Q.
Should I invest in Bitcoins?
A.
Short Answer: No.
Reason # 1: There Are No Called Strikes In Investing
Long Answer: There are a number of reasons I don't invest in Bitcoins. Let's go through them.
Warren Buffett said this in his 1999 Letter To Shareholders:
The stock market is a no-called-strike game. You don't have to swing at everything—you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, “Swing, you bum!”
There are lots of investments, new and old, being pitched to me every single day by the media, by other investors, and by financial professionals. It is important when evaluating any investment to keep in mind WHY you are investing. In my case it is to pay for future expenses like college and retirement. In order to reach those financial goals I need to save a reasonable amount and invest in it in a reasonable manner. I certainly don't have to invest in everything I see. I certainly don't need 4000% returns to reach those goals. If an investment bothers me for some reason, I just let it go right by and wait for the next fat pitch. No called strikes. A long-term perspective is the best antidote to greed and fear.
Reason # 2 Don't Invest In Stuff You Don't Understand
Bitcoins are mined by fancy computers that solve complex mathematical calculations. However, there is somehow an arbitrary limit of 21 Million of them. I have no idea why there is a limit, no idea how to buy and sell them with minimal transaction costs, and certainly no idea how to solve those math problems, with or without a fancy computer. I don't invest in things I don't understand and I don't think you should either. There may be people who actually understand the whole Bitcoin thing, but I assure you they bought theirs a long time ago and are probably the people selling them to you now.
Reason # 3 Performance Chasing Is Not A Recipe For Investing Success 
I saw a Wall Street Journal article recently that said Bitcoins are up from $13.50 at the first of the year to as high as $782. All of a sudden, people are talking about Bitcoins and wondering if they should invest in them. Why do they want to invest in them? Because the price has gone up recently. That's called Buying High. Buying High seems to hang out a lot with Selling Low in my experience. You don't buy something because the price has increased a lot recently and then expect to make money on it. Ask yourself how that worked out with Dutch tulips in the 1600s, with tech stocks at the turn of the millenium and with houses in Vegas in 2006.
Now I have no idea where the price of Bitcoins will be a year from now or ten years from now. Perhaps its proponents are right that it will replace the dollar as the world's reserve currency. Perhaps it really is different this time. But I doubt it. I prefer an investing strategy that doesn't require me to predict the future to be successful. Just as I warned you to limit your investment in gold two years ago, I'm warning you now about Bitcoins. Gold went up for 3 months after my warning, then has been heading downhill ever since, losing over a third of its value from the peak. Trees don't grow to the sky and the tree in that chart to the right is looking awfully high. Performance chasing and market timing are loser's games.
[Update Prior To Publication: I wrote this in November, since that time, Bitcoins peaked at over $1200, fell to less than $600 and are now back around $700. Some performance chasers who bought them, then panicked, have already been punished by losing 50% of their investment.
Update 10/2017: Bitcoin eventually bottomed out at just over $200 in January 2015 and since that time has had a meteoric rise to over $5,800. While my crystal ball is always cloudy, it sure feels a little bubbly to me, even if it isn't a “classic bubble.“]
Reason # 4 Currencies Have An Expected Return of Zero, Before Expenses
Currencies go up and down in relationship to each other. Over the long-term, these changes cancel each other out. It is the equivalent of the speculative portion of the return on stocks. Bogle has demonstrated that stock returns come from dividends, plus dividend growth, plus a speculative return. The speculative return may be positive or negative. When price to earnings ratios are climbing, it is positive. When falling, the speculative return is negative. Over the long run, the speculative return is zero. In real estate investing, you get paid rent. From time to time, rent can be increased with inflation and that in turn increases the value of an income property. There is also a speculative return that may be positive or negative, but over the long term it is zero.
With currency investing, there are no dividends or rents. There is just the speculative return. Over the long-term, that is zero, before expenses. After expenses, the return is negative. Putting your money into investments with a negative expected return is not a recipe for success. Do people make money in currency investing? Of course. People make money at the roulette table too. But you don't see any casinos going out of business. The best way to make money in currencies is to be the casino. Find thousands of people who want to buy and sell them and charge them a small percentage every time they do so. I'm sure there are people who have “alpha” in currency trading. But the sum of alpha is always zero. For every bit of positive alpha, there is negative alpha.
I have no edge against other currency speculators. I am neither the most informed, the most talented, nor the most lucky in that market place. My alpha is highly likely to be negative. Better not to go into the casino at all. People often make the error that buying stocks, bonds, or real estate is just speculating as well. It isn't. There is a positive expected return. There is a beta. With a bond, you receive interest and then get your money back. With a stock, you share in the profits of a well-run company. With real estate, you collect rent. Yes, transaction costs suck away some of your return, but that return is there. Buying a bitcoin is the equivalent of buying a Beanie Baby. You are reliant on the Greater Fool Theory. You must find someone willing to pay even more for it than you did. That works great, until it doesn't. It's all alpha, no beta.
