I got wrecked and lost most of my Bitcoin. Key takeaways.

I’ve been keeping my Bitcoin safe for many years. In 2022 I failed.

I took on some debt so I could pay my 2021 taxes without selling any Bitcoin, which was already 40% off the highs. Small amount of debt in percent terms. Then Luna happened. Then 3AC. Then FTX. Finally BlockFi. I learned about convexity. I learned about counterparty risk. I could withstand the drawdown, but the people I lent money to could not.

Why didn’t you sell at the top?

• I was confident that it would go higher. No blowoff top.
• I thought, if I wait a little bit, I can sell fewer bitcoin and then I will have the money I need and retain more of the bitcoin.
• If I sell, I have to give up 20+% of the proceeds to taxes. I cannot buy back to the same amount unless the price dips at least 20% which I am really unsure about.

Psychological solutions:

• Goal function is not only to maximize wealth, but to minimize risk. It is a balance. You can have more Bitcoin, but you will also take on more risk and you might lose everything. So, the proper balance is to leave some Bitcoin on the table. For example:
• Do not take on debt to buy bitcoin
• Do not farm your bitcoin out for yield
• When the price gets 50% as far as you think it will get, it’s probably time to sell some. This will be better for your emotional health and might strengthen your ability to ride out the next bear cycle.
• Scaling out is a better risk vs. reward compared with letting the price run up and trying sell a lump at the top. Might miss it.

Why didn’t you buy at the bottom?

• I didn’t have enough cash to buy an amount of Bitcoin that I would be happy with. Price has been going down a long time. If it goes down just a little more I will buy an amount of Bitcoin that I am happier with.
• If I buy in I won’t have enough cash to be happy if Bitcoin just keeps going down. I cannot justify putting this cash into a thing that has been relentlessly going down for a year.

Psychological solutions:

• It’s important not to catch the falling knife and put your family in a risky position. But if Bitcoin is looking like it may have bottomed you can pick a reasonable stop loss, say 50% more down. Calculate how much you can buy in now, such that if it were to hit the stop loss and you exited completely you would still be able to be at an acceptable savings level. This is the max you can consider putting in.
• Remember that the only information advantage that you have is that you are early, and Bitcoin is probably going to be higher in the future. You don’t have any knowledge (better than the market) that the price will go down. There are many powerful and knowledgeable market participants who can push the price around — and they can kick off a pump any day now.
• Don’t get anchored to a particular bitcoin quantity or attempt to chase a loss. That is the path to disordered gambling and irrational mistakes. The past is the past. It is only rational to consider the present situation and the future.
• Scaling in is a better risk vs. reward compared with letting the price continue to fall and trying to buy a lump at the bottom. Might miss it.

Useful Exercise — Advice vs Behavior:

• A useful exercise is to write down what advice you would give to someone about what strategy to use, and then write down a description of the strategy that your behavior is aligned with. Then analyze the difference between the advice you would give and the behavior you are exhibiting. Why is there a difference? Is there something special about your current situation which justifies the deviation? Or is your behavior being driven by a factor that is not rational such as magical thinking?

Visualization to help weigh risk

• You can do things that put you in a situation where you are more or less certain about what will happen. When you take a risk, you put yourself in a situation where you are not sure about whether or not something bad will happen.
• Visualize a door. You can open the door and wait for something to come through it that you really want. After a time, some unicorn may emerge from the open door and grant you a wish. But you must also notice that when you open the door, a second door also slides open. After a time, some goblin may emerge from the second open door and steal from you. This is the nature of risk. You can open both doors, or keep both doors shut. But you should not allow yourself to be fooled into thinking that you can open one and the other will stay closed.