The Number One Principle of Investing: Buy Low, Sell High
The number one principle of investing is to buy low and sell high. When you buy low and sell high, you realize a gain from your investment.
Then you can keep it as profits and pay your taxes on it, or you can reinvest it in that security again at a lower price with the gains from the higher price and accumulate faster.
Wait to pay your taxes on it when you take profits later, why not?
(This is not professional investment or tax advice, just a friendly online guide, a guy talking to you at the bus stop sort of thing.) Either way, the key to successful investing is almost by definition, buying low and selling high.
Investing legend Benjamin Graham, the author of “The Intelligent Investor,” recommends timeless investing advice to, “Buy Cheap, Sell Dear.”
He was the chief inspiration for the wildly successful investing career of investment legend Warren Buffett, “The Oracle of Omaha.” YOu may have heard of him. He was the richest man in the world for years before Microsoft co-founder Bill Gates's net worth eclipsed his in the 1990s.
Graham himself was more accustomed to reading financial reports from businesses he was considering, than looking at daily and weekly stock graphs charting share price movements.
So you can just imagine a fast-talking, Wall Street, boiler room paper pusher with stocks wiggling up and down charts in the background of his cubicle telling you Graham’s proverbial investment advice the more commonly phrased way, “Buy Low, Sell High!” (Or Phoebe from the NBC show, “Friends,” in the one where she takes up day trading stocks.)
Value Investing and Bitcoin
Either way, you say it, the purpose of investing is to make profits from purchasing a commodity or security at a market price that doesn’t reflect its true value. (Visit: Bitcoin Rainbow Charts to get the idea! Especially if you’re a visual learner.)
This happens all the time due to the intrinsic inefficiency of the world and markets. Bitcoin enthusiasts (the one who wrote this included!) believe that Bitcoin is one of those ignored, underappreciated, undervalued commodities and that investing in it now at its prevailing prices on crypto exchanges will turn out to be a great bargain in the coming years.
Then according to the methodology of value investing, ideally an investor will see the market begin to price in the asset’s value correctly after they bought at the bargain price, as information proliferates through all market participants. That will net you a return on your investment if you sell at a higher price for a realized gain on your principal investment.
In fact, one of the underlying premises of value investing, the philosophy of Benjamin Graham, mentioned earlier, is that traded securities are frequently undervalued by markets according to publicly available information that the entire market has not yet priced in, and could take months or even years to fully and correctly evaluate to market pricing.
It is the goal of the value investor then, to find these underpriced securities and invest in them to maximize lifetime returns on their principle.
This investing philosophy is what inspired Warren Buffett to go into business as a youth, and led him to the extraordinary returns on his investments that have established him as a legend and potentially the greatest investor in all history.
Putting The Number One Principle of Investing Into Practice
The number one principle of investing is simple in theory.
It becomes a more delicate matter to actually implement into a successful investing or trading strategy in the real world.
That involves executing trades based on a sense of the market that is counterintuitive to most market participants. It is even counterintuitive to professional traders.
That sense is that when markets are crashing it is an exciting time to buy and when they are growing like crazy that is a good time to sell.
Usually investors, especially inexperienced ones, but even professional fund managers, get stuck in groupthink and do what everyone else is doing.
(Bitcoin Rainbow Charts help you to calibrate your mindset to think the right way about when is the best time to buy bitcoin.)
When a stock or crypto is a hot buy, a crowd forms, people pile on, and as they drive its price higher, the amount of ROI to be made shrinks, and each new buyer gets a much less attractive deal than the lucky or knowledgeable and well-prepared investors got who bought the security early and started the trend.
To be one of the early investors in a profitable commercial endeavor requires doing something different than what the crowds are doing. It requires a contrarian approach to investing, but in favor of sound business thinking and advanced knowledge about the particulars of a promising investment opportunity, not merely for the sake of disagreement.
Why So Many People Are Still Investing In Bitcoin
Bitcoin (BTC) was the highest ROI investment of the 2010s. It’s gearing up for another decade as the best-performing asset on planet earth.
From the time it first began trading on crypto exchanges around 2010 until the bull market in 2017, BTC delivered the greatest ROI of any investment in history.