Reason # 5 I Can't Handle That Kind of Volatility
The Wall Street Journal article linked above notes that the standard deviation of Bitcoins is 139%. Compare that to the Stock Market's standard deviation of 13-23%, depending on who you ask. In 2008 the price of stocks were cut in half. Vast numbers of Americans sold their stocks and went to cash at market lows. I didn't. I bought more. REITs lost 78% of their value. Did I sell them? Nope, I bought more, but it bothered me to lose that much of my initial investment. What is the standard deviation of REITs? About 17%. Now, imagine the losses, however temporary they might be, that are inherent in an asset class with a standard deviation 8 TIMES as high as REITs. Can you handle that kind of volatility? I certainly can't, and I doubt most investors can.
The WSJ article recommends you either completely ignore Bitcoins or just invest a tiny amount in it. Let's say you were prescient enough to have invested a tiny amount, perhaps $1,000 in it on January 1st of this year at $13.50 and you sold it at its recent peak of $782. You now have $58K. Not exactly life-changing. Now, what is the likelihood that the price of Bitcoins increases at that rate again? Even if you double or triple your money you're not likely to be willing to invest enough of your portfolio into such a speculative investment at this point that it is really going to change your life. If you're not willing to commit at least 5% of your portfolio to an asset class, don't bother investing in it at all. I won't be buying any Bitcoins and I suggest you don't either. As a high income professional you've already won the game. You don't need to invest in speculative instruments like Bitcoins to reach all of your financial goals. Don't run risks you don't need to run.
What do you think? Do you invest in Bitcoins or other currencies? Why or why not? Comment below!
Hey James, just found your site while I was looking on Google for TSP related material. I absolutely agree with all of your points, especially points 2 and 3.
While I understand the concept behind Bitcoins, they’re only worth as much as the market says they are, similar to gold. There is no “intrinsic value.” Bitcoins are even more worthless than gold. At least you can use gold as jewelry and in manufacturing.
You can’t pay your taxes in Bitcoins, and the tax collectors have the biggest guns backing them, so I’m not betting on the Bitcoins.
No one cared when Bitcoin premiered a few years ago and were 10 cents a pop. But now that they’ve gone well above $500/coin, everyone and their grandma is talking about buying in. Just like the Dutch tulips you mentioned, this is a sure sign of a bubble. If I want to gamble, I just take my money to the casino and have fun.
For point #2, I think I remember from reading The Warren Buffet Way that he didn’t invest in the Dot Com companies/bubble because he didn’t understand their business model and how they were going to make money. He said he might miss out on some opportunities, but it would also miss out on a lot of losses. I am definitely not interested in bitcoins.
Excellent breakdown. From 1am to about 3am after New Year’s, some friends and I discussed the merits of bitcoins. One of my friends owns some bitcoin because he “believes in it as a currency” and hopes that it one day replaces the USD and all other currencies. He thinks that the specific calculation methodologies in the currency are what make it so great as the Federal Reserve and other entities cannot manipulate the currency markets (i.e. print new money at will). My whole point is similar to yours above: It is not an investment. If you want to speculate, that is fine but understand you are gambling with something that is very volatile. I also pointed out that, as with any fad, there are imitators. There are multiple bitcoin-like offerings on the market now. This reminds me of baseball cards in the 90’s. Every year, there were more offerings until the market was flooded and confused. All in all, I will not be touching bitcoin in the foreseeable future.
Wow, crazy how this has aged!
Best thing about bitcoins- they sure make for entertaining investor related reading!
No-the best thing about Bitcoin is that it is the single most lucrative investment to have made in the past 5 years. Glad I bought and held.
Hope it continues to work out well for you.
I first heard of bitcoins in April 2013 after they had a rally similar to the one now. I work in IT and read about how they worked, reason #2 doesn’t apply to me.
Reason #4 applies to other government-issued currencies but not bitcoin because bitcoin has a limited supply capped at 21 million. Holders of bitcoin would see a return at the same rate as the growth of the bitcoin economy; it’s like holding gold in the time when all currency was backed by gold.
Although bitcoin cannot be made into jewelry it still has intrinsic value. It can be sent through the internet to anyone in the world in minutes without trusting a 3rd party. It’s low transaction fees mean it could be used for micropayments.
Although there are imitators to bitcoin, none has the infrastructure to match it because none have been around as long. The leading competators have far fewer real-world merchants accepting them as payment than bitcoin. Currencies are subject to the network effect, the leader has a massive advantage.
My advice if you want to buy is to read and learn how the bitcoin network functions first. The price is by far the least interesting thing about bitcoin for me, the network is in my opinion a masterpiece of software engineering. If you understand it you will have the confidence to hold onto them when the price corrects and not panic sell (by the way, panic selling happens in the stock market too, in response to your Update Prior to Publication) If you fall under reason #2 through lack of interest or time then my advice is to simply stay away.
But not a bad article overall. I’m a bitcoin investor, though it would be more accurate to say speculator because the risk of losing it quite high.
