My 12-Point Checklist for Better Investing (and did it work for Bitcoin?)

Back in March 2021, I ran through my decision-making process, using Bitcoin as a working example. Now cryptocurrencies are back in the news, it’s worth revisiting.

This was originally posted here in March 2021.

OK. I’ve been beating around the bush on this for weeks, so let’s get straight to it. Should you invest in Bitcoin?

Actually, just quickly — I was planning on covering off more Bitcoin ground, like whether it’s a good thing, or if it’ll catch on. But in the interests of protecting the already-sore areas around this particular bush, I’m only covering the investment decision here.

My bush-teasing antics stretch back for three posts (here, here, and here). I think it’s worth reading them first. But, let’s be honest, you won’t. So I’m going to use the last one’s twelve steps to help you understand how I arrived at my own decision (and, by extension, how I make all investment decisions).

Here are Steps One and Two:

“1: Acknowledge what your instinctive Han-Solo System is telling you to do.”

“2: Analyse that output: Is it stirring up a strong emotional response? Particularly feelings of fear and greed? If ‘yes’, it’s time to fully engage your slower, rational C-Threepiopian system.”

I’ve read the same stories you have: the ones about the guy who bought a Bitcoin when it was $1,000, and now it’s worth $56,645. Maybe you even know that guy? He makes me jealous, the git. I want that! I am, in other words, feeling extremely, desperately greedy. So alarm bells are ringing. This doesn’t mean it’s automatically wrong to buy Bitcoin, but it does mean it’s time to slow down and think.

Next step:

“3. The first C-3PO step is to ask yourself: how qualified am I to make a big decision here? (i.e. if the decision is “Should I put out that fire? Or evacuate the area?” Be brutally honest with yourself: Are you a 30-years-in-the-job firefighter? Or a semi-pissed sales executive who’s just lit a barbecue with two cans of lighter fluid and a fart?)”

I’m on shaky ground with Bitcoin. I’ve got a decent investment track record, but it came from identifying a handful of exceptional fund managers, then backing them through thick and thin. I’ve never made money from investing in new, alternative asset classes (quite the contrary). It’s therefore outside my circle of competence, meaning my opinion on Bitcoin isn’t worth much. That’s not an encouraging start.

But maybe I can find some data, or an expert, that can help me work out if it’s a good investment?

“4. Seek out relevant data that will give you a better idea of the likely success of your decision. (Unless it’s a fire: If you’re Googling “probability of surviving a house fire” in the midst of an inferno, then you’re either a maniac or the governor of a central bank. Either way you’re in trouble.)”

“5. Assess the quality, accuracy, reliability and relevance of that data. E.g: Does it actually apply to your specific circumstances? Does it include enough instances to be accurate? Is it from a biased source?”

There’s plenty of data on Bitcoin — its price history for a start. The bleedingly obvious takeaway is that it’s gone up a lot. But for me, in the absence of a solid understanding of the asset itself, data that only goes back to 2009 isn’t long enough. I personally need a lot longer than that. No-one’s ever seen what it does, for example, in fast-rising inflation. Because we haven’t seen this in Bitcoin’s lifetime. Sure, there are plenty of theories out there, but theories aren’t data.

So, checkpoint six, I need to find a trusted, expert opinion to get comfortable then.

“6. Seek out relevant opinions on the subject. As with the data, ask if that opinion is from someone who is credible in this subject, as well as trustworthy and unbiased. Opinions from anyone else are usually worse than no opinion at all.”

Well… same problem. Bitcoin simply hasn’t been around long enough to believe there are any genuine experts (as separate from people who just know a lot more than I do about it. There are plenty of those, but I still don’t class them as experts).

“7. Use all of this information to calculate an honest, rough probability of success.”

I’ve fully engaged my rational C-Threepiopian brain, and the best it can come up with is that my chances of success are 50/50.

“8. ALSO: assess how likely it is that the probability you’ve just calculated is correct. Sometimes you can be confident you’re pretty much right, other times you should admit it’s little more than stab in the dark. Let this sway your final decision.”

Yep. It’s a stab in the dark. My 50–50 estimate could be way off — in either direction.

“9. ALSO: Assess the likely impact of your decision. Particularly, what the very best and worst-case outcomes are, even if they seem unlikely. Sometimes it’s worth defying the odds if the potential benefit is huge, and you should be VERY wary of doing something with even an unlikely chance of disaster.”

