By Dr. James M. Dahle, WCI Founder
I am often asked investing questions that require a working crystal ball to answer. Since mine has always been cloudy, I usually refocus the questioner on designing an investment plan that will work given a wide range of potential future scenarios. However, there are occasionally times when the clouds in my ball clear a bit and the future becomes a little more obvious. Perhaps the reason for this is my knowledge of financial history — I've seen this movie before and I know how it ends. Such was the case in late 2017 and early 2018 with regards to Bitcoin and similar cryptocurrencies.
My message on Bitcoin has been consistent for years ever since I first wrote about them on this blog: Cryptocurrencies are neither a necessary, nor a wise asset class to include in your portfolio. Like whole life insurance and dividend stock investing, its fans will not be dissuaded. That's okay, it's a free country and you can do whatever you like with your money.
In late 2017, Bitcoin experienced a classic mania.
Multiple Warnings Against Investing in Bitcoin
I repeatedly warned readers on the podcast, the monthly newsletter, forums, and particularly social media about the consequences of getting caught up in this. Here are some examples:
Podcast
From Podcast # 35 recorded in December 2017 and posted January 2018:
I can’t remember the last time I bought into an investment that had gone up 1000 percent in the last year and did well. It just seems like…a speculative frenzy, it feels very tulip-bulbish.
Is [Bitcoin] in a bubble? Here is Bill Bernstein’s article about whether or not it was back in October.
- Not yet the subject of conversation at social gatherings
- People aren’t quitting jobs to speculate in it
- Skeptics aren’t yet met with anger
- No extreme price projections
[00:04:36] A previous article I wrote about Bitcoin 4 years ago, essentially warning readers not to jump in to a speculative instrument after a recent run-up. Over the next year, it dropped in value by over 75%. It took two more years to recover to that previous high. However, since that time a year ago, it has gone up 1000%. I can’t help but feel that I’ve seen this movie before and I know how it ends. I don’t know WHEN it ends, but I do know HOW it ends. It certainly meets the criteria for a bubble today.
[00:06:16] The question I ask when people ask me about what they should do about Bitcoin is, “What does your written financial plan say you should do about something like bitcoin?”
[00:09:11] Should you invest in Bitcoin? If you want to invest in Bitcoin don’t do it right after it’s had this huge spike in price and don’t do it with any significant portion of your portfolio. Wait until it’s price has not been skyrocketing lately. And then if you think it’s a good long term play for your portfolio go ahead and invest a few percent in it. But I’m not going to.
Monthly Newsletter
From the December 2017 Monthly Newsletter:
What took several years for Tulip Mania to do has occurred in a matter of weeks with Bitcoin. There are all kinds of Bitcoin millionaires out there now and the Fear of Missing Out (FOMO) has become palpable.
I sit on the sidelines and observe with fascination. I've been reading about speculative bubbles in financial history books for years, but this is really the first one I've had personal experience with during my investing career, unless you count that silliness with real estate back in 2008 or so.
Bitcoin has gone from something that only true aficionados know about, to something regularly discussed by those on financial forums, and now to something that is in the newspaper each day and discussed in social situations.
In fact, just this week there were more requests for online quotes for Bitcoin than the Dow Jones Industrial Average and people have been searching for “How to invest in Bitcoin” more than “How to invest in gold” for a couple of months. I can't help but be reminded of Joe Kennedy's quote from 1928, “You know it's time to sell when shoeshine boys give you stock tips.”
WCI Forum
Not big on investing in any currency, much less a cryptocurrency. The only reason they’re getting any attention at all are the crazy good returns the last little bit.
From December 12, 2017
From a forum member: HELP !!! I took out a small position in BTC and a couple other cryptocurrencies. I have already made my initial capital investment back in short order (~2 weeks). Now its just playing with house money and I can’t stop.
Even though its just small amounts, I can see this being a huge time suck going forward. I have told myself I won’t check the crypto values but its so hard to do when they are skyrocketing! I check it multiple times per day. I want to continue to focus on medicine (specialty is fun and generates income) and real estate (generates passive and generational income, and wealth) but this crypto craze has got me absolutely distracted!
My response: Yet another good reason not to “invest” in speculative instruments- the gambling addiction/time suck factor. Most good traders write down the exit criteria when they enter a position. I would suggest you do so.