Everywhere I read about prudent investing I’m told young people like me can afford to take risks, rebalancing their portfolio as they age. I own bitcoins (4% of my net worth when I bought them) but of course I also have index funds.
I’m not sure why you expect any currency to have a positive real expected return. The economy may grow, but that doesn’t make the value of a dollar, gold, or any other currency go up at more than the rate of inflation. The supply of gold is just as limited as the supply of bitcoins.
I guess Nick is using bitcoin as an inflation hedge, as I do bonds or a survivalist does ammo and/or gold. If I believed a bitcoin today will buy as much or more in 5,10, 20, 50 years I might own a few also. But unlike Nick I don’t understand them and I inherently distrust new web based stuff and instead stick to stocks and hand tools and gardening skills. (Next risky investment: honey bees! But only at under 1/10% of my portfolio.)
Nominal bonds are a terrible inflation hedge. I agree there is an awfully good chance a bitcoin won’t be worth much in 5 years.
I’m intrigued by Bitcoin and other cryptocurrencies, but currently too wary to invest, personally. I mean, Koinye..really?! It baffles me a bit but I think it could be the way forward. After all, the majority of traditional currency is digital rather than printed or minted…I wonder if we’ll start seeing a crypto-surge in private equity soon?
Lucky for us, we know what we’re investing in. We don’t look at Bitcoin like a foreign currency, and neither does the IRS. From an investment standpoint, we look to hardware innovation and sales, trade fees, transaction fees, and electronic commodity automated trade to manage our bottom line. We don’t mine Bitcoin directly for many reasons, but we do work daily with hundreds of other electronic cryptographic currencies.
We’re a transparent company, and we invite you to see what our bottom line looks like for both our Round 1 and Round 2 investors. Our APY’s are stable and will continue to prove unprecedented stability in this industry. We’ve taken a great deal of time and performed an equally extravagant deal of research to know that our returns will be sound for years to come.
If you’d like to learn more about this avenue, don’t hesitate to reach out. Our contact info is on the site, and I’d personally love to walk you through our process.
Aaron Belovsky
Director, Coinex.IO
Your APY’s are stable at 146.42% and 97.61%? What would an unstable APY look like?
Seriously, your statements don’t pass the sniff test. If someone had a stable return of 100% per year, he could quit working one or two years into his career. The fact that so few people are able to do that suggests that perhaps returns of 100%+ per year aren’t particularly “stable.”
While I suppose it’s possible that you “know” your returns will be sound for years to come, your track record of being in business for less than 2 months isn’t exactly comforting. I mean, it’s only been 10 days since you received your $20K in seed funding. (which looks like it came directly from you) http://www.crunchbase.com/company/coinex-io
Best of luck with your company. I sincerely hope your returns persist. Heck, I’d be happy with 1/10th of your claimed returns over the long run.
I appreciate you wishing us well. You’re correct that 1/10th of our returns are still great. We have a great deal of breathing room before it’s necessary to start turning the other way. Stability is about long-term non-diminishing potential, and that’s exactly what I mean when I say it.
I believe you’re missing the core idea. In your post here, you address Bitcoin investment from a forex perspective. Anyone would have to be nuts to dive in expecting great forex returns at all. It’s a fun hobby at best.
We are not an investment bank, we are a high-margin company. Yes, you’re correct. Seed funding posted two months ago, but our statistics are much older, our company is operating with decades of experience within its walls, and contingency strategies make what we are able to offer a no-loss scenario. I’d love to walk you through it, as I’ve said. Unfortunately, no small amount of research on Google is going to help you learn anymore about this industry, and I sense you’d like to.
What we have opened our doors with is an opportunity for folks to buy into the system as a whole at cost so that we are consistently able to bring improvements in technology into our company. We recently introduced Round 2, which breaks from our initial at-cost offering to allow for higher growth rates without affecting our future customers to any degree deemed unacceptable. After covering expected returns, our remaining investment in better technology at lower cost is distributed evenly among existing customers improving the power of their holding over time.
There are many strategies at work to continue running Coinex.IO as a successful high-margin/high-growth and stable company. When I say stable, I mean a 10-year plan for stability. We have setup on the dividing line to profit from Bitcoin’s loss. We are watching the global electronic commodities market and holding our eye on sparks that go beyond virtual environments around the world. It is our continuing endeavor to be a backing player in this and similar high-traffic trade networks.
If you compare what we are working on in relation to others, our current margins are conservatively low. Our strategy for diversity plants our feet on concrete rather than sand. Yes, I agree that when you look at the stock market or foreign currency trading, you don’t often see these kinds of returns. It’s difficult and to some extent “lucky” to arrive at 12% returns, much less keep them stable year over year.
To answer your question, an unstable APY is one that comes from day-trading, running a home business, contracting, managing your retirement fund above 6%, and betting on football. If you were to suggest, for instance, that trading paper stock in a company and receiving often low dividends on that investment were any more stable, I’d have to argue the point knowing what we’re doing at Coinex.IO.