“10. ALSO consider the external impact: So not just the impact on you, or only in financial terms. But, for example, the emotional or time costs and benefits to you and your family, or any impact you might have on your community and on wider society too.”

Oddly I’m not definitively at “no” yet. This is why Checkpoints Nine and Ten exist. If you’ve got loads of money knocking about, then sticking some of it in Bitcoin may not hurt much, even if it goes to zero. It’s possible that it goes up another ten times from here (note that possible isn’t the same thing as likely). So, just like the lottery, you might make even more money and have a cool story to tell your mates.

If that’s the case, go for it. Elon Musk certainly did. But my personal rule is never to invest unless I believe the odds are on my side, and that includes small gambles on Hail Marys: Like cigarettes, one may not hurt, but if they become a habit they can leave a big dent over the course of a lifetime.

If, in contrast to the Rich People’s problem above, you have a slim pot of money saved for retirement (or a house deposit, or the kids’ university fees etc.) and you’re thinking of putting a large part of that in Bitcoin, you should definitely imagine what its price going to zero would look and feel like (or if you accidentally lost your Bitcoins — that happens). This is to counter our greed reflex, which causes us to spend too much time fantasising what the best outcome would look like. If this is you, I recommend you stay well clear. You’ll hate me if it doubles next week — sorry. But the worst-case scenario will be ruinous to you and your family. And you just can’t know how likely that is.

Put it this way: Elon Musk could load 99% of his wealth into Bitcoin, and if it collapsed to zero, he’d still be considerably richer than you or I could even dream of being. Whereas if we put 99% of our savings into Bitcoin and it crashed, we’d be screwed. This is why you need to be wary about taking advice from super-rich people — their risk-reward trade-offs are nothing like yours.

Checkpoint 10 also reminds me to consider how my decisions impact society. Mining Bitcoins is terrible for the environment, and they’re also used to dodge taxes and to finance crime and terrorism. Let’s be frank, these points don’t help the ‘buy’ case.

Penultimate step:

“11. Put all of this information together, making sure to combine the outputs of both your Han-Solo System and your C-Threepiopian System. The ideal ‘yes’ has a high chance of a successful outcome, with a decent shot of mind-blowing success thrown in for free. Obviously 0% chance of failure would be awesome, but it’s more realistic to aim for the risk of failure being far smaller than the chance of success (with no chance of that failure being ruinous to you). Life doesn’t always present these as options unfortunately, but it will still help you to find the least bad one.”

Now, I said my Han Solo system was feeling greedy about Bitcoin. That’s not strictly true. I can tell that my Han-Solo system of 22 years ago would have been feeling greedy. But experience reprograms our instincts, and my experiences since then (particularly from the rise and burst of the late-nineties tech bubble) mean I have a bad feeling about this. Those suspicions aren’t caused by Bitcoin itself, but by the behaviour of people around it. They seem unnervingly fervoured, and too many ‘experts’ have popped up out of nowhere. Again, this doesn’t mean you won’t make money, or that Bitcoin won’t last, but it does put me off.

So the outputs from two decision-making systems are: a “no” from my Han-Solo System; and a “no idea” from my C-Threepiopian System. So, on balance, it’s looking like a “no thanks” to Bitcoin.

A reminder of my final checkpoint then. This is what I’m looking for, and what I try to avoid:

“12. There are some exceptions to this (life is complex) — but ultimately you’re looking for what’s known in the investment world as ‘positive asymmetry’ (roughly: lots of upside, with no or little downside) and to avoid ‘negative asymmetry’ (limited upside, with a chance of anything from a small loss to complete disaster).”

Bitcoin doesn’t look like either of those. For me, it looks like this (with the thickness of the line representing chances of it happening — the thicker the line, the more likely it is to happen):

What might possible exceptions be? Maybe if I find myself in an implausibly dangerous movie plot, where I need to double my money in a month (and I’m banned from all local casinos). Thankfully this doesn’t apply to me: there’s no reason why I have to buy Bitcoin.

So, after several posts containing thousands of words, here’s one more that answers the question “am I investing in Bitcoin?”:

Nope.

Epilogue for 2022

So has anything changed now that Bitcoin’s price has plunged more than two thirds to $16k?

Not really. Run it through the same process, and I still come to the same conclusion: Yes, it could still possibly go up a lot from here. Perhaps that’s more likely to after the recent fall too. But there’s also nothing to stop it falling another 70% either. This would drop it to a level it hit as the lockdowns hit in 2020, so it’s well within the realm of possibility.

Still a nope for me.