From January 6th 2018:
From a forum member: I’m a recent graduate of residency who had followed bitcoin for years and began investing a little over a year ago… I took money I had made from individual stocks (think FANG) as well as profits from selling the house we bought right before residency (again, a fair amount of luck) and rolled them into BTC and ETH initially. I started buying/trading lower cap alt coins that also exploded in value and now hold a significant amount of bitcoin. Or at least a portfolio that is worth a significant amount of bitcoin as I hold a handful of non-BTC crypto (or alt coins). If BTC gets to $30k by the end of the year, I will likely be a “crypto millionaire.”
My response: If I were you I would sit down and consider the odds of whether your good fortune is primarily due to your skill or your luck. If you conclude luck, as I probably would in your situation, I would suggest you sell enough crypto that it won’t hurt your financial future if it drops by 90% next week.
From October 2017
From November 2017:
From December 2017
From January 2018:
From February 2018:
As I write this post in December 2018, Bitcoin is trading around $3,400. I understand that is around the cost to “produce” it, although apparently, that is highly variable as well. I don't post all this just to say “I told you so,” but to demonstrate the benefit of becoming financially literate. The financially literate stood on the sidelines of this classic mania. They had seen this movie before, and knew how it ended.
My critics say “You don't understand Bitcoin. Block-chain technology will change the world.” While I suspect I understand the creation process and uses of Bitcoin far better than its average purchaser, the fact remains that I don't need to understand it to know I don't want to invest in it. Here are five reasons I don't invest in Bitcoin and similar cryptocurrencies:
5 Reasons I Don't Invest in Bitcoin
#1 Bitcoin Isn't an Investment
This was summed up well by Mr. Money Mustache (emphasis his) in his January 2018 post “Why Bitcoin is Stupid.”
No, you should not invest in Bitcoin. The reason is that it’s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.
These are all things that people have bought in the past, and driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.
When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity. You’re playing a psychological, win-lose battle against other humans with money as the only objective. Even if you win some money through dumb luck, you have lost some time and life energy, which means you have lost.
Investing means buying an asset that actually creates products and services and cashflow for an extended period of time. Like a piece of a profitable business or a rentable piece of real estate. An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.
This seems a good place to trot out my favorite Beanie Baby Mania picture, of a couple in divorce court in 1999 dividing up their Beanie Babies.
Isn't it amazing that everyone in this picture is somehow maintaining a straight face while watching this?
At any rate, I agree with MMM that cryptocurrencies aren't investments. At best they're potentially useful future currencies. At worst, they're purely speculative instruments. I don't place either in my portfolio because they don't have an expected positive return, even on a nominal basis.
#2 Bitcoin Isn't Even a Currency
At one point (mostly while the price was rising) the number of companies who accepted it was rising, although it was never any significant percentage of companies nor a significant percentage of the revenue of those companies. In essence, the reason most of these companies agreed to accept Bitcoin was purely marketing. Bitcoin was cool so the fact that they took it meant they were cool too. It has yet to function as a currency for anyone who doesn't have something to hide.
#3 Cryptocurrency Volatility Exceeds My Risk Tolerance
In 2017 Bitcoin rose from $984 to $16,090, a >1500% return. In 2018, Bitcoin fell from $16,090 to (at time of writing) $3,533, a 78% fall. Now, 78% seems bad, but what it really means is someone who bought Bitcoin at the peak and somehow held on all year endured the following losses:
Just one of those drops would have had stock investors quivering in their boots. In 2008, the US stock market lost 37% and we're still talking about it and analyzing it 10 years later. Bitcoin has had four drops larger than that THIS YEAR ALONE. One reason I buy bonds (and diversify into real estate) is that I can't endure the volatility of a 100% stock portfolio and sleep well at night. A Bitcoin investor must be taking enough Ambien that they wake up most mornings wearing pajamas in the liquor aisle at the grocery store across town.
[Update prior to publication: As my editor prepared this post for publication in May 2019, 5 months after I wrote it, she noted that Bitcoin is now trading at $8,000, up from $4,000 just 6 weeks ago, so expect to be hearing a lot more about it in the news and at the water cooler in the coming weeks.
