Bitcoin, a Black Swan: What can be learned from a missed opportunity

Here is a German version of this article.

Until recently, there was no decision or lack of decision in my life that I regretted afterwards. With the rise of Bitcoin, this changed slightly. I nowadays occasionally catch myself thinking that I missed a big opportunity by not purchasing a few Bitcoins early on, when one BTC only cost a few bucks. I am probably not the only one with that sentiment.

I was actually quite close. In 2011 I mentioned Bitcoin in a blogpost for the first time. So at that point I was aware of the crypto currency. However, it took a few more years until I actually made a purchase – for the sole purpose of a text I was about to write about the purchasing procedure. So I only bought 0,1 BTC, which I paid about 50 Euro for. At that point, one BTC was already valued at around 500 Euro / 600 USD. Today, after an unprecedented increase particularly over the past weeks, the Bitcoin price hovers around 4000 USD.

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Of course there is little to be gained from having regrets about the past, especially when the issue is about a missed opportunity, as opposed to a really bad decision. Also I am not a very materialistic person, and “being rich” has never been a life goal of mine. Nevertheless, reading articles about people who made an early call to purchase some coins for essentially nothing and nowadays are pretty well off, is fascinating and offers some, in my eyes valuable, lessons.

Hindsight bias, risk aversion and the importance of curiosity

It’s always tempting to fall for the so called hindsight bias, assuming that one could have seen the future rise of Bitcoin’s value already back in 2009 when the first transaction was made by its mysterious inventor(s) known under the pseudonym Satoshi Nakamoto. But in reality no one could have predicted this.

However, I would have wished that my own approach to a new technological phenomenon such as Bitcoin had been a different one, such as: “I don’t think this will in any way become a thing of significance, but it won’t hurt me right now to buy some Bitcoins for little money, and it will be an educative process as well”. Instead I had the emergence of the crypto currency on my radar, but lacked both curiosity and energy to get involved. Additionally, I was probably also subject to loss aversion, which relates to the phenomenon that people are more negatively affected by losing something than they are positively affected by gaining something, which might lead to short-term actions (or inaction). Shelling out “real” money for some virtual currency would have felt like a “loss” at that point. So the lesson for my future self: Be even more curious and be aware of the effect of loss aversion.

The rich get richer? Not when it came to Bitcoin

It’s increasingly harder for people who don’t have a lof wealth to build wealth – that’s what’s often singled out as the big flaw of today’s state of capitalism. But when it came to the early period of Bitcoin, different rules applied: Theoretically every woman and every man had the same opportunity to build unexpected wealth. Unlike in most other forms of investing, the obstacle was not primarily lack of funds. One didn’t need more than 100 Euro/USD, which means that at least in developed countries most people were not excluded by default. The obstacles instead were absence of knowledge, absence of curiosity, absence of the will to experiment and absence of patience (you didn’t gain a lot if you bought Bitcoins at 5 Euro/BTC and sold at 10 Euro/BTC).

Maybe I am exaggerating, but at least during its early days, Bitcoin was an extremely egalitarian technology. Lots of highly intelligent, educated, powerful and wealthy people did not invest in it because they either did not know about it or because they thought it was bullshit. On the other hand, while I am not aware of a reliable statistic about the demographic and social status of the early Bitcoin buyers, it’s highly likely that you had a fair share of people among them who were excluded from traditional means of investing (at least from those which promised substantial returns).

There is a widespread tendency to blame others or external events for one’s perceived failures or lack of opportunities. For large parts of the population of developed countries, Bitcoin offers a beautiful antithesis: If one didn’t jump on it early, there is only one who carries responsibility for this: oneself.

Please note that I deliberately don’t make any statement about Bitcoin today or how it will evolve. Anything can happen. My point is that everyone who, like me, feels that they missed out on something need to be aware of why they did miss out, and how they can improve the likelihood of not missing out a “similar” phenomenon in the future. With “similar” I mean another Black Swan – an extremely rare and unpredictable event which offers great opportunities to those few who spot it and who take a small, calculated gamble.