Look at Apple. Look at IBM, Google, and AT&T. Take a gander at smaller companies in our industry with only a single common vertical and much higher margins like Bitfury and Butterfly labs with sustained profits dating back much further. If you could be in on what these folks built, you’d be looking at numbers larger than our own. That’s exactly what we’re offering.
It’s difficult these days for folks to wrap their minds around the concept of shared, “cloudvenient” as we call them, business opportunities. It truly is a whole new world with more open standards. I’m not a towering CEO scrounging every dollar I can. I’m an entrepreneur appreciating what I do and sharing it with others. That’s the big difference.
The average middle-class American is being cheated while they lose money to their mortgage and scrape pennies from the stock market. Hopefully the average middle-class American isn’t jumping at forex. Your perspective in this article is much better for the enterprise-class investor than the common personality.
I’m not interested in selling here today, but I am interested in sharing what I’ve been an instrumental part of building. It did not come without mounds of research, consideration for the obviously volatile Bitcoin market, or the 13 years of experience I bring to the table along with the other professionals working alongside us; none of which have less than a decade of direct experience in their field.
Yes, we’re working next to a market plagued by risk, but practices like ours in industries that did the same thing we’re doing through the technology of their day have shown margins larger than this for hundreds of years.
I appreciate your opinions and reiterate that we know the stable value and strong future of our system, our approach, and the professionals manning the vessel. It’s true that I have invested a portion of capital into this business. What business owner hasn’t? Clearly, I make no secret of anything one quick checkup on Google can’t answer.
I don’t presume to know your “sniffer” or claim to intuition, but you’ve said yourself that in this particular case, you would be investing in something that you don’t understand: point #2. We make a strong effort to inform those who are interested in hopping onboard to try us out. We answer all of their questions, and there is still an occasional curve ball that we investigate not only for their benefit but ours as well. If they’re no longer interested in working with us (haven’t had one yet), we buy back their shares or sell our own equipment to pass their initial investment back to them.
I’m not asking anyone to invest in Bitcoin and couldn’t agree more with the context of your article. For clearly stated reasons, it’s not a full-breadth picture of the electronic currency market or industry; that’s where I get stuck on the information contained therein and feel compelled to slide in two cents you may be interested in following the journey of as they work to re-earn themselves year over year.
Revisiting this article after having just read your article “How to Become an Investing Adult” and would bring your attention to the following…
You mention above that the level of volatility in Bitcoin is too high for you, but in the Bernstein article you have inserted the quote “…volatility is a “shallow” risk. It is not a risk that investing adults worry about.”. Is Bitcoin your exception to the rule? Obviously, it didn’t fare well at the WEF in Davos recently…
We’re really all on a continuum aren’t we? The important thing with regards to shallow risk tolerance is to know yourself. I know that I can’t handle Bitcoin like volatility in my portfolio. Your mileage may vary.
Perhaps as you said previously, it’s shallow risk leading to deep risk?!
Interesting news today on Bitcoins:
MAJOR BITCOIN EXCHANGE, Mt. Gox, goes offline after 740,000 units are reported missing, possibly costing customers hundreds of millions of dollars and delivering a potentially fatal blow to virtual currency.
The price has been as low as $400 in the last 24 hours, down from a high of nearly $1200. Anyone who bought since this article was written (much less published) is currently underwater.
Bitcoin’s volatility is one of its natures. Maybe you’re just like Warren Buffet that is skeptical about bitcoin bubble. I can’t blame you though; bitcoin is not free from any flaws. Speculations are left and right– heist, banning, DDoS attack, seizing and anything that is out of control. But think about this: If bitcoin is not worth investing, why does bitcoin believer keeps growing and growing? Governments and agencies are also keeping an eye of its progress. If you’re afraid of investing in bitcoin, maybe you want to try some luck in bitcoin betting. I recommend BetCoin™’s slot machine for you. It pure luck dear!
I can’t tell if this one is spam or not. But I can’t think of a much worse financial idea than combining Bitcoins and slot machines.
Reason #1 “I certainly don’t have to invest in everything I see” is an argument against investing in anything, not necessarily against Bitcoin. Reason # 2 “I don’t invest in things I don’t understand and I don’t think you should either” and Reason # 5 “I Can’t Handle That Kind of Volatility” are arguments for you, not for everyone.
The problem with a lot of content on White Coat Investor is that they tell you what you should or shouldn’t do, instead of providing information, and letting the reader/investor decide for themselves.
“…Bitcoins peaked at over $1200, fell to less than $600 and are now back around $700. Some performance chasers who bought them, then panicked, have already been punished by losing 50% of their investment” As if this never happens with any other investment! I bought my house in LA in 2006 and paid a lot for it, only to see it’s value drop in 2007-2009. Now, the value is 35% more than what I paid for it.
“Let’s say you were prescient enough to have invested a tiny amount, perhaps $1,000 in it on January 1st of this year at $13.50 and you sold it at its recent peak of $782. You now have $58K. Not exactly life-changing.” Are you serious? What should the return on $1000.00 have been, in your opinion to qualify as “life-changing”?
