187 | Crypto: A Principles-Based Conversation with Hilary Hendershott


Welcome to episode 187 of Profit Boss® Radio! In this episode, we’re talking about cryptocurrency–but also something even bigger than that. There are some people who have made millions in crypto, but there are plenty who have lost everything, and many more who are still on the fence.


You might already know that I’ve gone on the record saying that it’s okay to say yes or no to crypto. It’s not about whether crypto assets are good or bad, but whether you–as an investor–understand their characteristics and how crypto can work in your financial life.


That’s why I wanted to break it down and share my thoughts on the pros and cons of crypto. With so many investment opinions and strategies available today, I think it’s even more important to make sure that you’re making informed financial decisions that are right for you.


So, if you’ve been hearing a lot about crypto and Bitcoin lately and thinking about taking the plunge, I want to help you develop a better understanding of how the choices you make can help (or hurt) your chances of achieving your financial goals. And if I can provide value by saving countless hours of your time, and large amounts of your hard-earned money, then that’s a win-win in my book and I’ll take those wins every time.


In this episode, Hilary talked about the difference between active and passive investing and made the statement that no active managers have outpaced their comparable index over the long-run. In this slide, you can see the data that backs that up. The vertical purple columns – and the corresponding percentages above them – show the track record of active managers over the 10-year period from 2008 through 2019. In other words, if you chose active management over this time period and hired a highly paid professional to do that for you, you suffered an 89% chance of losing in the US stock category. You suffered a 78% chance of losing in the International stock category. And their track records get worse as the time periods get longer. We think it’s easy to see why passive investment management is a great choice.


This chart shows that if you had invested $1 in US Large stocks (basically if you had purchased the S&P 500 index fund and not sold it) from 1927 through the end of 2020, you’d have turned $1 into $8,541 !! That means if you had invested $100,000, by the end of 2020 you’d have $854,100,000 (almost $900M)!


This chart builds on the previous one, and shows that if you had invested $1 in US small stocks (basically if you had purchased a US small stock index fund and not sold it) from 1927 through the end of 2020, you’d have turned $1 into $276,794. That means if you had invested $100,000, you’d have $27,679,400,000 !! Yes, that’s $27.7 billion, with a B.


Here’s what you’ll find out in this week’s episode of Profit Boss® Radio

  • The benefits of having strict systems in any part of your life–including an investment philosophy.
  • How FOMO informs the behavior of so many investors.
  • The two basic investment philosophies of active and passive investing–and why one almost always outperforms the other over a long period of time.
  • Why passive investors, in general, do not need to consider crypto assets.
  • What makes crypto so much more like a game of chance than investing in an index fund.


Resources and Related Profit Boss® Content


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Hilary Hendershott: Hello, profit boss. Today we’re talking about crypto but really, we’re talking about something much, much bigger. You may know that I’m on the record saying that it’s okay to say no to crypto, and I stand behind that statement. And I’ve had many people reach out to me to thank me for saying that but it’s also okay to say yes to crypto. And I’m not here to advocate for or against crypto. I’m just here to help you understand its characteristics and to help you make an informed choice about what’s going to work in your financial life. Today’s episode isn’t really for you. If you’ve already made $100 million in bitcoin, more power to you. You are wealthier than I’ll probably ever be. Kudos to you. But there are plenty who lost everything they ever put into crypto, and there are those still on the fence. Today’s episode is for you if you’re wondering how to decide what kinds of assets and investments belong in your life and in your accounts. But today’s episode can actually encompass a lot more than just bitcoin and crypto. Today’s episode, if you listen closely and take some time to think and maybe do some soul searching can actually change your life. It can actually be something you use as a keystone to make financial choices for the rest of your life, therefore, increasing the chances you’ll achieve your financial goals and saving you hundreds of hours of time and probably hundreds of thousands of dollars. Sound good? Good. 


Hilary Hendershott: So, briefly, let me talk about the value of having principles, which when you implement principles rigorously and loyally, you have a system to operate within. You now have a structure or a standard operating procedure. There is a ton of value in having a system. First of all, in some areas of life, nothing gets accomplished until you have a system. Let’s talk about diets, for example, which are just systems for food. You decide what your principles are. Your principles lead you to a system, and then life only works out if you follow the system. Ketogenic diets require you to actually maintain your body being in ketosis in order to work. Okay. So, you have to stay low carb. You cannot exceed your daily allotment of carbs. If you do, you’re no longer in ketosis and now you’re just eating a ton of fat. So, if you’re in ketosis, you’re burning that fat for energy but if you’re not in ketosis, you’re burning carbs for energy. It’s binary. You’re either in ketosis or you’re not. There are plenty of gorgeous, strong, and lean people who are in ketosis and plenty who are not either in ketosis or following a ketogenic diet. For a while, I ate chicken and broccoli and rice all day to lose weight for my wedding. That was not a keto diet. That diet worked. I was happy with my results. 

