I have been following Bitcoin since 2014. I didn’t buy it then and I won’t buy it now. Cryptocurrencies, like Bitcoin, are appearing in every news feed on social media as of late and it’s getting on my last nerve, so, I’m going to rant. Everyone and their brother thinks they are a Bitcoin expert and I am by no means a cryptocurrency expert but I know a good investment from a bad one. I am going to explain why I think Bitcoin is NOT a sound investment and rather is just pure speculative gambling. Let this article stand as a warning to not buy bitcoin as an investment and definitely do not sink your entire portfolio into cryptocurrencies if you are not prepared to lose it all. I am an investor, not a gambler. I recommend those interested in striving to be financial independent, retired early (FIRE) should become investors as well.
I believe in making sound investments and to make a sound investment it is by definition when you invest in an asset that produces services or products and which create cash-flow for an indefinite (long-term) period of time. I like to invest in companies that produce products/services and create cash-flow, which as an equity shareholder, I have ownership of. I physically own not only the net assets of the company, but also the cash flow it produces. I am in essence getting paid to continue to own it regardless of whether I sell my ownership in that asset to someone else I get a return. Buying gold, silver, tulips (see the Dutch tulip mania bubble), collector items, etc. are not investments because they DO NOT PRODUCE Cash flow and they will never produce cash-flow – ever.
Buying something that doesn’t produce cash-flow ever means that your only way to make money is by selling it someone else for more money. That is, your only out is to dupe someone else into buying what you bought for more than you bought it for. There is no underlying value because there is no cashflow. It is only worth what people think it is worth. The idea behind a sound investment is that if you can hold it for an indefinite period of time you will be compensated. Just like when you buy a baseball card, or any other collector item one might speculate on, when you buy a Bitcoin you aren’t buying anything that can produce cashflow. Further, you really aren’t buying a piece of anything – it’s not real. It’s 1s and 0s. The only out is to trade it to someone else for higher. This is not a sound investment, it is a speculative gamble.
The technology itself related to Bitcoin isn’t even all the impressive and is relatively out dated. IF I were to speculate or gamble on a cryptocurrency, it definitely wouldn’t be Bitcoin. Chances are very high that a new cryptocurrency that we don’t even know about yet (because it hasn’t been invented yet) will be created and will be better in nearly every way. So, in a lot of ways you buying into a technology (blockchain). It feels a lot like buying a VCR, which used to retail for nearly $1000 back in the day and soon fell to near 0 when the technology advanced to DVD.
Bitcoin is only valuable if it becomes an essential world currency. I’ve seen a lot of facebook posts about the value of Bitcoin as a currency, and I need to clarify, Bitcoin is NOT a currency. To be a currency it must have the following qualities:
- It must have easy and frictionless trading between people
- It must be widely accepted as a legal tender for all debts, public, and private
- It must have a stable value that does not fluctuate (other it’s impossible to set prices)
Source: Mr Money Mustache (see his article on Bitcoin – Why Bitcoin is Stupid – his views align very well with mine).
Lastly, a currency should not be artificially sparse in supply. The fact that Bitcoin supply cannot be controlled is the reason it will never be the main stream currency. It needs to expand with the supply of goods and services in the world, otherwise we end up with deflation and hoarding of the currency. It is useful to have a centralized group of wise expert (i.e.: The Bank of Canada or Federal Reserve in the US, or other countries’ central banks) helping to monitor and guide the system.
If, or rather when, a cryptocurrency ever does ever succeed and become a currency, it will be government-backed one. It will be controlled by the government and backed by the government, ideally it would be a global cryptocurrency backed by an international monetary fund (a collective of many countries whom all track and agree on it’s value backed their wealth). One thing is sure, this cryptocurrency that is built in the future, or backed from one in existence will most certainly not be anonymous and allow you to evade taxes (like Bitcoin). Let’s not forget, Bitcoin is only valuable if it becomes an essential world currency and as I’ve asserted that will not happen with Bitcoin’s outdated technology.
I believe we will eventually adopt a cryptocurrency as we move toward creating a Global Currency. I like the cryptocurrency technology, blockchain, it’s fantastic, but, it will have to be backed by world governments (like an international monetary fund) and contain more advanced technology than currently exists, as well as be much more advanced than current Bitcoin technology (created in 2008).”
People are not currently using Bitcoin as a currency. Let me be clear, the only people driving the price of Bitcoin prices are other speculative and bitcoin miners. When bitcoin miners trade bitcoin back and forth (each time for a higher value) it is called painting the tape. The miners stand to lose nothing as thy trade the exact same bitcoin back and forth for say $100 more each time. This isn’t allowed in regulated markets, it is allowed with cryptocurrencies. This is what is happening with Bitcoin because it isn’t regulated. It is attracting the types of folks, the wolfs of wall street 20 years ago, that cannot trade this way in regulated markets. When they stop painting the tape and speculators are unable to trade up the price, Bitcoin prices will fall to their utility value floor, which is low, very low. If you have any bitcoin sell it off at a high point while you still can! Do not try to time the market, you will fail. NO ONE has ever successfully timed the market consistently over a long time horizon. There is no model that consistently will outperform the index returns over a 30+ year time horizon (except maybe Warren Buffet’s model, but he’s the only one I’ve seen that has outperformed the market continuously).
On that note, like Warren Buffet, I also don’t like investing in assets I don’t fully understand. I do not have a deep knowledge on the code, so I am not prepared to make an investment. Before I invest in an equity I get to know it’s operations, I study the income statements, balance sheets, forecasts etc. With Bitcoin I cannot do this. Beyond it being a speculative play, it is also one that I cannot fully understand, nor do I have the interest in getting such training (which would take months, maybe even years).
Do not try to time the market. The data shows even the best traders and investors on Wall Street cannot outperform the index benchmarks long-term or time the market consistently.
But everyone and their brother is screaming but look at the price history! Nothing has ever been a sound investment JUST because it has been going up in price. In fact, historically speaking this should be a red flag.
Lastly, I have a question for all of the Bitcoin experts, because I’m sort of curious myself, what happens when Bitcoin mining is no longer profitable from an energy and technology cost perspective? Who will validate the block-chain and the transactions? I suspect at some point Bitcoin will have to charge a fee to do this. That might mark the DEATH of Bitcoin, and I suspect that’s coming soon. This is because of the lowering profitability of bitcoin mining, fueled by smaller fractions of bitcoins recovered (which is due to more folks beginning to mine on the dwindling supply), coupled with increasing costs associated with bitcoin mining.
If you want to make a lot of money with high returns, you have to take a lot of risk. I’ve outlined in a previous article how one might take on an investing strategy with a solid asset allocation using ETFs (with low fees) to achieve a “guaranteed, stable, positive return.”
To learn more about cryptocurrency technology check-out this Youtube Video.
Checkout this analysis by Aswath Damodaran, a thoughtful investor and Professor at NYU school of business.
Full Disclosure: At the time of writing this article Bitcoin is floating around $20,000 USD and EVERYONE on my social media feed is obsessed with how great Bitcoin is. It will correct, I just can’t pretend to know when.