I could find more examples like this.
Nobody can predict what is going to happen to Bitcoin. It sounds like a start of something new, again that doesn’t mean that Bitcoin is a good or bad investment.
I think a lot of people are going to like following about Bitcoin: privacy, minimal transferring expenses and the limit of 21mil which means that
Bitcoin will be adding minimally to inflation. Imagine investing in a world with no or almost no inflation! I am thrilled, however for those investor’s whose gain depends to a large extent on inflation, that is a bad news.
Now, I do know that my home equity is a result of increase in price of my house due to the circumstances, i.e. inflation in real estate market, and not due to improvements that I made, and sure, do I like that my net value increased 280K while I was sleeping: oh, yes, yes I do. However, if there were no inflation, I wouldn’t have to be jealous of my neighbor who works as a party clown, but can live in the same neighborhood with MDs, Bankers and CEOs, because his grandfather was lucky to buy a nicer piece of orchard, that is today located in West LA, and my grandfather bought a piece of orchard in now bankrupt Greece.
I haven’t seen a comment on this thread in a while. Meanwhile, Bitcoin has fallen to $382 from its high of $1200. You may have noticed the title of the piece is 5 reasons I don’t Invest in Bitcoin.
$58K wouldn’t change my life. I’d still go to work tomorrow and it wouldn’t noticeably affect my retirement date. Perhaps it would change yours, I don’t know.
Anyway, if you prefer to invest a big chunk of your portfolio in Bitcoin, knock yourself out. It ought to be twice as attractive to you now as back when I wrote the article.
Hello. I’m 18 years old, now a lot of you may be calling me young but that’s besides the point I have a question. Now, I remember in my 7th grade year (I’m in 12th grade now) bitcoins were something like $30, just lower than today’s prices. I know bit coin prices because numerous of my friends have/mine them and one of my friends is a member of a online website, the Silk Road 3, where you make transactions through strictly bitcoins. My junior year, I asked my friend how much a bitcoin was so I could have him buy me something and pay him back, they were about $1300. Now looking back on that and talking to friends about it, they even knew people who invested in bitcoins and flipped them at their peak. I am thinking about it since that is a substantial gain. It makes sense to me to buy bitcoins at say $100 a coin, or any price, and flip them once they reach a significant increase. I view it like stocks, they go up and down, and if it reaches $0, then that companies stocks become useless. But, unlike companies, bitcoins will be around as long as the Internet is around while companies have a chance of dieing off. Please respon and help clear up my confusion, or email me. Thank you
I have no idea if bitcoins will go up in value or not in the future. I believe they are trading today at $241. When I wrote this post that basically says don’t invest in bitcoins, they were trading at $782. That’s a 69% loss. Give me a minute to gloat here….
But there is a difference between a bitcoin and investing in the entire publicly traded economy of the world. When the stock market drops 50%, there is an exceedingly good chance it will, at some point in the future, regain that loss. It would not surprise me to see bitcoins hit $0 before they ever hit $782 again. If you think I’m wrong and they’re a great investment, well, buy as many as an 18 year old 12th grader can afford. But if I were you I’d be investing in your education and future earnings potential.
“Give me a minute to gloat here…” lol. Hopefully you didn’t convince this kid to sell his Bitcoin.
Hopefully he sold before the 50% drop this month.
Why? He would still be up 20x from when this post was made. At some point, you might just have to admit that you were totally wrong on this one. A good investor and advisor admits when he was wrong on something. Even Jamie Dimon came out and said he got it wrong on Bitcoin. You can’t “gloat” when you get something right and then make excuses when you are wrong.
What do you mean wrong? So far I’ve been right twice on Bitcoin. I was right with this post and I’ve been right with my recent warnings just before this 50% drop. Both times I warned readers it was a frenzy and about to drop. Both times it dropped.
The only wrong I could possibly be accused of was not telling people to get back in when it dropped to $250 from $1000. But I don’t think people ought to be speculating with their serious money and I don’t buy currencies at all so I’m not going to tell them that.
I have no idea where Bitcoin goes from here, but when I see a frenzy, I’m going to point it out. Not buying during a frenzy is investing 101 kind of material.
At some point, you need to just admit you had this totally wrong.
Had what wrong? That I didn’t need to invest in Bitcoin to reach my goals? Nope, that’s always going to be correct. Read the title:
“5 Reasons I Don’t Invest in Bitcoin”
You seem to have generalized the article to somehow say “The value of Bitcoin is not going to go up.” That’s not what it says if you read it carefully.
Incorrect. Your original reply to my comment said “Give me a minute to gloat here” and you pointed out how Bitcoin had dropped significantly. When you gloat about being correct, you need to, in turn, admit to being wrong. “It would not surprise me to see Bitcoin hit $0 before it ever hits $782 again.” For someone who prides himself in giving investing advice, it’s a shame you know so little about investing outside of traditional means.