Years later, I tried the keto diet. That diet did not work for me. I didn’t want to give up my red wine and chips and burritos, apparently. Let’s not get into judging my discipline. The point is that I couldn’t keep myself in ketosis and keep fighting off those urges so I just gave it up. I no longer attempt to follow a ketogenic diet. No problem. I have other principles I follow when it comes to food. Those principles lead to a system, and I follow that system. It doesn’t matter what system you choose. You just have to choose and remain loyal to a system. It’s like if you put diesel in a gas-burning car. Diesel works fine in some cars but in others, you would trash the engine, right? So, the benefits of having a system are tremendous. First, it can become a habit. So, something you do day in and day out and you don’t have to think about it. So, soon enough, it takes up less of your daily allotment of decisions and you can move on and move up in life. You can master more things. We are getting back to investing. So, right now we’re talking about the benefits of systems. Second, you can stop having squirrel syndrome. Once you’ve fully evaluated and explored something and decided it’s not for you, you no longer have to spend time internet-researching it or paying coaches to teach you about it or reading books about it, or just spinning like a top trying to figure out if you want to do this or that. Selecting your systems is a very clarifying and peace-giving and time-giving process. So, you can put it to rest. You can just say to yourself, “Until new data comes out about this, I’m not going to spend any more time considering this for myself. I’ve made up my mind.” Okay? So, you can stop having squirrel syndrome, you can get focused, do other things with your time. 

Third benefit of having systems, systems produce results. So, you can start to put some real results on the scoreboard. For me, walking into my wedding and feeling confident in my body was a result, also, when I got serious about saving money and started to watch the balances grow. Real, measurable results. So, the first part of what I’m saying to you today is basically a little commercial for adopting systems in your life. Most of the world seems to be obsessed with morning routines. And what are morning routines? They are systems. And if you do them every day, their benefits compound in your life, and that’s why people love them. Life hacks are all systems, just cool names for systems. And in my practice in my business that I run and in my life, I have an investment philosophy. It’s based on what I know, what I want to make time for, and what I’m willing to have happen with my money and my clients’ money and the outcomes I want to produce and that I’m satisfied with as a human being. So, this show is all about wealth building, and I never really dig into the details of what wealth building is. It’s basically earning money, spending some of it to live, and saving the rest of it by investing it in investments that grow and eventually get big enough to replace your income. I’m sure you know that but it’s important to break down the steps. 

And I’m suggesting that the answer to show you in bitcoin or cryptocurrencies can be answered easily once you have an investment philosophy or a system. It either fits your system or it doesn’t. And I do want to step back for a minute, though, and name something that we don’t typically name. That’s the common zeitgeist around investing. If you think about what’s behind most people’s conversations about investing, it’s something that naturally leads to FOMO. The unspoken goal of the vast majority of the public when it comes to investing is make as much money as you possibly can, as fast as you possibly can. It’s an infinite, unmeasurable, unattainable goal. Seriously, really, take a minute and think about what’s behind almost all of the conversations about cryptocurrency. It’s new and exciting. Sometimes it goes up really fast, and some people have made a life-altering amount of money with it. That’s what they say out loud. And what they don’t say is you should stop what you’re doing, take some of the money you have employed elsewhere in your life and go do this because you could make more money doing this, which would put you closer to the unspoken but clearly desirable investing goal of all of humanity, which is to make as much money as you possibly can as fast as you possibly can. 

It is what Gordon Gekko referred to in the first Wall Street movie as greed, and I say that with no judgment. Mr. Gekko’s main assertion in the film is that greed is good. And, hey, a lot of what we talk about on this show is designed to release you from those dainty, white-laced gloves the Victorians and the patriarchals put on your hands and get you out there asking for more and commanding money into your ecosystem. I do want you to be a little greedy. I would use the words bold and assertive but the point is I’m just calling a spade a spade. Most people have an investment philosophy called, “Make as much money as you possibly can as fast as you possibly can.” And I’m suggesting that this is not a philosophy you would articulate for yourself if you took the opportunity and that you have the opportunity to articulate one that actually makes sense for you and potentially is even backed up by research. Imagine that. And I notice in my wealth management practice, I have some clients who have really leaned into the investment principles I’ve advocated and I’m implementing on their behalf. Obviously, these investment principles, they started out as my principles and then at some point these people decided to work with me and they allow me to implement these principles in their money. And again, the really great thing about certainty in your principles is that you can stop considering other plans of action. 

