For a couple of years now I’ve been watching bitcoin move up in value. I first bought a few back in late 2011 or so when they were going for about $4 each – just a few months after the first big run-up to $30 and ensuing crash. At the time, it was thought by most bitcoin people that bitcoin would never again reach that price. Over the next year I bought a few and used them for various purchases. By the beginning of 2013 they were approaching $20 again, and I was kicking myself for not buying more when they were cheap. It was so obvious, looking back, that they were going to move up! I bought a few at $20 early in 2013 and watched as they rocketed up to more than 10 times that amount (followed of course, by a big crash). Again, I wished I would have bought more back when they were cheap. It was so obvious, looking back, that they were going to move up!
Having missed two opportunities, I didn’t want to miss a third. I didn’t have a lot of cash on hand, and so decided that I would take a 401(k) loan for $10,000 and put it all in bitcoin.
On June 15 I took the loan out.
Over the next month, bitcoin moved downward and I made three purchases as it did so, each about a week apart. I ended up buying 109.93btc with my $10,000 – an average cost of about $90.97 each.
For the next four months I watched bitcoin slowly climb, and on October 14th, I sold 31 bitcoins for $4,030.67 – about $130 each – a 43% yield over that period.
To really see how well my bitcoin investment did, it is necessary to look at the opportunity cost – what my money would have made if it remained in my 401(k). Without getting too involved, I noticed that my 401(k) tracks the S&P500 pretty well, having made almost the exact same returns as the S&P – 19.9% year-to-date returns compared to the S&P’s 19.76%. Thus, I used the performance of the S&P500 as a benchmark against which to measure my bitcoin returns. Not perfect, but close enough for a blog post.
In the four months between June 15 and October 15, the S&P500 gained 4.29% – an order of magnitude less than my bitcoin investment during that same period.
Coinbase will take a couple of days to get the money into my account. I suspect they are helping themselves to a little bit of arbitrage, but I don’t really mind. I still have about 80 bitcoins in my account, and as I write this they are worth about $11,200.Taking a large 401(k) loan to buy a virtual currency with a reputation among doubters of being an unstable scam is risky. I recognize that. But guess what – I like risk. Risk is profitable. And it’s exciting.
Nobody knows the future of bitcoin. If I had to guess, I would say it will probably go to near zero at some time in the next few decades and be done with. But for now, bitcoin is definitely an interesting phenomenon with some real power to make serious changes.