How to Manage an Asset Price Mania (Like Bitcoin)

Bitcoin has gone stratospheric in recent weeks and it seems to be one of the only things anyone is talking about anymore. If you’re like most people you probably don’t know what Bitcoin is or if you do you don’t own any (or very much) in the first place. But you’ve probably read reports about how it’s the next world changing technology or you’re hearing from friends about how they made money investing in Bitcoin and now you’re jealous and the fear of missing out is creeping in. According to CNBC Coinbase has added 300,000 accounts in just the last week and has more accounts than Charles Schwab so people are climbing over one another to get involved in the mania. But how should we handle an investment mania like this? Here are a few simple steps to help.

1. What The Hell Are We Doing In the First Place?

When you’re confronted with the urge to jump into a new mania you have to pull yourself back and ask yourself what the hell you’re doing in the first place? If you’re like most people your savings is the residual of your unspent income. This is literally savings. We call “investing” investment, but it’s really not. What most people do on the stock market is literally an allocation of savings. As I’ve explained before, the stock market isn’t where you get rich and it isn’t where people should think of themselves as “investors”. So, you have to figure out if you’re touching your savings, your investment money or your dumbass money.

This is an important distinction. Your savings is money you need with some degree of certainty at some point in the future. This is the money that will pay for a house in the future, your child’s education or your retirement. You take this money and put it into the “don’t be a dumbass” pile.¹ This gets reallocated into relatively safe assets with a high probability of being there in the future. This includes assets that generate cash flows that are very likely to create a positive return over time. You know, cash, bonds and stocks.

Your investment money is money you’re willing to lose, but also money that could have a big asymmetric payoff. We can call this the “I’m not a dumbass in this thing, but I can part ways with this money” pile. This money is spent with the purpose of increasing your future production. So, education, job training, spending on a new widget for your company. That is money that could disappear, but is spent in the process of something that will likely increase your future production. It has an asymmetric probable outcome because it’s something you’re either becoming an expert in or are already an expert in.

Your dumbass money is basically your gambling money. This can go into the “let’s be a dumbass and hope I look like a genius” pile. This is for things that you aren’t really an expert about, but hope to create asymmetric outcomes with. You know, playing roulette, betting on horses, buying unproven assets that may or may not be worthless, etc. In essence, this is money that might go to $0 and you deserve for it to go to $0 if it does. It’s a lot more fun to have this kind of pile and it’s a tremendous luxury to be able to be a dumbass with your money. Also, if you have a big pile of dumbass money you’re probably not a dumbass.

Once you figure out how much of each pile you have then you can figure out where it might go. If you have a dumbass pile then remember that that doesn’t mean you need to be a dumbass with it. There are smart ways to allocate your dumbass pile and dumbass ways to allocate your dumbass pile. But also remember, if you don’t have a dumbass pile then you can’t afford to be a dumbass. You can stop reading this post and try to be less of a dumbass in the future so that you have more money in your dumbass pile.

2. Do I Understand This Thing? 

If you have some money in your dumbass pile then you need to start asking difficult questions so you are less of a dumbass with your dumbass pile. The first one is whether you understand the thing you’re planning to allocate your dumbass money into. Warren Buffett reminds us never to invest in things we don’t understand. For instance, I am a pretty good blackjack player. I know the game well, but I am not an expert. Well enough to know that I will usually lose at it, but also well enough to know that I can create asymmetric situations that increase my odds of winning. On the other hand, I have no idea how Pai Gow works so I will never ever sit down at a Pai Gow table unless someone else agrees to let me lose their dumbass money.

So, when it comes to something like Bitcoin you have to really immerse yourself in understanding it since it’s pretty new. Of course, you’ll never understand it as well as most of the people who already own it, but understanding it will at least set the table for understanding how not to be too much of a dumbass with your dumbass money. I would never play Pai Gow because I am way too lazy to understand how it works. Likewise, you shouldn’t own Bitcoin if you’re unwilling to invest some time in understanding it. You’ll still be a Bitcoin dumbass, but being less of a dumbass will likely decrease the rate at which you lose your dumbass money.

3. Am I FOMOing At The Mouth?

One of the main reasons why millions of people jump on investment manias and get crushed by them is because of a simple Fear Of Missing Out. Your co-worker made $10,000 investing in Fidget Spinners and now you feel like you weren’t enough of a dumbass with your dumbass money so you invest your dumbass money in something that is truly for dumbasses and you lose your (dumb) ass.

If FOMO is the main driving force behind your dumbass decision then wait 18 months, sober up and find a new hobby so you don’t waste your dumbass money on something that you wanted to buy just because someone else bought it for a lower price before you. That’s called “holding the bag” and you don’t want to be the bagholder even with your dumbass money.

4. Is It Really Different This Time? 

So, now you have some dumbass money and you have decided you understand this gamble well enough to put some dumbass money to work. A mania like Bitcoin isn’t like getting involved in a mania like The Powerball. The Bitcoin mania is a technology mania sold on the premise that this is a world changing technology that will become self fulfilling to some degree. In other words, its adoption becomes self reinforcing and makes every future transaction more valuable. Kind of like the adoption of the internet. Every new user made the network more valuable which made the network more valuable.

As with any mania the main question you have to ask yourself is whether it’s really different this time and is there a sense of urgency that you need to adopt this new thing immediately?  So, for instance, in the case of Bitcoin you have to decide whether you think Bitcoin is actually a world changing technology and whether you need to own that world changing technology before it passes you by? In most cases, the answer is an emphatic no. It’s rarely different this time. But that’s what gives dumbass money such an asymmetric value – if it is different this time then your dumbass money will actually make you look like a genius.

Conclusion

The key message here is differentiating between your dumbass pile and everything else. Once you’ve got that figured out then you just need to answer a few (nearly impossible) questions and you are well on your way to losing your dumbass money.²

¹ – Dumbass money can be different for different people. For instance, the entrepreneur who understands CryptoCurrencies and invested in creating these coins in the first place was not actually allocating dumbass money. He/she was quite literally investing as in spending for future production. Investment is the backbone of the enconomy and although most corporations end up failing this type of spending should be viewed differently than the dumbass who takes his “Don’t be a dumbass” pile and spends it at the local casino. 

² – Lots of people will pretend that they are not Bitcoin dumbasses, but any asset that relies on the future adoption of other users means that all future adopters are relative dumbasses. In other words, with such a new technology everyone is essentially a dumbass and the most dangerous dumbasses are often the dumbasses who claim they aren’t actually a dumbass.  

NB – I am not saying that Bitcoin itself is bad. I do not pretend to know how Bitcoin will impact the world in the coming decades. The decentralized technology is certainly interesting and potentially world changing, but no one really knows if that’s true or not at this point. Yes, lots of people think they know, but they really don’t. So you have to put these ideas in the dumbass pile because anyone allocating assets to this segment is taking a flier on something they can’t really be that certain about. In other words, Bitcoin is more speculative than anything else. And it’s fine to speculate, but also important to know that you’re speculating.