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Illustration: Flickr/Jason Benjamin, CC0 1.0 Universal

 

 

4 comments

  1. Not sure if I agree here – instead I think there is a lot of bias:
    1) being able to even know about something like Bitcoin, you need to be generally well informed and also educated to be able to put it into perspective. This is much more likely if you are not poor.
    2) you need to have the technical means to actually jump on the train. Mind that in the early years of bitcoin, there were almost no way of “buying and storing” them. Most coins were “mined” and the process and hardware necessary to be a part of this was very hard.
    3) to be able to detect a black swan and to be able to jump on it are two very different things. For the latter you need something that most poor people lack: disposable time and income. I myself “tried” bitcoin mining when the price was 5$, but quickly lost interest because back then it was very hard to actually do something with the result. The actual benefit / value does not come from the price only, but also from the market penetration. (E.g. Bitcoin does not help you if the only pizza joint that accepts it is in California but you live in Sweden)

    So to summarize: There is (as always) a strong bias towards rich people (or their children) being the beneficiaries of such new opportunities.

    Personally I find the story of Ethereum a much more compelling one. Since Vitali Buteric “made” something better out of a new trend instead of just investing and cashing out.

    • Thanks for your comment!

      I agree with the existence of these limitations and I tried to account for them in the text: “Theoretically every woman and every man had the same opportunity to build unexpected wealth. Unlike in most other forms of investing, the obstacle was not primarily lack of funds. One didn’t need more than 100 Euro/USD, which means that at least in developed countries most people were not excluded by default.The obstacles instead were absence of knowledge, absence of curiosity, absence of the will to experiment and absence of patience”

      What you write about rich people having more opportunities is of course universally true. But it’s in my opinion much more interesting to point out when this rule didn’t apply to the same extend as it usual does. Imagine a teenage girl or boy in some disadvantaged part of a country who was really into technology and stayed up long nights at her/his parent’s basement to figure out this Bitcoin stuff, managed to scrap together a few bucks, bought some Bitcoins and kept them. This is definitely something that was possible, while the same could not have been said essentially any other imaginable way (except maybe entrepreneurship).

      Not sure if I manage to get my point across. It’s not that I am claiming that everyone who bought Bitcoin early one did not belong to the more wealthy circles. But unlike in most other situations, existing wealth wasn’t a requirement per se to get a huge ROI.

  2. This article resonates strongly with me, sadly! I was debating buying a couple of thousand bitcoin in summer 2010 (at that time would have cost me around £100). And as a technology fan who built pcs, hacked consoles, and was always browsing online I was surely the perfect candidate. I downloaded the blockchain, was au fait with buying and storing methods. All set.

    And yet it passed me by, I clearly remember thinking to myself in the end that it seemed just like a techie fad and had no more value than world of Warcraft gold or the like and why throw my money away.

    I now of course beat myself up mentally whenever I see a ‘new bitcoin high’ article. Your article helped me appreciate the hindsight thing a little more. Another point I’ve read online a lot for people in our situation is that supposing you bought super low…would you really hold them until 2017 prices? Through the crashes? Past a 5x return? 10x? I don’t think I could have held my nerve and suspect I’d have ended selling much lower than current levels. But let’s not doubt it would still have made a handsome chunk of money.

    Bitcoin will always be the one that got away. It will always hurt. But as you say, it’s pointless regretting something that has happened and can’t be changed. I feel very happy for those who were smarter or luckier!

    • “Another point I’ve read online a lot for people in our situation is that supposing you bought super low…would you really hold them until 2017 prices? ”
      Yeah that is very true. My guess would be that it would have depended on the amount of BTC one bought and the existence of other liquid assets. If one had bought 100 BTC with all of one’s savings, it seems indeed rather likely that one would have sold off all or most of it way too early.

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