What changed? Nothing that I can tell, it's just an incredibly volatile speculative instrument. Upside volatility doesn't really bother investors much, but I assure you that if the price can double in 6 weeks, it can also be halved in six weeks. Can you really tolerate that kind of volatility long term? I can't.]
#4 The Cryptocurrency Markets Have More Than Their Share of Scams and Scammers
Like any new, relatively unregulated market, Bitcoin and other cryptocurrencies have attracted plenty of unsavory characters. Googling “Bitcoin Scam” returns 69 million results.
Here's a good summary of perhaps the worst of the incidents, basically the equivalent of the New York Stock Exchange going under. Even the SEC is hesitant to approve a cryptocurrency ETF. Considering what they HAVE approved, that's a pretty damning indictment. Consider some of these approved ETFs:
- Horizons Marijuana Life Sciences Index ETF
- Quincy Jones Streaming Music, Media & Entertainment ETF
- The Obesity ETF
- Global X Millennials Thematic ETF
- Buzz US Sentiment Leaders ETF (Buys stocks based on social media trends)
- ETFMG Video Game Tech ETF
- iShares MSCI Kokusai ETF (Owns everything but Japan)
Or these mutual funds (with their respective expense ratios)
- RECAX (54%)
- AMUAX (27%)
- RHYAX (26%)
- MBPHX (12%)
- AXAIX (12%)
Makes 2% seem downright cheap, doesn't it? But my point is that the SEC is hardly some unassailable bastion of investor protection. If they're hesitant to approve an ETF that invests in an asset class, you should be hesitant about investing in it too!
#5 I Don't Need to Speculate to Reach My Goals
Finally, I don't invest in Bitcoin because I don't need to and if you're typical of my readership, neither do you. Don't take risks you don't need to take. Stop playing when you win the game. There are no called strikes in investing. You don't have to invest in everything.
Remember the purpose of investing—to reach your financial goals while taking as little risk as possible. Viewed through that lens, “investing” in Bitcoin or any other cryptocurrency is, just like MMM says, stupid. Don't be stupid.
What do you think? What impressed you most about the rise and fall of Bitcoin? Tell us your Bitcoin successes and failures. Why do you think so many people get sucked into what should be an obvious mania? Comment below!
I will admit that it was hard not to get caught up in the frenzy when Bitcoin mania was running rampant, with newspapers, social media, and TV discussing the massive wave of Bitcoin millionaires.
There was a huge component of FOMO for me and the irrational side of me was thinking this could be it. Fortunately the rational side of me took over as I realized I had no idea at all what Bitcoin was at the time (and really still don’t). It got to the point that I didn’t even want to take a flier on it with play money because of some of the very thoughts you mentioned, mainly felt it was at the bubble phase (by the time you hear about it in mass media it is too late and you are chasing returns while the smart money people are moving out).
Even if Bitcoin does go to incredibly high levels in the future I will not have regrets because I don’t need it to get where I want to be because I am pretty much there now.
It is funny how hindsight makes things look so obvious and easy.
I love the Beanie baby pic. My kids love playing with all the now worthless beanie babies.
Hindsight now suggests that WCI and MMM were quite mistaken about bitcoin. I suppose in their view it’s still a speculative bubble that has lasted for over a decade and continues to grow. Just like tulips. Not.
“Speculative” does not necessarily = “Bubble”
Speculative means you need someone else to pay you more for it later to make a profit.
Bubble means something is inappropriately priced.
Bitcoin is definitely speculative.
I have no idea if it is in a bubble.
Enjoy your tulips. Hope they grow to the sky.
The Chinese and Russian governments are currently stockpiling gold. Investment leaders like Ray Dalio are champions for holding gold in your portfolio. So while it is a somewhat difficult and cumbersome thing to invest in, unless you are putting it in a fund like GLD, it is likely something that more of us should do. The math and statistical analysis Dalio has done over the past 30-40 years are quite amazing. Although Bitcoin is a specific type of cryptocurrency, the debate as to whether to hold a cryptocurrency in your investment portfolio is interesting.