What are you hoping I’ll type here Mark? That in retrospect buying Bitcoin at $241 and selling at $56,000 would have been a great move? I think that much is pretty obvious.
The question you have to answer, of course, is whether or not to buy Bitcoin at $56,000. I still don’t know the answer. If you do, I suggest you act on it.
Honestly, I don’t know the answer to that either. I didn’t originally see it as an investment. I bought it as a hedge against inflation and because, as a libertarian, have very strong opinions regarding centralized banking. To me, it was no different than buying gold, except that it had a much better chance of increasing in value based on its previous history. So I bought it when it was less than $1000 and have held on to most of it. I still believe in it more as a currency than an investment. And I believe most institutional investors are getting involved not because they think it will continue its meteoric rise, but because it’s a great way to hedge against hyperinflation and diversify.
So if it fell in value 95% you still think just as many people and institutions would be interested in it? I’m a little skeptical.
Love your site and book. I’m currently a 2nd year resident, and ruminating on what to invest in. Have your thoughts changed towards crytocurrencies given the undeniable boom of Bitcoin and Ethereum recently?
If you haven’t been following the news, Ether has gain 2500% since start of the year 2017, bitcoin is also at an all time high. Major banks and tech companies are all jumping in to invest in both.
Technical breakthroughs of the past century: mainframes –> PCs –> Internet —> mobile phone/social media —> the next is speculated to be decentralized currency and blockchain technology.
Just wanted to see if you view things the same still, and still will not both investing in crytocurrencies.
No, my views haven’t changed.
I agree with you that what you are doing is speculating, not investing. Hope it works out okay for you.
Maybe cryptocurrencies take over the world, maybe they don’t. I have no idea. But the last time Bitcoin news was like it is now I wrote this article, and shortly thereafter the bottom dropped out (75% loss) of the bitcoin market. Caveat Emptor!
Thanks for responding, i’m a complete novice so just looking to learn and get some opinions while i’m doing more research. Your site offers a ton of valuable information and advice, which I look to as gospel, given no one else is really teaching this stuff as coherently, so kudos to you.
From what I have read, it’s not so much bitcoin as a currency that matters, but it’s the blockchain technology that runs underneath it which can be used throughout the internet to implement countless applications (aka Smart contracts) transparently and decentralized, and that’s really why companies/banks/some people are investing in. Warren Buffet dismissed bitcoin as just a way to transfer money, but this is a gross underestimation of blockchain technology can do.
I hope you are right that this whole thing is just smoke, then i won’t feel as bad not investing in them earlier. Back when someone bought pizza with 10,000 bitcoins as a gag, now mere 7 years later is worth > $20 million. I know another individual spent ~$70,000 in Jan 2017 and bought 6600 Ether when it was still $12 each, and is now worth over $1 million, mere 5 months later; not a bad return, and certainly life changing.
Why are IBM, Microsoft, Intel, JPMorgan, etc all forming blockchain alliance? Even MIT has its cryptocurrency initiative? Do you think they are all making some huge investment mistake purely over speculation? All this potential, and impressive return don’t even peak your interest a little?
I have no idea whether they’re “over speculating” or “under speculating.” My crystal ball is always so cloudy. But I don’t buy something just because the price of it went up a whole bunch in the recent past. Do you? Do you know some rational way to determine what the price of a bitcoin is likely to be 20-40 years from now when you retire? I don’t know of one.
Trees don’t grow to the sky.
I’m a Boglehead that stumbled on your article and came to my senses before I dropped $1k on crypto currency. Great article, great analogy to baseball, and thank you.
Red flags for me:
– Two random people asked me about bitcoin this week because they know I’m familiar with it.
– It feels a lot like the late 90’s again. Become a millionaire with no real work or discipline! “Experts” predicting huge returns for everyone.
– Financial articles neglect to mention if you bought during the 2013 high, it would be 2017 before you broke even again.
– Realization that if I bought btc when I heard about it years ago, it likely would have all been lost at Mt. Gox anyway.
I’m going to note the price today and track what would have happened to my $1k investment. I have a feeling it will do more good in a 529 plan or on a family vacation.
I also think there is a potential for many people to under report their gains, because they are not familiar with investing and eventually face tax penalties for it. Are the coin exchanges sending 1099-DIVs to their clients? Not likely.
Bitcoin and cryptocurrencies have made some people multi-millionaires since you wrote this article. I would say you probably discouraged a lot of people from making the investment of their lifetime. PayPal had envisioned a decentralized currency such as what has happened with Bitcoin. Can you still stand by what you wrote all those years ago?
I still don’t invest in Bitcoin for the same five reasons, so yes, I stand by that. Shortly after I wrote this article, the value of a bitcoin tanked dramatically.
The people I write for will become multi-millionaires simply by saving 20% of their income and investing it in a diversified portfolio. They don’t need to speculate on stuff like Bitcoin to get there.
If you want to buy bitcoin at $4241, knock yourself out. But remember that trees don’t grow to the sky.
