Should I Buy Bitcoin After The Crash? A Deep Dive Analysis

On November 25, 2018, Bitcoin crashed below $4,000 and is down 80+% from peak-mania of $20,078 on December 17, 2017. If you bought back then, you would be up around 8X!

Bitcoin is turning out to be one of the biggest bubbles in all of history, but the blockchain technology is here to stay. New investment types like NFTs that rely on blockchain are all the rage as well. Check out the latest Bitcoin market cap chart.

Should I buy Bitcoin now that it's corrected?

The question smart investors should be thinking now is whether Bitcoin is a buy at these levels. HODLrs have been pounded into submission and we are finally seeing some capitulation.

As someone who only uses investment returns to buy risky assets e.g. income from dividend stocks or bonds to gamble in speculative investments, let's look at the positives for buying Bitcoin today.

Reasons To Buy Bitcoin After The Crash

1. “Cheaper” Valuations

There is no way to properly value Bitcoin since it doesn't generate free cash flow. Valuing Bitcoin is like valuing Gold, hard to do. Therefore, we've got to look at relative value e.g. what Bitcoin is trading at today versus in the past. Take a look at the Mayer Ratio below. As you can see from the chart, Bitcoin is below its median value in red.

Bitcoin Valuation Chart

2. Bitcoin May Be A Reliable Alternative

Unlike banks, which can be taken under, raided, or robbed, Bitcoin is relatively stable since 2013. Let's forget about the Mt. Goxx fiasco! The problem with using Bitcoin to purchase anything is the transaction cost. Who the heck is going to pay $20 in transaction fees any time they want to buy some groceries?

Thankfully, transaction costs have come down due to improvements in technology, including the Lightning Network advancement, Bitcoin Cash, and the Segregated Witness program.

Cryptocurrency transaction fee

3. Bitcoin Slowly Becoming Mainstream

As older generations die off, and younger generations adopt Bitcoin or at least have heard of Bitcoin and crypto, it becomes more mainstream. The people in power, the Bank CEOs are older old folks who have a vested interested in protecting their old institutions.

Cryptocurrency becoming mainstream

Bitcoin remains the clearly largest cryptocurrency with a current market share of approximately 43%. Generally, it's a winner take all mentality in new frontiers.

4. Institutional Demand Is Growing For Bitcoin

Goldman, JP Morgan and other huge institutions have started cryptocurrency funds and trading desks. There are entire startups founded on the blockchain technology. Coinbase raised a massive round of funding, and will therefore do more to bring crypto to the masses. There are also ETFs being created to take advantage of the crypto trend.

The more liquidity that can be tapped to invest in crypto, the more demand there will be for crypto.

More Reasons To Buy After The Bitcoin Crash

5. A Potential Safe Haven In Times Of Global Uncertainty

If North Korea decides to shoot a nuclear missile at South Korea, all hell will break loose if China comes to North Korea's defense (they are allies). The US will get involved, wipe out North Korea, and then we've got a version of World War III.

The stock market will melt down and there will be bank runs. But if you own Bitcoin, you will be relatively safe because of the decentralized way Bitcoin and other cryptocurrencies are held and valued.

6. The Desire For Privacy Will Continue

There is a huge black market where people buy and sell things they don't want other people knowing about. This is where Bitcoin and other cryptos come in because it is an anonymous payments system.

Just like how there is a revolt against Facebook and Google following our every move to sell ads, the same can be said for financial transactions. We want privacy.

7. Bitcoin Is A Stable Money Supply

Unlike the US Dollar, which can depreciate with massive printing of new dollars, only about approximately 7200 bitcoins are being created each day. Just look at the hyper inflation that is going on in Venezuela due to massive printing of money.

The more money out there, the less the currency is worth. Therefore, with the cost of mining bitcoin, bitcoin is better able to hold its value.

8. Bitcoin Has Come Back From The Dead Before

Bitcoin has gotten crushed before, and has proceeded to recover and then some. Check out this historical bitcoin crash chart.

Bitcoin crash and comeback chart

Bitcoin Is For Gamblers

There's a great saying in poker, “NO BET, NO WIN!”

If you are a gambler who loves to take big risks for potentially big reward, then Bitcoin might just be your investment of choice. Although we saw Bitcoin crash, Blockchain technology is here to stay.

Just don't gamble more than 10% of your liquid net worth in Bitcoin or any highly speculative investment. If Bitcoin hits big, then great! If Bitcoin goes to zero, then the most you lose is 10% of your liquid net worth.

I had my Bitcoin moment in 2000 when I bought a Chinese internet stock that went from $3 to $155 in a matter of six months. Thankfully, I sold at about $150 and parlayed my $150,000 windfall into San Francisco real estate in 2003. Always turn your funny money into a hard asset!

Today, I'm an old man now with a wife who doesn't work and a toddler. Therefore, I can't afford to take super high risks anymore. Besides, our net worth is large enough where we don't have to work again, so why go nuts?

Worried About Another Bitcoin Crash? Try Real Estate Instead

Instead, we de-risked in 2017 by selling a San francisco single family rental for $2,740,000, and invested $550,000 of the $1,800,000 in proceeds in real estate crowdfunding.

We transferred our expensive coastal city capital, and bought 17 different commercial properties in the heartland of America that have 4-6X higher cap rates (net interest yields).  The other $1,250,000 was invested evenly in stocks and bonds.

Real estate crowdfunding allows for this type of efficient arbitrage, and will grow in popularity over time. I'd check out Fundrise, the leading platform in the space and also one of the oldest too. Fundrise offers diversified eREITs that are much more stable than Bitcoin.

With the multi-year housing boom underway, I'm investing in as much real estate as I can. I've currently got $800,000 invested in real estate crowdfunding plus several million in single family homes.

Fundrise due diligence funnel process

About the Author: 

Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding.

In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income, partly thanks to his investments in real estate crowdfunding. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.

This article on the Investing After The Bitcoin Crash is a Financial original article. Sign up for the free Financial Samurai newsletter here. Bitcoin is now above $30,000 again and looks relatively attractive after reaching as high as $60,000.