Trading at pennies per coin or less at the beginning of that period, bitcoin traded for $20,000 for a coin on crypto exchanges by the end of 2017. Since then the cryptocurrency has continued to swell in capital inflows and market value for a bit of the coin at an exchange.
By November of 2021, bitcoin had accumulated so much value and global attention, the price of a coin at exchange was $68,000. So many people have invested in bitcoin because the crypto represents an immutable account on a public ledger with state-of-the-art security and access to participants.
The coin offers these benefits with a novel network architecture for peer-to-peer distributed financial databases that rewards participants with BTC for securing and propagating their cryptographic ledgers accurately.
Before outlining 3 major reasons why bitcoin is significantly undervalued at the moment relative to its prospects over the next decade, here’s a brief summary of what the Bitcoin network actually does and how it works.
This is important to understand why Bitcoin has been such an outlier over the last decade— in market value, in energy consumption, and in a deeply important and very real metacognitive way, all on a global and historical scale.
How Money Works and What Money Does
Every day people ease their way through life using money, but it’s not very often that one of these billions of people stops to think about what money is and how it makes their lives much easier. Money is one of the earliest technologies invented by humanity, and one of the foundational technologies to civilization, just as language, law, and medicine are.
Money is an invention that does three things for us: 1.) It is a durable store of value, 2.) a precise unit of account, 3.) and a universal economic medium of exchange.
You can create money in any number of ways, so long as what you’re using to create money and what you end up creating can fulfill these three use cases, and this is an engineering problem that works with and around the inherent properties of things and the material reality of the world in which the users of your system of money live and operate.
So when people first began to create and use money, they used wampum, beads strung together in a certain intricate way. Because they took time to create, there was an inherent engineering limit on how many could be produced, and that limited their supply, creating scarcity so that they could be reliably used as a medium of exchange in a durable unit of account.
Sea shells have been used by ancient peoples, but not near the ocean where they were plentiful. The free availability of sea shells near the ocean would overwhelm their ability to precisely account for real differences in the economy and thus cause them to fail also to work as a durable store of value or common means of exchange.
The first money to become a global standard was gold. It’s relatively randomly distributed over the planet, scarce, and requires capital-intensive business and physical resources to acquire. Once refined to a certain level of purity, all gold is the same as any other gold by weight.
That quality is called “fungibility” and it’s important for money to work its best as a precise unit of account and universal medium of exchange. And gold, a soft, shiny, yellow metal, is extremely durable. It’s billions of years old and was created by hot solar fusion reactions under very high pressure inside of stars. It would be too costly in the 2020s to create for it to be worth trying.
How Bitcoin Works and What Bitcoin Does
What Bitcoin does is create money. Like a sovereign nation’s central bank creates money. But not exactly like central banks do. In fact, you could say (and Bitcoin’s most avowed proponents do!) that the way Bitcoin creates money is very unlike the fiat currency of a sovereign central bank. Certainly, the way it works to create money is very unique and combines software technologies and techniques that have only been developed over the last 50 years.
Central banks create a limitless amount of money. The career financiers and financial academics who get appointed to steer central bank policy by elected public policymakers can create as much new money supply as they determine to create. That also gives them the power to steer the value of every circulating unit of their currency by easing and tightening the money supply at will.
Their goals are to keep prices and employment stable using monetary policy as a tool to optimize the economy. But they are beholden to the political will of democracies that always demand more and that leaves the money supply expanding at an accelerating pace, and the value of the money you hold diminishes in step with the expanding money supply.
What Bitcoin does is create money with a hard supply cap, so that it’s more like digitally simulated gold than digitally simulated paper notes with ink prints, which are even easier to reproduce digitally— virtually free— than they are to produce with paper and the press.
That supply cap is an agreement between all the participants in the network, and they run their Bitcoin Core implementations, the app that “mines” bitcoin, with that specification. The more valuable their bitcoin becomes, the more assuredly they will all hang in there together and keep the supply cap because that scarcity is a big part of what gives their bitcoin its value.
There is only so much bitcoin now, a certain specific amount. And it’s all accounted for to belong to a certain bitcoin address from which it can only be spent by whoever holds the private key of the public / private key encryption pair.