Lastly, let’s point out some math. Let’s say you bought bitcoin at $700, where it was when I wrote this article, or worse, at $1200 where it went to shortly after this article before tanking the first time. In order to have become a multi-millionaire from that decision, you would have had to invest either $330K in bitcoin (at $700) or $566K (at $1200) and held it through the entire rise in order to have $2 Million in bitcoin.
If you think putting half a million bucks into bitcoin (likely a larger percentage of their portfolio) is a wise investment for my typical reader, I’ve got a bridge to sell you.
James,
I find it interesting that you have continued to doubt Bitcoin over the years. Now that Bitcoin is recognized by institutional investors (CBOE, CME now trading Bitcoin futures) as an asset class it may be time for you to try a little bit harder to “understand it.” I am willing to bet that within a year or two, Bitcoin ETFs will start being offered and even recommended as a holding (likely 5-10%) within a “diversified portfolio”. Bitcoin price movement has been shown to be uncorrelated with other asset classes, and for that reason, holding bitcoin actually reduces the volatility of a portfolio. And although your readership primarily resides within Western nations, the reach of Bitcoin is borderless with value far beyond its utility as a portfolio holding. The denationalization of money is happening and already proving to be immensely valuable in emerging markets where their currency is worthless (e.g. Venezuela) and where banks are inaccessible.
Fundamentally changing the way we exchange value takes time. Has only happened a handful of times in history. It took 400 years to transition to paper money. Took about 40 years for credit cards to be adopted. Bitcoin is only 8 years old but it may only take another 10 years.
Finally, blockchain technology that underlies Bitcoin is literally as big of a technologic advancement as the internet itself. Bitcoin is just the beginning. This is more than just an investment opportunity.
Whether you see the world using bitcoin or one of the other 300 cryptocurrencies out there or whatever you think about blockchain technology, buying something AFTER it goes up 1800% the year before is unlikely to end well. Bitcoin crashed shortly after I wrote this article four years ago and that didn’t feel half as bubbly as it does now.
I don’t invest in gold, I don’t invest in Yen, I don’t invest in Euros, and I don’t invest in Bitcoin. If you want to, knock yourself out. It’s your money. I’m just happy that I don’t need to invest in speculative investments in order to meet my financial goals. I feel badly for those who do because it’s a heck of a wild ride and that isn’t going to end any time soon.
I find your arguments for buying it as an investment to be weak. Manure has low correlation with other asset classes, but I’m not buying it. Even if blockchain technology turns out to be the way of the future like the internet was, are you invest in Excite or Google? Hard to tell, but I can assure you that we’re not going to be using all 300 cryptocurrencies in the future. Hope you’re betting on the winner.
I appreciate you sticking to your guns. I am currently up 500% on my investments but I do agree the majority of cryptocurrencies are pure speculation with no long term value. There are actually a lot of use for blockchain technology in various industries besides financial markets that have not been impemented yet. You give your readers sound financial advice and I can appreciate that while I do disagree that cryptocurrencies are in a bubble at +$600,000,00 market cap while the NASDAQ is hovering over 7 trillion. To me the stock market is way over extended and in a bubble, however it will still see some tremendous graowth this next year. The cryptocurrency market and Bitcoin will continue to outperform the traditional financial markets in 2018 just like it did in 2017.
I love that you’re willing to put out a specific prediction. You’ll either look like a genius or a fool a year from now. Honestly, I have no idea which.
I agree there are plenty of uses for blockchain technology. But that’s no reason to buy anything AFTER it goes up in value 1800%. That’s just investing 101. Now if you took my warning when this post was originally published and got out before the 75% drop and then got back in when Bitcoin was $250, you’d be up way more than 500%. More like 6000%. I’m pretty much issuing that warning again at the end of 2017. Will it go up a little more before a severe drop? Sure, probably. But trees don’t grow to the sky. Anyone who expects ANOTHER 1800% gain in bitcoin in 2018 is eventually going to lose their money. If not in this, then in the next goofy “investment” to come along. Again, Investing 101.
But where Bitcoin eventually stabilizes? I have no idea. Maybe it’s $100. Maybe it’s $1000. Maybe it’s $10,000. Maybe it’s $100,000. I have no idea. But neither does anyone else.
Before everyone gets in an echo chamber with Bitcoin – if you believe in the long term rational value, then it can make sense to have a small amount. The CFTC regulates Bitcoin futures so they are classified as commodity/commodity money – closest to digital gold which does add alternative asset diversification.
Why else is Yale investing in crypto (includes Bitcoin): https://www.bloomberg.com/news/videos/2018-10-05/why-yale-investing-in-cryptocurrencies-could-be-a-big-deal-video
Long term rational value thesis by ex-KKR ex-McKinsey institutional investor: https://s3.eu-west-2.amazonaws.com/john-pfeffer/An+Investor%27s+Take+on+Cryptoassets+v6.pdf
As far as the “rational value” paper….beware the assumption of the paper:
I think this is a serious risk, that a given cryptocurrency does NOT develop successfully and is NEVER widely adopted. For example, I see little evidence of BTC being increasingly adopted as a currency. If anything, it seems to be going backward in that respect.
