Bitcoin is all the rage these days. It’s mysterious, it’s new, it’s sexy, and it’s increased seven times in value over the past year alone. As someone who’s been aware of Bitcoin since its early beginnings (back when I was a diehard Ron Paul supporter and diggin’ the idea of using a digital currency to escape the tyranny of the Federal Reserve and fiat money), it stings knowing that buying Bitcoin at that time would have turned out to be one of the better investment decisions I could have made.
I’ve had a lot of friends ask what I think about Bitcoin today, presumably as a possible investment opportunity. After all, it keeps going up and hitting new highs — why not hop on the Bitcoin train if it’s bound to keep going up?
Well, I’m uneasy with Bitcoin today. Below are my questions, concerns, and observations behind why I’m still cautious about the latest round of cryptocurrency euphoria and staying on the sidelines of Bitcoin for now. I also share a few thoughts on how I would approach Bitcoin from the perspective of being a possible investment idea for your hard-earned savings.
People buying Bitcoin today are buying it as an investment opportunity, not to use the currency itself. The hubbub around Bitcoin seems to overshadow what it really is: a digital currency. No one who’s reached out to me about Bitcoin has expressed any interest in actually using it as a currency — they’re likely interested in Bitcoin as an avenue to make a relatively quick buck and then move on to the next big thing.
If more people are seeing Bitcoin as a get-rich-quick investment vehicle — and not a currency — I have my doubts that the price of Bitcoin will do anything other than fluctuate wildly. And I would argue Bitcoin has minimal long-term value or staying power if people aren’t using it for its intended purpose as a currency.
I put Bitcoin in the “too hard” pile. If I don’t fully understand something, I don’t feel comfortable putting my hard-earned savings into it. Before buying Bitcoin, you should at least do some hands-on research and try making a transaction with Bitcoin. (In other words, try using Bitcoin to make a payment before you plow your savings into it.) If you can’t/don’t understand the basics, don’t buy.
Without a basic understanding of what Bitcoin is, how it works, and why other people should use it as a currency, buying Bitcoin today is a speculation — not an investment. In short, when you make an investment you should understand what you’re buying, why you’re buying it, and why you think it will go up in value over the long term. You should be able to spell out your investing thesis with a crayon in a way that a child could understand. Most explanations I’ve seen for why Bitcoin is bound to succeed are abstract and complex, not simple and intuitive. But then again, I’ve been a lifelong Sacramento Kings fan.
Why will people use a currency that’s skyrocketing in value? This is something I still haven’t intuitively been able to wrap my mind around. If people expect Bitcoin to go up in value by 80% or 1,000% or more over the next few years, why would anyone use their Bitcoins in a transaction instead of dollars or another established currency?
If Bitcoins are rising in value in a big way, people would be better off holding those Bitcoins rather than using them — which defeats the purpose of Bitcoin as a currency. This goes back to my earlier point that Bitcoin doesn’t have lasting purpose or value unless people are using it as a currency, but I don’t see why people will use it as a currency if the expectation is that Bitcoin’s value will just continue to rise in perpetuity over time. This is a loop I haven’t been able to close in my mind, and it’s why I’m still not sold on the idea that Bitcoin is a slam-dunk investment opportunity.
There are safer places for my investment dollars. The stock market is a proven long-term wealth generator. There has been no 20-year period where the S&P 500 lost value (even after inflation). I would much rather invest in businesses through the stock market — which are creating tangible value and have a proven long-term track record of creating wealth — than speculate on cryptocurrencies at this point.
Don’t let FOMO drive your investment decisions. FOMO (fear of missing out) is a powerful and dangerous force in investing. With all the buzz around Bitcoin and cryptocurrencies, it’s easy to feel like you’re missing out on the next big thing. Take a step back and consider if FOMO is what’s pushing you to invest in something, rather than even-minded, rational research and understanding.
When a lot of people speculate their savings on something they don’t understand, bad things usually happen. Everyone’s neighbor and barber is talking about the possibilities for Bitcoin and the blockchain to disrupt everything and change the world. (If you don’t know what the blockchain is, you’re not ready to buy Bitcoin as an investment.) This reminds me of the hoopla over dot-com stocks in the ‘90s or U.S. housing in the ‘00s. Chasing the hot trend because that’s what all the cool kids are doing — rather than sticking with something that’s proven (like investing in a low-cost index fund or a diversified portfolio of individual stocks) — typically ends in misery, not riches. I’ll pass.
You should invest in the stock market before “investing” in Bitcoin. The stock market has provided annualized returns of approximately 8%-12% for more than a century. It is a far safer and more reliable tool to generate wealth over the long term (emphasis on long term — we’re talking decades, not months or years) than virtually any other investment vehicle that’s open to the general public. Find a low-cost index fund or start investing in individual companies if that strikes your fancy. Start with the stock market and then move on to Bitcoin, if you must.
If you still can’t help but scratch that Bitcoin itch, don’t put more than 1% or 2% of your net worth into Bitcoin or cryptocurrencies. If you’re looking to make money on Bitcoin — rather than use it as a currency — I would not trust any more than 1% or 2% of my net worth with it. Don’t invest anything in Bitcoin that you can’t afford to lose. Remember that it’s a speculation, not an investment.
To be clear, I am not predicting where Bitcoin goes from here. I would be equally unsurprised if, in the next year, Bitcoin quadruples in value or plummets to $0. I am still in learning mode and will tread carefully with my money until I have a better grasp of the function and long-term potential of Bitcoin.
It seems inevitable that the world will move to digital currencies in the coming years and decades, so I’m not writing off the possibility that one day Bitcoin, Ethereum, or some yet-to-be-created cryptocurrency will be the primary medium of exchange (currency) used worldwide. For now, I am happy sitting on the sidelines — even though that’s not the sexy thing to do.
And I fully expect to be proven wrong on most or all of this. Please enlighten me in the comments below, on Twitter (@David_Kretzmann), or drop me a note at david@thevantage.co. Maybe you can help me become a Bitcoin believer.
Some resources I’ve found helpful as I try to understand Bitcoin and cryptocurrencies:
How Money Got Free: Bitcoin and the Fight for the Future of Finance — Brian Patrick Eha
(I’m halfway through this book, which walks through the history of Bitcoin and its unlikely rise to prominence over the past decade.)
The Crypto Currency Debate: Future of Money or Speculative Hype? — Aswath Damodaran
Blockchain: Catalyst for Massive Change Across Industries — Wall Street Journal
A Primer on Cryptocurrency — L2inc
Bitcoin is All the Rage. Should You Be Raging Too? — Aaron Bush, The Vantage
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Originally published on thevantage.co and republished here with permission.
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Photo Credit: Getty Images