Simply ignoring cryptocurrencies and not learning about what they are and how they fit in our world going forward is probably being willfully ignorant. Yet, buying and selling crypto based on price swings is speculating just as much as buying and selling stocks is speculating. Interestingly, if you are an index funder, you may already own some bitcoin depending on what your indexes hold. GBTC is probably the easiest avenue to “buy bitcoin” and is another avenue similar to GLD for gold. Just something to consider for those who have not completely closed their mind to Bitcoin and other crypto’s, yet don’t want to speculate using Coinbase to buy and sell a few “coins”.
I’m curious why you think “an index funder already owns some bitcoin”? Because some publicly traded company owns some? It can’t possibly be even 0.1% of a total market index fund, in which case it makes no difference to the return of the index.
As far as gold, expect long-term returns to equal inflation and significant volatility. If that’s an attractive asset class to you, go for it. But don’t buy it because China, Russia, and Ray Dalio bought some.
Accordingly to an article I found on a goldbug type website (i.e. a website selling gold) Russia now holds twice as much gold as it did 5 years ago but held more back in the 1990s and China owns 75% more than it did 10 years ago. The site speculated this would increase the price of gold but in reality despite significant volatility, the price hasn’t changed in the last 5 years and is still down from its peak in 2011. Compare VTSAX to GLD over the last decade if you want to see a “lost decade” for gold buyers. Even Dalio says don’t put more than 5-10% of your portfolio into it.
WCI:
For the record, I own neither gold nor Bitcoin. But, to be fair, comparing the market to gold for the past 10 years isn’t fair either as you know 10 years is not a good historical comparison. Go back 100 years and compare. Obviously you can’t compare GLD to VTSAX for 100 years as neither existed, but I assume you get my point.
Gold can be a good hedge against the market…sometimes….in the past…which is why Dalio keeps some in his hedge fund….which has done quite well. The past 10 years have been ridiculous for the market and you know that. That doesn’t mean the next 10 will be. My point with bringing up gold is only to metaphorically compare it to Bitcoin/crypto’s. Going forward they may be a good hedge against the market, the banks and the governments (especially in 3rd world countries). Or maybe it goes away like the wind. I don’t know. But your graph above is out of date….and I’m not convinced slamming crypto’s is the correct long term answer.
I’d buy gold ten times in any form before buying bitcoin. The long term track record on gold is pretty clear- over the very long term it keeps up with inflation. While volatile, it basically maintains its purchasing power. Hold it for 60 years and you kind of know what to expect from it.
Bitcoin is roulette in comparison.
Not sure which graph you’re talking abut being out of date but a graph of the price of bitcoin more than 10 minutes old is out of date due to its severe volatility.
WCI,
The graph that is out of date is the big blue one at the beginning of the article. The reason I don’t like it, is that it chooses to stop right when Bitcoin was at it’s bottom. I think this was likely due to the fact that you probably wrote the article 6 months ago, and it just got posted now…but it makes the entire column seem jaded. Bitcoin has since rebounded as I’m sure you know. Not to the level of 18,000 but at last check it was at about 7800 and rising.
Most things I agree 100% with what you write. This has been one subject where the jury is still out in my opinion. Either way, I think you might be keeping your mind closed to the issue and not actually learning about it. I’m not sure. I like to provide an alternative point of view though. I understand that this is not the point of this blog, but I do believe there are people far more intelligent than myself when it comes to economics and investing that are investing in Bitcoin for the long term. As I have previously mentioned in past columns you have written on Bitcoin, using these graphs and charts to defend your point, ironically runs against the points you make everywhere else….which in short is buy, hold, rebalance. Picking and choosing charts/graphs over points of time can be shown to argue against any form of investing.
After learning more about economics over the past few years, I am open to the possibility that I could do better over the long term with diversification into things that I otherwise wouldn’t touch (like gold and Bitcoin). All that being said, I’m not sure I have the intelligence or ability to do it well. Which is what I believe you are getting at when you repeatedly beat down Bitcoin.
Thanks,
I stopped it when I wrote the post. I added an update about its current price prior to publication.
What do you think I don’t know about Bitcoin that if I only knew I would be screaming from the rooftops “Buy, buy, buy!”
Is it a currency? I don’t invest in currencies. If I were going to, I wouldn’t go looking for the most volatile, least used one I could find.