So, some of my clients have really accepted it, really just embraced this investment philosophy that I’m using in their accounts. And our conversations tend to be about their vacations and their time off the grid and the adventures that they’re planning and their kids and grandkids. And others haven’t so much embraced the investment philosophy. They’re still kind of doing the make as much money as fast as you can as you possibly can kind of philosophy. And they’re also still listening to their friends and colleagues and coworkers at cocktail parties. And they come to me year after year after year with the same questions, “Should I buy bitcoin? Should I buy gold? Should I do this? Should I do that? Should I be thinking about this? Should I be doing this instead?” And it’s not that I mind answering the questions because I don’t. It’s great that they take my advice but the point is because they haven’t fully adopted the system or trusted it, they’re still spending their time in uncertainty, and uncertainty is not the most productive emotional place to be. So, again, I’m suggesting that you have the opportunity to adopt an investment philosophy that will bring you certainty.

So, there are two basic investment philosophies. They are active investing and passive investing. Active investing is what most people think investing is or what it has to be. It’s where you attempt to identify assets or companies or things before they go up in price so that you can buy low and sell high. It’s what most people ask me about when I walk into a cocktail party and they find out what I do for a living. They say, “Hey, what do you think about Facebook or what do you think about Apple?” These are questions that come from an active investing philosophy. Wall Street is really synonymous with active investing. Every individual Wall Street bank has its own purported philosophy, tech tools, people, experts that they rely on, and their value proposition is that they’re better than the next Wall Street investment house. Active investing can be implemented by you as a DIY method or by other professionals that you hire. Maybe their fund managers or stockbrokers are one of the really innumerable number of people who are willing to take your money and promise to give you back more. By its definition, there is no system that had active investing beat passive investing continuously and ongoingly over the long run. I’ll say that again. No one has ever articulated, found, described, written down, created a procedure that has active investing beat passive investing over the long run. In other words, even the highest-paid and most educated investment professionals haven’t developed a repeatable process that beats passive investing over your lifetime. 

So, this is why it sometimes leads to really incredible outcomes because they’re outliers. And this is why it sometimes leads to really disappointing outcomes. Buying crypto is definitely an active investment strategy. So, active investing, it tends to be really expensive if you pay a manager to do it for you. That doesn’t necessarily apply when it comes to bitcoin or crypto. If you’re mining your own, for example, there are crypto ETFs that it definitely applies to. Those things are really expensive. Active investing is any form of you saying, “I pick that investment or that investment manager to win the race.” And then, of course, you get to enjoy the spoils if they win and take the losses if they don’t. However, I will say that when it comes to stock investing year-after-year and decade-after-decade, we find that even the professional active managers do not beat their passive counterparts. Why? Because the stock market is very hard to predict in the short term and very easy to predict in the long term. Active managers are trying to predict in the short term. 

Passive investing as compared to active is just buying a whole bunch of stocks or companies that are in categories that have a long history of returns. So, if you put enough elementary school fifth-graders together, you kind of know what their average test scores are going to be on any test the fifth graders take. I don’t know what that would be but the point is it’s the average, right? So, if you put enough of these companies and categories together, we know what the average return is. We have 100 years of stock market data. Passive investing is synonymous with the philosophy that has more and more people buying index funds these days. A passive investor says, “I would like a strategy that is going to work for the rest of my life, and I don’t want to pick an active manager and lose. So, I’ll just commit to this and I’ll go spend my time doing what I do best to make money,” or, “I would like returns that are predictable over the long run.” That’s passive. Most passive investors buy portfolios of index funds. I’ve talked about index funds on this show before. In my wealth management firm, we use funds that are fairly exclusively available to fee-only advisors like us called asset class funds. They cannot be purchased on the retail channel. They are constructed using the same philosophy as index funds but they do have some advantages that tend to lead to higher returns. I don’t talk about them that often on this show because most of you aren’t working with me, and I don’t want to talk about something that’s meaningless to you. But index funds and asset class funds are definitely in the same family. 