Absolutely, there is a risk. I don’t think there was an intention not to disclose the high risk nature of it. It’s on the first paragraph. However, that’s not what the paper is claiming – it does not claim that Bitcoin needs to gain widespread adoption “as a currency”. I specifically mentioned commodity/commodity money in my first comment, a very different thing than currency. And so does the paper allude to “digital gold”, which is specifically what Fed Chair Powell said on live TV: Bitcoin is a store of value, like gold.
And as a proxy of potential widespread adoption, the NY state issued BitLicense licensed Coinbase alone currently has 20M+ users, growing rapidly.
I note: “While also risky, this potential value and the probability that it might develop for the current leading candidate for this use case (Bitcoin) would appear to be sufficiently high to make it rational for many investors to allocate a small portion of their assets to Bitcoin with a long-term investment horizon.”
I will also note I think it is fair to say if you projected to meet all your goals with a real return of 3% (according to Vanguard), you can probably retire with high savings rates in index funds.
But I also note that some people may wish to make more than that with proper due diligence and I think this paper thesis represents a starting point with accurately referenced knowledge to decide for themselves.
Yes, I agree that everyone gets to decide for themselves what to do with their money. I also agree that some people may wish to make more than 3% real. I mean, I wish to make 300% real, but I’m not going to let that desire cause me to do something stupid with my portfolio like buying cryptocurrencies with anything but a trivial amount of it.
Boy, this post didn’t age well. Had you invested in bitcoin in 2013, it would’ve greatly outperformed all of your investments, hands down.
My crystal ball is always so cloudy. If yours is not, I assume you’re a billionaire, right? No? Oh, well I guess you shouldn’t cast stones then.
I’ve never understood why Bitcoin is called a currency. An asset or commodity – sure. But a currency is backed by the full faith and credit of a government as its legal tender. Nations don’t generally adopt more than one simultaneously either (Cuba being the notable exception).
I’m not sure everybody agrees with you that a currency must be backed by a government. I agree Bitcoin isn’t a currency, but not for that reason. A currency should be a stable store of value (at least in the short term) widely accepted in transactions. I don’t think Bitcoin meets that criteria.
It’s easy to go back and second-guess these sort of things after-the-fact. I wish I’d been a believer when I first heard about BTC. But, back then there was every reason to doubt. This was a new start-up and could very easily have been a flash-in-the-pan.
However, the argument you’ve continued to make–don’t buy an asset when it has just gone up 1800%– doesn’t really apply to BTC. The value of BTC is in its growing user-base. The more people buy-in, the more valuable it becomes–not just in a supply/demand sense but in the intrinsic value of its use as money.
You’ve made the argument that it is not “currency” because it is not a stable store of value. Bitcoin is actually the hardest money ever. It is more stable than the dollar because there can only every be 21 million BTC. The dollar is also just a number in the computer but is not stable because the government can print trillions with a keystroke. It only has the illusion of stability because of our collective faith in it. Zimbabwe, Greece, Venezuela all had “currencies” that became worth less than the paper they were printed on because of the lack of faith and runaway inflation.
COVID 19 will end up being the catalyst but not the cause of the ultimate collapse of the dollar. The world will move away from the dollar standard. The US will try to go back to partially backing the dollar with gold to restore confidence. This will send the price of gold up to >$20k and ounce. Stocks/equities will yield huge percent returns during run-away inflation but the real returns will be poor. Eventually, the bitcoin standard will be so wide spread across the globe that the US will have to capitulate.
# 1 I think you and I have different definitions of stability. BTC went up 25% this month. It takes a pretty creative definition of “stable” to call that stable.
# 2 The % of people using BTC as a currency is so small that it is indistinguishable from zero. I still cannot buy a single thing I want to buy with it. Calling it a currency is a joke. In order to use it you have to convert it to your detested dollar.
# 3 Maybe the world moves away from the dollar during your lifetime. Maybe the US will go back to partially backing it with gold. I have no idea (and neither do you.) But the US certainly isn’t going to back the dollar with Bitcoin. Give me a break. You are making a bet based on a very interesting prediction about the future. Good luck with your bet. I prefer to stand on the sidelines and cheer you on.
[Anonymous ad hominem attack deleted.]
I was trying to deactivate an account and they told me that I had to pay 3500 dollars penalties. I told them to take it out of the account and they said no. This BTC IS a scam. I did not do my homework, used a manager, he set it up as a business account and put 20 thousand in it without asking or telling me. They are asking .e to put in 5 thousand a week. I live on a fixed income , and am only a 5 dollar a day saver.
So if you invest in a stock and the broker steals all of your money, do you say the stock market is a scam? Or is it just perhaps that you did a very poor job in vetting a company to whom you gave money for an investment? Sounds like the guy who took your money without asking is the scam, not BTC. Either that, or the ridiculousness of this post indicates someone trolling…