I have absolutely NO idea what the value of Bitcoin will be in a year, ten years, or 50 years. Neither does anyone else. That to me seems like a good reason to avoid buying any.
It’s like you looked at the graph and didn’t read the article or something.
WCI,
Yes, I did read the article. In looking at it again, I will comment accordingly. Had you started the post at the “5 reasons I don’t invest in Bitcoin” and only included what was below that it would have been a well written article and what I expect from you. I don’t necessarily agree with everything below that part, but that part is well written.
Almost the entire area above that probably should have been left out in my opinion. It’s like you were yelling at the computer with ego and anger, and I’m not sure why you included it. It detracts from your message. At this point, I feel like we are getting to the point of: “Someone is Wrong on the internet”, so I will stop commenting. Either way, thanks for continuing our education! And Oh yeah…I do agree that doctors should not be “investing” in Bitcoin unless they also have an economics education far beyond mine.
That’s exactly my point, learning more about Bitcoin (or economics) doesn’t actually change what is going on here. It’s still the same product. It’s a gamble no matter how much you know. Now that gamble will pay off for some and not for others but in my opinion, it isn’t a gamble that one should take, especially given that my audience should have zero need to gamble in order to be very financially successful.
https://www.xkcd.com/386/
“Yet, buying and selling crypto based on price swings is speculating just as much as buying and selling stocks is speculating.”
Whatever you think about the wisdom of dancing in and out of the market, this is a goofy and intellectually dishonest statement. Nowhere is this piece recommending daytrading stocks.
Dr. PayItBack,
I’m confused by your statement. I don’t understand how the statement regarding buying/selling cryptos that I wrote is “goofy and intellectually dishonest”. Please explain, and I am happy to defend myself being called dishonest. I do not think there is anything dishonest about my statement that buying and selling is speculating. No where did I imply that WCI recommends day trading stocks. No matter how many times I read what you have written, I am left confused by your comment.
If the opening chart isn’t enough to make me steer clear of Bitcoin, the reports of millions of Bitcoins being “stolen” from cryptocurrency exchanges seals the deal.
I think it’s possible to believe in the potential of a technology like blockchain without exposing oneself to the risk of the underlying nascent technology.
I should have followed this advice when I bought some Tesla stock last year. I was so impressed with the vision of the founder (and the cars) that I decided to show my support with a stock purchase.
Well, it was at the very least a cheap(ish) lesson to stick to index investing when it comes to the stock market!
— TDD
I tried to buy some bitcoin with the sole intention of gambling. But the exchange/website was down.
My local casino doesn’t shut down without warning–they are always open to take my money.
I love MMM’s explanation of bitcoin; it may be the single best post he’s ever done. The differentiation between excitement about blockchain as a technology and excitement over Bitcoin (or any other cryptocurrency) as an investment is so critical.
I think a more appropriate title may have been “Bitcoin is not an investment for my taste.” In the investment world, the definition of an investment is the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
Serious question: what would have to happen for WCI to call Bitcoin an investment? Even if you don’t think it is now, is there is a non-zero chance it may become one in your mind in the future? What would have to happen? Or will you forever stick to your guns?
Is bitcoin commonly being used as currency for legal transactions? Is it a stable store of value?
An investment is a future stream of income plus return of principal. Arguably the purchase of gold or currencies is not an investment. There’s no productive stream of income like when you buy a fraction of a company or even debt issued by a company.
Gold does not make more gold. You pay to store and secure it. You hope some other fool will pay you more than you paid for it (after taxes, fees, and other transaction costs). When you trade your dollars for yen then for euros, renminbi, and bitcoins, those currencies aren’t producing any offspring. (Heck, the central banks and bitcoin miners are busy making more of these things.)
The hope with bitcoin and currency trading is that you consistently can buy low and sell high and some other poor sap will be on the losing end of the transactions most of the time. If you were that good at market timing, why not do it with stocks? At least they generally tend to trend upward, net of taxes and inflation, over a span of decades or longer.
If you read the article, the title was well written. If you think watered down titles are a good idea, you don’t understand my business. I can think of even better ones than that one:
Why Bitcoin Sucks
5 Reasons You Shouldn’t Put Any Money in Bitcoin
Why Kim Kardashian and The White Coat Investor Avoid Bitcoin Like the Plague
Sex, Drugs, and Bitcoin
As to predicting the future, my crystal ball is cloudy as usual so it is hard to predict even my own opinions in 20 years.
