Helping Normies Learn to HODL

With Bitcoin’s 444th death behind us for the moment, this seems like an excellent time to write out some thoughts on the psychology of hodling: how to psychologically own more Bitcoin, or get your Dad to own more Bitcoin. And how to mentally hack the ups and down.

First, of course, I’m not talking about true believers here, those who sell their house, sell their car, sell their chairs to buy more Bitcoin. Rather, I’m talking to the normies. People with fiat jobs, a family, a retirement coming up, who cannot financially accept 80% drawdowns. So how much should they own, and how can they survive that drama that is pre-monetization Bitcoin?

I think a great framework here is one that Milton Friedman used to critique, of all things, the modern health insurance system. Namely, the point that you don’t insure the gasoline in your car, or the oil changes, because those are predictable costs that you can absorb. Rather, you insure the big stuff: the catastrophic accidents, the life-changing illnesses that otherwise destroy you financially.

After all, buying an expected dollar of payout will generally cost you far more than a dollar – insurance processors have to eat, and insurers have substantial overhead. In medial insurance, about 20 cents on your dollar is absorbed by overhead, while life insurance can eat 40 to 60 cents. In other words, for every expected $1 in medical payout it cost you $1.25, and for every expected dollar in life insurance it might cost you two. So life insurance pays, roughly, as badly as a casino slot machine.

Of course, you don’t mind this; the best catastrophic insurance is the catastrophe that didn’t happen. You lost your premium, sure, but you gained a non-catastrophe. Still, the point is that you should only insure catastrophic events, not everyday things that you can live with.

Normies Over-Insuring Bitcoin

So now let’s carry that to our normies considering how much Bitcoin to buy. Just as buying too much insurance will lose you money, buying too little Bitcoin costs you money. That is, underbuying an asset you believe will win is, effectively, over-insuring. You’re losing money.

To illustrate, Bitcoin’s done roughly 100% annual since inception. While stocks, the main competition, have done about 8%. So every $1,000 you’re underweight is costing you, statistically, $920 a year.

So, for the average normie, what should the number be? Assuming, as a Bitcoiner, he believes Bitcoin will beat stocks, and assuming he understands it could continue to fluctuate wildy, the answer is simple: put everything in Bitcoin that you can survive losing.

In numbers, if you’re the average middle-class American who believes in Bitcoin, this would imply that 5% or 10% of your assets is probably too low – middle-class investors can easily live with a 4% or 8% loss. But it also means that 90% or 95% is probably too high for the middle-class normie, unless his earnings radically outnumber his assets such that it’s all FU money.

So that’s the allocation question: “as much as you can handle losing.”

Over-insurance, home edition

Brain Hygiene for Hodlrs

Next up is the hodling itself: how does a normie attain the Zenlike psychological fortitude to hodl on and ride that Bitcoin roller-coaster.

Here, I’ll set aside Milton and reference my own misspent youth. I retired at 25 on dot-com speculation, then spent a couple years trading options. It turned out well, but there were really bad months when I’d lose more than I’d ever earned in my life, along with good months when I made more than I’d ever earned in my lie.  

Of course, I was 25 and single, and had a risk appetite I can only dream of now pushing 50 with kids. Existential financial gambling is, after all, is a young man’s game – your car is all gasoline, no crashes.

Still, the crashes were no fun at first, and it took me a couple “buy high, sell low” cycles of wreckage to figure out the psychology. There were a couple hacks I used, but two biggies come to mind I want to share.

1: Ignore Bad Days

The first is really obvious: ignore the crash. Once you catch wind of a storm, insulate yourself from even seeing the price. Log off Twitter. If you track on excel, simply stop updating it. Bitcoin’s actually ideal for this since there is really no need to know what it did this month. It’s not like some dot-com where you’re not sure if Yahoo or Google’s going to win so you flip back and forth. Bitcoin is a decades-long or generations-long investment, who cares what it does this month, or this year.

Of course, on good days check all you want: Lap up that precious utility. Log in over and over, email screenshots, congratulate your brilliance, brag to goldbugs, have a cold one. As long as you reward yourself on the good days, given there’s a lot more good days in Bitcoin than bad days, you’ll enjoy the rollercoaster a lot more.

Now, ignoring the crash might feel difficult. But we do it all the time with other investments. After all, if you own a house it might fluctuate several thousand dollars per month up or down, but you don’t stress because you don’t list it every month, therefore you remain blissfully ignorant of the price carnage. Meanwhile, of course, the NPV of your social security or pension is soaring and crashing with each election or earnings report, yet, again, nobody seems to care. Indeed, the NPV of your lifetime earnings fluctuated far more between 11th grade and choosing a college major and yet, again, nobody gets PTSD from choosing careers.

2: Tie Yourself to the Mast

Now on to hack #2, this one from mythology: tie yourself to the mast. Erect barriers to trading on bad days. You’re doing this because bad days make you want to sell, and selling on bad days almost always loses money.

My go-to hack was every time I wanted to sell I’d make a note in my calendar for one week later, then sit back and wait. Roughly 100% of the time I didn’t want to sell anymore, and afterwards was very happy I’d done nothing.

The psychological hack here is the bad event makes you want to “do something,” and setting a timer for one week is “doing something.” It tells your limbic system — your emotional brain — that help’s on the way, the calvary is coming, the carnage won’t last forever. Then you wait for a week and, by then, prices are usually on at least a rising trend – the price itself is “doing something.” Problem solved.

Conclusion

There’s obviously a lot more detail on both risk tolerance and loss psychology — both are massive fields in behavioral finance. And the two interact differently for every person. Still, I think the punchline is if you believe in an asset, you should have enough exposure that a bad day genuinely hurts – you should need a stiff whiskey. But if bad days bounce off without a scratch, you’re probably leaving a lot of money on the table. Bad days should hurt, just not so much that you risk selling at the bottom.

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