If you’re reading this, then you already know: Bitcoin is back.
It seems like everywhere I go people are talking about Bitcoin again. Is Bitcoin like Crossfit or veganism, where you have to tell everyone you know about it?
Spurred by the latest ETF approval, the king of crypto has been on a tear lately, and with it, the steady stream of sudden investing experts are coming out of the woodwork.
Now, there are two things I’d like to make abundantly clear:
- Some of the smartest people I know are very bullish on Bitcoin right now and these are folks whose opinions I take very seriously.
- This discussion is in no way either an endorsement or a dismissal of Bitcoin’s potential as an investment.
In fact, I purchased some Bitcoin* this week, which is in many ways the genesis for this discussion.
Here’s the question: why did I make this decision?
The fact is, most of us don’t have any idea. We make emotional decisions and backfill the decision with data that supports our thesis. One of the biggest factors in our investment decisions (subconsciously, of course) for most of us is FOMO.
This phenomenon has been well documented. This study provides a pertinent framework to understand how retail investors’ decisions are significantly influenced by loss aversion and herd behavior, with FOMO acting as a critical mediator. When investors perceive others gaining from market trends, the fear of missing out can compel them to follow suit, often disregarding their investment strategies or risk assessments.
After my wild ride as an investor over the last decade (which has been well documented in previous editions of this newsletter) one of the takeaways was that I needed better systems around investing.
In order to mitigate FOMO and other logical pitfalls, anytime I make an investment, I’ve designed a list of questions that I’ve designed to help me make better decisions over the long run.
First:
Why now? What’s my thesis and what are my guiding metrics?
Then, a layer deeper:
How does this fit into my overall portfolio? What purpose does it serve within the portfolio? How does it strengthen my position?
Finally, specifics:
What is my target entry price? What’s my exit criteria? What is the anticipated hold time for this position?
As you can see, my process is fairly robust.
And the fact is, most of us never ask these types of questions before we make an investment. I know I never used to.
There are a lot of reasons that we fail to analyze our decisions at this level, but my hunch is that the underlying reason in most cases is that we actually don’t want to.
If we ask the hard questions and create targeted thesis statements that are tied to specific outcomes, in most cases the beautiful picture we’ve created in our heads begins to wash away like a sand castle when the tide comes in.
Before I ask any of the hard questions, I’m quite clear on why I wanted to invest in Bitcoin, but maybe it feels a bit silly saying it out loud: I pictured what it would feel like if the rumors were true and it went to $1,000,000 like the pundits say it could.
And it felt good. I smiled, imagining how smart I might feel when I told my friends how I increased my position all the way back when it was $40,000! A brilliant move, to be sure.
But even deeper, I imagined how I would feel if Bitcoin went to a million, and I didn’t increase my position. And let me tell you, the imagined loss was much worse than the triumphant gloating I pictured in the first scenario. I have a lot of crypto investor friends and I could only imagine how stupid I would feel as they snickered at me over their champagne and caviar.
And that my friends, almost perfectly explains what is happening in most of our heads as we invest. We are driven by feelings: the expected gain, of course, but much more powerfully by the fear of potential loss.
These are the feelings that my pesky laundry list of questions seeks to mitigate. To protect ourselves from ourselves, we need to create a pattern interrupt that serves to separate our decisions from these powerful subconscious drivers and use the data available.
This is a lesson I’ve learned the hard way. I’ve had to repattern my brain to resist the dopamine spike associated with anticipated gain tied to risky behavior.
At the core of this process is teaching your brain to associate the reward centers with proper decision-making instead of potential positive outcomes. I want my dopamine response to light up when I go through my investment rubric and answer the pre-meditated questions and make a great decision in the context of my overall portfolio and the desired life outcomes that it serves.
As I started the process with this latest investment, I couldn’t help but chuckle out loud.
The further I got into my questions, the more I realized that this wasn’t an investment at all.
This was a gamble.
And the best part? I’m ok with that. Bitcoin currently comprises less than 1% of my overall net worth. I’ve set aside a small portion of my portfolio to invest in things that I think are fun, have massive upside potential, or will provide a great story.
I’ve considered a more significant investment in this asset class and will continue to educate myself and analyze the landscape. I might even make that move soon.
But if I do, rest assured that the questions above will have serious answers.
So whether you are a Bitcoin pro or dipping your toe in the water, ask yourself – if I’m feeling the urge to dive into this investment, where is that coming from?
Will you be a casualty of FOMO? Or will you make a decision that helps you build a life that you love?
Nowadays, I try to align my decisions with the latter. It’s often less exciting – but I can confidently say I like the outcomes a lot better.
Fight the FOMO,
mb