If you read the article, I don’t see other traditional or crypto currencies as investments either. So unless cryptocurrency becomes a business of some kind or some other profit generating instrument, I wouldn’t expect to see my opinion change.
Not watered down, I’d just prefer slightly more accurate. But yes, I do understand the business of financial blogging from non-registered advisors often uses catchy titles to gain eyeballs.
At the end of the day, it’s hard (in my mind) to label a $1billion asset class ‘not an investment.’ I mean just last week, Fidelity reveleaved their research that 22% of institutional investors (i.e. endowments, family offices, industry funds, hedge funds, etc…) already have exposure to cryptocurrencies, and 47% were open to future investments in cryptocurrency within the next five years.
I respect that you have opinions, just as everyone else does on the internet…but in your position, with as many eyeballs as you get, just wish you’d be a little more balanced and accurate.
You mean you wish I agreed with you more?
What exactly is not accurate about what I wrote?
Nope, not agree with me–nothing to do with me. Just was hoping for a more balanced discussion based in facts, rather than another ego-laden “Bitcoin isn’t an investment because I say so” post. Maybe get one of 22% of US financial institutions who already invest in cryptocurrencies (or almost 50% who plan to over the next five years) to write a guest post for you explaining their views?
WCI keeps having these wonderful opportunities to write a balanced informative post on an incredibly interesting investment class, but they all keep ending up the same. For your sake, I hope cryptocurrencies all go to zero, but I fear they may not, and WCI won’t be able to change their view in the future because they’ve been so ego-ly invested in hating them so much. Will be interesting to watch moving forward!!
I have thought about dumping some money in bitcoin just for fun, in the same way I think about going to the casino and dumping money (and sometimes winning big!) on blackjack and craps. It is fun and exciting.
I think WCI gave it due diligence talking about it, but at the heart of this site, the mantra is “so you do OK financially, here are the ways to put that money to work as safely as possible, so you can meet your financial goals (correct me if wrong)” and bitcoin thus far has mostly been wild swings and get rich quick stories. The closest investment class in comparison thus far is picking individual stocks and hoping for a huge upswing…but that sort of investment advice is basically the opposite of the advice you tend to find here.
Maybe bitcoin will be something different in the future, but that is yet to be seen. Right now I know a handful of people that made some bucks betting on it, and just as many on the opposite side. So far it hasn’t proven to be anything better than roulette, and that’s the analysis it got.
I remember when it first came out a handful of TV shows showed young people asking to be paid in bitcoins while the olds were just confused as to what that was (obviously for comedic effect). Thing is, I shop online a ton (and waste lots of money on new fangled tech goodies), and have yet to see a SINGLE solitary time I could buy anything with bitcoin. For all intents and purposes it is basically a risky investment class that you can either make/lose lots of money on. Not something usually touted around these parts.
JST—Well said. For the golfer folks, investing in cryptocurrency is like a 40-yard flop shot over water to a tight pin. Rather than talk about the shot, pros/cons, risks/rewards, in a balanced fashion, WCI (with no experience ever hitting the shot, and sub par knowledge of even how to hit one) would rather say the shot is always unwise, and not warranted, because, well, “we’re physicians and don’t need to know how to do it.” I just think it’d be more interesting to either 1) discuss it in a balanced way, ideally from a stance of experience and knowledge or 2) not discuss it at all.
In relation to the golf shot, I would think of it more as this scenario. You can take that 40 yd flop shot but have a high chance it ends up in the water, you get penalized a stroke, end up in a shitty spot, and potentially lose the match for it (or maybe just end up behind for a while). Alternatively, standard route is taking a safe shot onto the closest fairway, then an easier second chipshot you have made 100’s of times and everyone else has shown to be a safer path when you’re ahead.
That said, sometimes it’s fun to go for the tough shots now and then 🙂 (with extra un-needed money)
Keep taking your flop shots. I hope they work out well for you.
You keep saying “talk about it in a balanced way” without actually saying what that is. What information do you think should have been included in the article that would have made it “balanced” other than that I said it was a good idea (which it isn’t)?
