(Underpriced) Digital Assets vs. Consumption: Understanding Opportunity Costs

One of the main benefits associated with living in the early 21st century is represented by the fact that the let’s call it digital age is still in its infancy and digital asset acquisition opportunities abound. From those who bought one-word dot com domain names in the nineties for pocket change to individuals who mined bitcoin on their laptops in 2009, examples of open-minded individuals who were (generously) rewarded abound.

Fast-forward to 2020 and with the benefit of hindsight, it’s easy to judge the seller for parting with an absolute gem that is now worth millions and spending the mere $25,000 he sold for on a rapidly depreciating asset to make matters even worse. But it’s important to understand that back then, the seller most likely felt like he got a good deal. Someone who bought a bitcoin for $100 and sold for $500 might have felt the same way, eager to spend his $400 profit on perhaps a useless gadget.

Two important observations are worth highlighting:

  1. What is obvious with the benefit of hindsight wasn’t necessarily apparent when a certain trade took place…on the contrary, in many cases.
  2. “Over-paying” is also a relative term, so it would be wise to think twice before passing judgement in such cases as well.

Can Consumerist Mistakes Be Avoided?

Fortunately, the answer is a resounding yes and furthermore, it is fortunately not all that difficult either. On the contrary, it can be done without being in the possession of a crystal ball which tells you the future and convinces you that the asset you were considering parting with at $x will be worth $200x later on (from $100 to $20,000 per bitcoin, in our example).

The key revolves around understanding and respecting one simple concept: opportunity costs.

To put it differently and in more practical terms, around the idea that when deciding to sell an asset and using the money that has been obtained for consumption, you aren’t just “wasting” the amount in question but rather also saying no to the opportunity of putting it to much better use down the road. In our case, perhaps the Strategy.com seller had every reason to be happy with the $25,000 amount because it was considerably higher than what he could have gotten for the domain in question from other buyers back then. But by spending the proceeds on a depreciating asset, he didn’t just say goodbye to $25,000, he also missed the opportunity of perhaps spending that amount on 3-5 better-priced domains, which would have had a combined value that exceeded that of Strategy.com today by a wide margin.

Isn’t This Over-Rationalization?

Of course, and therein lies the key to the argument we need to understand: being aware of opportunity costs is simply a tool that you have in an arsenal. When used wisely and with common sense sprinkled in, the tool can literally be a life-saver but when misused or over-used, it can lead to paralysis by analysis as well as a wide range of other less than desirable outcomes.

The same way, the goal of this article by no means revolves around trying to convince readers to become hermits who only invest and never consume. Not at all. Once again, it’s ultimately all a matter of common sense when it comes to finding the right balance between our natural tendency to want to enjoy life and the realization that… well, life is long and asset accumulation can lead to financial stability, even if it involves sacrifices.

Is Securing Underpriced Digital Assets a Must?

The answer to this question ultimately depends on your frame of reference. From the perspective of return maximization, it is obviously better to try acquiring two domains similar in terms of quality to Strategy.com for those $25,000. Or the same way, buying a lot of bitcoin right after a record-breaking parabolic advance might be sub-optimal if you have valid reasons to believe a retrace is warranted that would enable you to acquire more bitcoin with the budget you have.

Even in the world’s #1 economy, the United States, study after study confirms that the average American family does not have enough in terms of savings to withstand a mere let’s say $1,000 auto repair bill without taking on short-term debt. Compared to the status quo which revolves around little to nothing in the way of savings, even after the 50% haircut your portfolio took, you still have assets worth $50,000 rather than the norm which is… well, next to nothing. If a medical emergency or another type of emergency arises, your nest egg can enable you to land on your feet because, again, it at least exists.

The Conclusion

As mentioned previously as well, the goal of this article is certainly not convincing people to embrace a self-imposed ban on consumption and dramatic austerity as far as day-to-day living is concerned. By all means, live your life and enjoy experiences with the ones you love because we are only on this planet for so long.

However, there is ample room in our lives for occasional spending tweaks that enable us to gradually accumulate assets: digital assets, “old school” assets, feel free to diversify in whichever manner you deem appropriate and don’t lose too much sleep if this or that asset under-performed. The main goal for the average individual should not revolve around becoming the next Warren Buffet, “accumulation” is the name of the game and as explained throughout this article, you will be miles ahead of the average consumer even if you do an absolutely terrible job as an investor.

As far as the 21st century is concerned, digital assets such as domain names and cryptocurrencies have clearly outperformed and especially if you are just learning about the various investments that exist, keeping an open mind with respect to them might not be the worst idea in the world. As it is, more and more people are understanding that these emerging asset classes are here to stay and more likely than not, the day will come (sooner rather than later) when even the most conservative of portfolios will be generous in terms of digital asset allocation.

Live your life but accumulate here and there… not the worst value proposition in the world, wouldn’t you agree?

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