So, it’s not going to come as any surprise to you that I consider myself and everyone I work for to be a passive investor, and passive investors do not need to consider crypto. Why? Let’s talk about the characteristics of crypto. Okay. A little bit about the history. Cryptocurrency was introduced in 2009 by Satoshi Nakamoto. That’s not his real name. Nakamoto described a new kind of money or currency, which was meant to exist in a secure, stable, and limited supply strengthened by electronic security or encryption. So, pair the word encryption with the word currency and you’ve got cryptocurrencies. Bitcoin became the first cryptocurrency, and of course, it’s the one most people are familiar with. As of the recording of this episode, it has a market capitalization or outstanding share value of over 1 trillion U.S. dollars. Ethereum is its closest competitor but more than 6,000 different crypto assets exist, and many new ones are created each month, so there are a lot of them. Unlike a dollar bill, cryptocurrency only exists as computer code. You really can’t touch or feel it. Nevertheless, there’s nothing materially different about buying bitcoin versus buying euros or krona or even Canadian dollars. It’s currency. It’s something for us to barter with. That’s it. So, you’re betting that bitcoin is going to go up against the currency you want to sell it in. It doesn’t produce shareholder value like Apple, Facebook, Nvidia, and Microsoft. It’s not a house that people can live in or rent out because it lacks the features of an investment that provides value. It’s not technically considered an investment to an investing professional. It’s considered speculation. So, you can only make money if it changes value vis-a-vis the currency you expect to liquidate it in. So, it’s not under the purview of any government or central bank. People often describe it as “sovereign” because your crypto wealth won’t lose purchasing power because of the operations of any government. 

I actually do think that’s a real advantage over U.S. dollars. Unfortunately, our government is inflating US dollars without regard. It’s quite criminal, in my opinion. For bitcoin, the supply is limited to a maximum of 21 million coins, I think 18 million of which have already been mined as I record this so they are running out. So, there could be runs on the currency if people panic. Bitcoin is settled or tracked and recorded by the blockchain but blockchain technology is just outside the scope of this episode. So, a lot of people want to talk about the blockchain. I’m simply talking about the features of owning crypto for the purpose of buying it at a low value and selling it at high value, meaning for the purpose of growing your net worth. So, I am not covering the blockchain today. So, it has no central authority in charge of it. Nobody’s safeguarding your ownership or preserving the worth of your cryptocurrency. Its purchasing power may or may not endure. In fact, there isn’t anything to stop a cryptocurrency’s price from going to zero when a better-designed version is launched or if regulatory changes stifle sentiment. And that’s a potentially really big loss for you. And that’s what I mean about a philosophy that aligns with the outcomes you’re willing to have happen in your life. 

Certainly, as a wealth manager by profession, if I put client moneys in bitcoin or any cryptocurrency, I’d have to be prepared to deliver the message, “I am really sorry, Mr. and Mrs. Jones, but your money is gone,” and I’m just not willing to do that. I’m not willing to do that for their money and I’m not willing to do it for mine. Speaking of losses, currently, over $140 billion worth of bitcoin is lost or left in wallets that cannot be accessed because people lost their password or someone stole them. So, I think you probably know this but your cryptocurrency wallet is secured through a password that you and supposedly only you know. Consequences are dire if you lose the password or if a thief gets ahold of it. And crypto heists are becoming more prevalent so beware. In the same vein, your cryptocurrency could suddenly become more or less appealing to hold, own, invest in, exchange, depending on because countries are really evolving in how their governments are going to react to the existence of cryptocurrency. Some governments are leaning in. I would not expect the U.S. government to do that. So, of course, there’s potentially tax ramifications and other regulations that could impact the value. Last but not least, cryptocurrency mining centers around the globe are actually a really huge consumer of electricity. So, even though crypto is digital, it’s really not as green or as efficient as we might think. I actually found an article in MarketWatch that compared its resource consumption to that of a country of more than 200 million people. 

So, let’s return to talking about the potential financial outcomes if you buy it. No doubt there are lots of win stories, and those are the ones that tend to get told but there are also plenty of loss stories, right? Just people lose everything sometimes. It’s been an extremely volatile ride for cryptocurrency advocates, so definitely don’t put your life savings into them. And I’m not at all saying it’s impossible to profit from trading cryptocurrencies but the attempt more closely resembles a game of chance than an investment like an S&P 500 index fund would be an investment because you can be really confident in the long-run returns of an S&P 500 index fund. Crypto’s not the same. 


Hilary Hendershott: Okay. So, what we’ve talked about today is how values can turn into systems and how valuable systems can be over time. They give you peace of mind, save you time and money, and they allow you to produce real results if they work. I wish for you is that you decide what kind of investor you want to be, get going in that direction, and get rid of debilitating FOMO. Just get rid of it. Active investors are trying to hit it out of the park, some of them do, and they run the risk of losing it all but they tend to underperform passive investing. So, again, some active investors are going to win. Passive investors give up the moonshot. We ascribe to the philosophy that slow and steady wins the race. Either way, defining your own financial goals and boundaries will provide great value over your lifetime. I hope you got great value out of this principles-based explanation of how to think about crypto. Enjoy the day, profit boss.



Hendershott Wealth Management, LLC and Profit Boss® Radio do not make specific investment recommendations on Profit Boss® Radio or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of Hilary Hendershott, CFP®, MBA.


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