200% number may be a little high moving forward. Let’s cut in it half for fun. The same $15,000 investment at a 100% CAGR over 5 years ends up at $480,000, your 401k is not going to do that.
If you really want to get excited consider the possibility that with increased institutional adoption, fixed supply, and the amount of dollars governments have thrown into the global markets over the past couple of years…the CAGR might actually go up! I don’t run these numbers because it’s already insane but…well, you know how to google CAGR calculator…have some fun if you want!
Enter psychology. It would be great if you could just invest your $15,000 and just watch it grow every year. Real life does not work like that and neither does Bitcoin. The CAGR is what is referred to as a “smoothed” average. Your CAGR will not be 200% every year. Some years it could be negative, some years it could be 1,500% but over a 5 year period it should average out to about 200%. The fact of the matter is you may invest $15,000 and within 6 months could easily see that investment be worth $5,000. It will take everything you have not to sell, what you should actually be doing at this point is buying more. The price volatility can make you sick however, it works in both directions. This is why you need time for this investment strategy to work out. Over a year or 18 month period your CAGR might not be anywhere close to 200%. The media will be telling you Bitcoin is dead for the 500th time and all your friends will come out of the wood works to ask you how Bitcoin is doing when you are down over 50%. Trust me, they will…however at the end of 5 years you will be able to inform them that Bitcoin is doing just fine, at least if history rhymes.
Notice none of these numbers mentioned above have anything to do with the actual price of Bitcoin. Why do I care about the price when all I am concerned with is CAGR? This is why to me, I don’t care if I buy Bitcoin at $500 or $50,000 because my CAGR is the same regardless of when I enter the market over a 5 year period. Of course it matters when you enter and Bitcoin markets have historically operated on 4 year cycles centered on the halvening but even considering that fact, if you bought at the top of the cycle in each of Bitcoin’s market cycle tops you still made a home run investment. I believe this will continue to be the case moving forward.
My rational brain tells me at some point this growth will slow. The fact of the matter is there is no ceiling on the price of Bitcoin in USD terms. I have no way of knowing if the CAGR of Bitcoin will stay at 200% for the next 5 years or not. The cycles may get longer and the return may shrink. Irregardless the point is that for anyone considering investing in Bitcoin the price is not the only thing to consider. It also helps to not worry about buying “1 whole Bitcoin”…who cares? All you look at is your USD investment at the CAGR over a 5 year period.
This is just one aspect to consider, I know many Bitcoiners who will never sell their Bitcoin. We can get into the arguments for this and a myriad of other considerations in future articles. Hopefully this article has shed some light on the mindset of Bitcoin investors and can help you in your Bitcoin Journey. Investors should always practice good risk management and not allocate more than they can afford to lose in any particular investment. There are no guarantees and as much as I believe in Bitcoin and it’s continued growth, I’m not so naive to ignore the fact that with great growth, comes great risk. That being said, if we continue to see 200% CAGR you don’t need to bet the farm to make it, maybe the tractor but not the farm.
Cheers!