And there is only so many new bitcoin issued at regular intervals (every ten minutes, to the miners who keep Bitcoin’s accounts), and that amount is set by the software implementation to fall by half every four years.
So the new supply of bitcoin diminishes at four-year intervals at a constant rate that will result in an asymptotically vanishing amount of new bitcoin to be produced so that the network supply caps out at 21 million bitcoin.
The features that make Bitcoin most unlike the fiat money we all know and love, the unique features and benefits that have made it such high tech star with investors, are:
- That gold-like scarcity built into Bitcoin and maintained using cryptography and over 10,000 Bitcoin nodes worldwide keeping track of every bit of bitcoin there is, updating the order of new transactions in real-time, and checking each others’ records to make sure everyone’s matches so no one can cheat the rules.
- The anonymity, privacy, and self-sovereignty of keeping deposits and making transactions on a pseudo-anonymous, decentralized, peer-to-peer, cryptographically secured network platform instead of relying on state-regulated intermediaries.
- Lower fees to park your money, potentially lower fees to send your money, and the convenience and control of having the ability to send any amount you have almost instantly to anywhere in the world, and clear it within about ten minutes.
It’s important to understand that Bitcoin is not a flash-in-the-pan fad for some electronic equivalent of beanie babies. Neither is Bitcoin a ponzi scheme as some of its detractors have claimed. Bitcoin is a legitimate commercial enterprise based on some pretty advanced, but not unheard of nor overhyped computer software technology and techniques.
It offers financial services, like JPMorgan Chase, Goldman Sachs, or Wells Fargo. But it offers them in a unique way built on peer-to-peer network software architecture instead of proprietary corporate software databases maintained by a single, centralized custodian.
Is Bitcoin Undervalued Going into 2023?
Yes, Bitcoin is absolutely undervalued going into 2023. Am I saying that I know for sure the price won’t dip drastically and stay there for another six months? No, I am not saying that at all. What I am saying is that over the next decade, I think Bitcoin is going to perform in a way that is comparable to its growth over the last decade, and that’s huge.
What we’re seeing in the middle of Q4 2022, is:
- A year of rapid development of the second, third, and fourth layer infrastructure on top of the bitcoin base layer. Lightning Network is just one example.
- A year of rapid entry of well-capitalized corporate incumbents with globally respected brands with new blockchain engineering hires and announcements of plans to begin integrating crypto into their payment options. That includes giants like Walmart, whose Chief Technology Officer said in Oct that crypto will be vital in customer transactions.
- A year of rapid entry by and growing interest from institutional investors and hedge funds looking to allocate some crypto to their books. Fidelity Investments, for example, is on another hiring spree this quarter.
- A year of record high hash-rate, meaning a record number of bitcoin miners are plugging in highly specialized ASIC bitcoin mining computers and securing the network.
- A year of low BTC supply on exchanges, with a trend of long-term holders moving their bitcoin off-exchange and locking it up to hold onto instead of having it ready to sell or trade.
And the price of bitcoin at the exchange fell by 90% over that year. So to me, BTC looks undervalued in Q4 2022.
The Difference Between Investing in Stocks and Bitcoin
Investing in stocks is different from investing in bitcoin.
If you already have some experience investing in stocks you don’t have to throw everything you know out the window, but there are some important differences. These are necessary to cover to give the best answer to the question, “When is the best time to buy bitcoin?”
Bitcoin market cycles are shorter on average than stock market cycles. They are also much steeper in price swing action. As a result, it is even more important, especially depending on the investor’s financial timeline, to be aware of bitcoin market cycles when making trades.
There is far more money to be lost or left on the table, more profitable ROI to be gained, and different time periods to work with.
When Is The Best Time to Buy Bitcoin?
The best time to buy bitcoin is when there are market signals indicating strength and price stability or price increases over the period during which you intend to hold some of your savings in bitcoin.
When the market is overheated and near the peak of a bubble, buying bitcoin will leave you with unrealized losses on your hands until the price returns to that level again.
Using Bitcoin Rainbow Charts, investors can calibrate their mindset toward making market entries and exits so as to maximize returns.
The Bitcoin Rainbow Charts are not investment advice. They are an investor analyst recommendation tool that helps give an idea in a beautiful visual form of what it means to buy low and sell high in the historical bitcoin market.