This post is the second in a two part series. See the first here.
I will never forget buying my first bitcoin. I rode my bike to the local drugstore and bought a Greendot Moneypak, a debit card-like instrument that could be used to send cash digitally. When I got home, I powered up my 1.6 GHz netbook and got online. I sent my moneypak to an anonymous vendor, along with my deposit address from Bitcoin-Qt, the only Bitcoin wallet with a GUI (graphical user interface) available at the time. I waited… and waited… and it appeared in my wallet. At present value, that bitcoin would be worth a little over $2MM USD. I was sixteen years old.
Unfortunately, I never held on to the bitcoin I played with in high school. I couldn’t imagine at the time that Bitcoin would happen the way it has these past few years. I didn’t think like that at the time. I had no clue what an investment was. Like most people, I didn’t receive a financial education of any kind at home or school. Had I never entered the world of cryptocurrency and met the mentors that I have, I would be financially illiterate to this day. All I thought of money at the time was its intoxicating effect on those around me, and that without it, it seemed like you were nothing.
Earlier that same year, I entered the workforce. At fifteen I began work as a laborer for a commercial roofing company. By the time I left high school I had tried my hand as a construction worker, dishwasher, streetwear retailer, computer repairman, eBay store owner, bus boy, fry cook, delivery driver, server, barback, travelling floor waxer, mover, and cable guy. I worked all the time and always had some hairbrained get-rich-quick scheme going on as well. With how much I worked, you’d think I would have ended high school with a healthy savings account. In reality, I entered adulthood already in debt.
Debt (or leverage, as the big time calls it) is a drug. Often, the illusion that you deserve the fast car, the big house, the huge rock on your wedding ring, is too alluring to resist. The truth is, if you can’t afford something, you shouldn’t buy it. This sounds perfectly reasonable, but imagine the response of most people to the following ideas:
“You shouldn’t own a car if you have to finance one. Just use a rideshare service, or bicycle, or learn how to turn a wrench and buy a beater in cash!”
“The diamond trade is immoral and unethical by nearly every cultural standard. Forget the social norm and represent your union in a unique way.”
“Home ownership isn’t the best investment! Instead of tying yourself down to a bank, rent well within your means.”
Ironically, the same people who scoff at those statements are the ones who ask me how to pull off the entrepreneurial lifestyle that requires flexibility to travel, love, and live. They often expect me to be some kind of financial guru. The truth is, I’m horrible with finances.
Until I began my career as a software developer, I worked minimum wage jobs and supplemented my income with whatever credit cards would accept me. My first year in the tech industry, my income increased by 525% from the preceding year - and my net worth decreased almost the same amount! How did this happen? Debt. As my income increased, so did my desires. Not sinister desires. Just little things. A shiny bicycle. A safer neighborhood. New clothes instead of the thrift store.
With every passing year, my income increased drastically, but couldn’t keep up with my appetite. Each month was a rollercoaster of paying off debts, growing my professional skills and income, and wanting more. I’m not a pack rat. I’ve never wanted much in terms of quantity but quality was like a drug. I felt I deserved to eat, drink, and live the best life I could. I would reflect on my budgets that I never met with regret, but never learned to adjust my behaviors. My expectations had increased faster than my ability to finance them.
Then, Bitcoin got me. I reentered the world of cryptocurrency as a software engineer just in time to watch Bitcoin grow from an anarchistic science experiment into a conversation about monetary policy with global implications. I didn’t understand economics, had never tried my hand at trading stocks, and really didn’t know anything about money. I just thought Bitcoin was really cool. So every time it hit a value I couldn’t believe it would surpass, I sold. And then undoubtedly it would climb ever higher, FOMO would kick in, and I’d buy back in. This cycle continued almost to the peak in late 2017! Somehow, I had managed to buy Bitcoin through this entire ride, and had nothing to show for it. I joke to this day that my only regret is ever selling bitcoin. That ride ended when scarcity struck me like a bolt of lightning.
Money is seemingly infinite. Everyone around us has it, our jobs pay it and our government prints it. There are a plethora of options for borrowing money to finance things we can’t afford, and there seems to always be more, because there is. Bitcoin simply doesn’t work this way. Allow me to explain:
- Bitcoin is a fixed supply, deflationary instrument. Meaning, there isn’t more. When you send bitcoin away, it’s not coming back. Good luck getting someone to let you “borrow some bitcoin”. That’s not how Bitcoiners work because they all, like me, have experienced the pain of losing bitcoin. This pain teaches the fundamental principle of healthy financial behavior: saving. Or as I like to think of it, not losing. Losing money sucks, but I can always make more. Losing bitcoin HURTS.
- Bitcoin market cycles are fast, loud, and strong. Observing real outcomes versus potential outcomes of decisions over the past decade relating to Bitcoin, one learns about analyzing and preparing for real world market cycles, which are slower, more nuanced, and more difficult to understand. Most people go through life with little to no understanding of the market and how it affects their daily lives.
- Most importantly: due to the inevitability of Bitcoin becoming a globally accepted currency, and the massive undertaking of millions of people it will take to get there, Bitcoin teaches low time preference in investing. Low time preference is the cure to compulsive spending, the enemy of debt, the protector of compounding interest. Simply put, time preference is the perceived relative value of receiving a good now versus later. While it may seem hypocritical to declare crypto enthusiasts as long term investors after the ICO bubble, true bitcoiners are here to watch an extremely undervalued asset class realize its potential. Low time preference for Bitcoin is the acceptance that anything of true value requires hard work, hard work requires time, and time requires patience.
The lessons above represent “common sense” financial wisdom you can find anywhere from Warren Buffet interviews to The Economist. And yet, for most of us, the allure of a night above our means will seduce us despite the inevitable financial hangover. In real life, we can rectify those mistakes. There will be another paycheck, another month of budgeting to pay off debts. In Bitcoin, there are no do-overs. That harsh reality has taught me a lesson painful enough to change my financial behaviors at the incentive level.
And it only cost me a few million dollars…