Fortunately, I haven’t received too many questions from clients about bitcoin and crypto-currencies, but it is a very popular topic these days and I’ve heard it brought up many times in various forums. I thought I’d share my thoughts on the topic, so you can be better prepared to respond to those people who might be suggesting it’s the investment of a lifetime.
- Buying bitcoin and other cryptocurrencies is not investing, it’s speculation. One of the hallmarks of an investment is you need to be able to calculate intrinsic value to know what the investment is worth. With bitcoin, there is no way to assess intrinsic value. There is no dividend stream to discount or earnings to value. No hard or tangible asset backing it. The only way one makes money by trading bitcoin is if there is someone willing to pay a higher price in the future. However, as we’ve seen recently, it can change course and go down as rapidly as it went up as there is no intrinsic value to tether it.
- Cryptocurrencies aren’t real currencies. A currency is, by definition, a store of value and a medium of exchange. Anything that can lose 20-30% of its value in a day is impossible to use as a store of value or medium of exchange. At under $8,000 recently, Bitcoin has lost 60% of its value since its December peak. Can you imagine how you’d manage if you were paid in bitcoin? How would you pay your mortgage or rent?
- There are no real supply constraints. Proponents of “investing” in bitcoin claim that it will hold its value because only so many bitcoins can be produced. However, there is no limit on the number of spin-off currencies that can be created, essentially meaning there is no supply limit. Over 1,300 different cryptocurrencies exist as of last count.
If you’d like to read more on this topic, here is a link to a thoughtful article: http://bit.ly/2FyW4zs It’s hard to say what will become of the various cryptocurrencies and if governments will ever allow them to be widely used. They’ve already gotten negative publicity because of their use for money laundering and in criminal circles. However, what is exciting is the potential myriad ways the underlying blockchain technology might revolutionize industries as disparate as finance and energy. Don’t confuse your enthusiasm for a revolutionary technology with speculating in a by-product of the technology.