Why do you assume I take flop shots and/or invest in Bitcoin? You have no idea my portfolio, risk tolerance, nor financial goals…but I appreciate your constant assumptions about me!?
To be more balanced, maybe next time you can address the following facts:
– Bitcoin is a $1billion+ market, with almost 50% of financial institutions (pensions, hedge funds, etc…) either invested or planning to invest. Slightly different than beanie babies (see the balance here!?)
– Bitcoin has been used as currency to buy goods for over 9 years, and over 500 firms now accept Bitcoin as payment
– The average drawdown in cryptocurrency prices over the past 4 bear cycles has been 69.7%. The average growth experienced across the past five bull cycles has been 617%. The current drawdown is 66.5%.
Again, as others have pointed out, maybe next time there will be less ego “look at how many times I told you so” with cherry-picked charts, and more balance about this incredibly interesting $1b asset class.
Of course I have no idea who you are and what you invest in. In that respect, I’m handicapped and (probably mistakenly) carrying on a conversation with an anonymous critic despite revealing who I am online. Feel free to supply some information about yourself if you don’t wish for me to make assumptions.
9 years and still only 500 firms take it. Not exactly making a very strong argument. I already debunked your argument about the “financial institutions” above.
I find the asset class interesting, but not attractive. As noted above, the chart was pulled on the day the article was written. Hardly cherry picked.
So basically, you’re mad that I didn’t make it seem more attractive as an investment and saying I didn’t give a “balanced” review.
Investing in cryptocurrency is stupid. That’s how I feel, I think the data backs that up pretty well as discussed above, and I plan to persist in saying so. How’s that for balanced?
That’s like asking for a balanced write-up for payday loans, whole life insurance, and 2% ER mutual funds. They’re all dumb ideas for investors and I’m going to continue to call it like I see it.
If you think they’re awesome and all doctors should invest in them, I would suggest you start a blog and write all about it. I’m sure it’ll be very popular.
But I’m done here.
Here’s the guest post policy, feel free to send it to 50% of US Banks and ask them to explain their decision:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
But I guess I’d say the same thing I say to whole life insurance advocates who say “lots of banks buy whole life insurance, you should to.” You’re not a bank. Your financial situation and needs are different than a bank’s so you shouldn’t model your portfolio after theirs. Besides, banks do dumb things too.
Now, in case it isn’t totally clear, this is my blog where I write my opinions. When reading the opinions of others on the internet, you should take what you find useful and leave the rest. If you continually find yourself reading a site where you do not find value in the writing, you might want to question how you spend your time. On the other hand, if you find what you read to challenge your beliefs and force you to examine them more closely, whether you change your mind or not, I would submit you are spending your time wisely. But attacking the source of those opinions as “egotistical” seems like a poor use of your time to me. I don’t write blog posts because I’m trying to get educated about something by my readers. I become educated about something, form my opinions, and then share them with my readers. If you don’t want my peaches, don’t shake my tree.
It seems your main beef is that you don’t agree with my definition of investment. I think I’d prefer the company of Warren Buffett in that regard. Here’s what he has to say about the topic: http://daslee.me/warren-buffetts-definition-of-investing
Bitcoin is # 2, a purely speculative instrument that isn’t even used by any significant group of people as a currency. I invest in # 1 and # 3.
Good luck investing. I worry if you continue to have difficulty distinguishing speculative instruments from productive assets that you may need that luck.
The frenzy over bitcoin was clearly overblown the past few years. I personally do see how “extremely online” individuals found cryptos attractive with the places that accept it (Pirate Bay, Reddit, VPN services, etc). It looks like there were unforeseen issues with privacy and hacking, however, as you note.
From what little I know about it, blockchain technology is already a game changer. But why not let a company do the due diligence of making the tech more stable, profitable, and mainstream? If anything, I think cryptos offer a cautionary tale about “get-rich-quick” routes, kind of like individual, highly volatile stocks. There are obvious differences between the two, but in my mind it all just reaffirms a straightforward, index-based investment philosophy.
I think the real value of bitcoin is that it is a great tool for money laundering or fraudulent transfer. What else is better than bitcoin? Fast and untraceable. That may be the reason why it still exists.
