Bitcoin has experienced tremendous trailing returns, yet according to this Bloomberg article, roughly 45% of holders are currently below their purchase price.
You know I think Bitcoin is useless, with an investment case crippled by a paradox that makes it purely a speculative tool.
But it’s a useful way to explain something that can hurt your portfolio and retirement plans.
On the surface, so many Bitcoin holders being underwater is astounding given the long-term returns. It’s easier to process as the latest (and drastic) example of the investor return gap.
The Investor Return Gap
Investors underperform their investments. Morningstar has studied this for years, and the findings have remained remarkably consistent. As laid out in Mind the Gap 2025:
We estimate the average dollar invested in US mutual funds and exchange-traded funds earned 7.0% per year over the 10 years ended Dec. 31, 2024 (“investor return”). That’s about1.2% percentage points per year less than these funds’ 8.2% aggregate annual total return (“total return”) over that span assuming an initial lump-sum purchase. That 1.2 percentage point “investor return gap”, which is explained by the timing and magnitude of investors’ purchases and sales of fund shares during the 10-year period, is equivalent to around 15% of the funds’ aggregate total return.
There are several reasons for this gap, and some are reasonable. For example, as Morningstar points out, systematic investing and rebalancing can contribute.
But a meaningful portion comes from poor timing decisions driven by greed and fear, as with Bitcoin. It’s pointless, and its advocates have routinely created new reasons people should own it as prior justifications faltered. Its most enduring attribute was that it went up in price, which pulled in speculative performance chasers. When it was cut in half, many of those investors sold as their Bitcoin thesis evaporated.
Performance chasing will burn you. Buying something you don’t understand and can’t value means you’ll bail when it stumbles.
This doesn’t just hurt current returns. Bailing on a speculative bet locks in losses that can’t compound going forward.
Warren Buffett’s Rule #1 is triggered. Never lose money, which isn’t about short-term volatility, but permanent loss of capital. A permanent loss means those dollars aren’t available for future growth.
Buffett defines investing as forgoing consumption now to consume more later. You’re setting aside money now for more later in retirement. Speculating in things you don’t understand and chasing performance is forgoing consumption now to consumer less later. You might as well have just bought yourself a nice present instead of chasing those Bitcoin returns.