Cash.
You don’t want to sell your drugs for $100,000 equivalent USD of bitcoin only to find out that when you try to sell the bitcoin 3 months later to a useful currency that it’s now worth $20,000.
The best thing I learned from reading Ben Graham: The difference between investing and speculating. It is amazing how simple, rare, and important that distinction is. I have been an investor every since reading that 30 years ago. No regrets.
“Investing means buying an asset that actually creates products and services and cashflow for an extended period of time.” This statement is backed by Benjamin Graham and Warren Buffet’s ideas – two of the most important investors of the last 100 years. Anything else is speculation, including gold. Saying things like how many hedge fund managers or institutional investors are trying it doesn’t change this basic reality of life. Not even one of these people beat the market in the last 10 years.
Hey guys no use trying to convince this guy about Bitcoin. He’ll never come around because his whole blog/business model is selling adds and courses in traditional investment products. As Charlie Munger says “to understand human behavior you must understand their incentives” He has been wrong since 2013 when Bitcoin was trading at $700 and has only doubled down on the hate since then. Despite Bitcoin’s obvious volatility its been the best performing asset class over 10 years. Everyone should have 1% of their net worth hedged in it. Even if you bought the top during the last cycle, but DCA weekly since then you’d be in the green as of today. Later this year Fidelity, Bakkt, and Eris X are launching their institutional grade platforms thus continuing the inevitable march of Bitcoin as a global store of value. Making strategic, small, and careful allocations to bitcoin during residency was the single best decision I’ve ever made. I’m currently in my mid 30’s and do medicine just for fun to not get bored at home. Do your own due diligence and be leery of folks who are irrational haters or supporters.
[Ad hominem attack deleted and after multiple previous attacks, poster’s IP address blocked.]
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This is a great blog and I read it to get opinions on lots of traditional investing.
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A lot has changed in the Bitcoin ecosystem in regards to the protocol, applications being built on it, and investment services being built around it. It’s a 150 billion dollar asset class and growing. I’ve gone to the MIT bitcoin conference for years and have met tons of brilliant programmers, investors, econ guys, and journalists working on Bitcoin. I’m constantly in awe of how much smarter than me they are. Do your own due diligence. A 1% investment of net worth using dollar cost averaging maintains good risk management and creates the opportunity for asymmetric returns to your portfolio. Sticking to the data/numbers this has always been the case since Bitcoin’s inception and continues to be the case, even if you bought the top of the last market cycle.
[You’re welcome to argue your points. If you persist with the ad hominem attacks you won’t be commenting here long, much like the loaded mutual fund salesmen and whole life salesmen on the blocked list. I’m too busy trying to educate physicians about investing to spend time addressing anonymous internet critics. If you don’t know how to behave appropriately on the internet, you’ll have to do so on sites other than mine.]
Don’t give me that B.S. I can sell ads to Bitcoin funds, ETFs, active managers etc. just as easily as anything else. I just happen to turn them down because I don’t think they’re good for my readers.
Funny you quote Munger, who said this about Bitcoin:
https://markets.businessinsider.com/currencies/news/bitcoin-price-charlie-munger-jokes-about-cryptocurrencies-2019-5-1028167399
and this:
https://www.cnbc.com/2018/05/07/berkshires-charlie-munger-bitcoin-is-worthless-artificial-gold.html
Thanks for playing.
You can put 1% of your portfolio into anything. It really doesn’t matter. Light it on fire if you want. It won’t have much effect on the final outcome. Heck, lots of investors pay a crummy advisor that much each year. I’d rather see it in Bitcoin!
Nothing irrational going on here. The reasoning was lined out in the post, just because you disagree hardly makes it irrational.
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BTC up 33% since my original post a month ago 🙂
People fear what they do not understand. See Jim’s comments below.
Congratulations on your successful speculation.
Jim,
I love your site and I think you’ve helped a lot of people become more financially literate. But your first two points are false. Anything I put time or money into is an investment. I invested many hours during Med school playing Halo with my friends. I also of course invested some hours into studying. I invested some dollars into PCLN before the dotcom bubble which tanked but have ultimately well recovered. You are currently investing into stocks and index funds in the hope they will be worth more to someone else in the future. Given the historical returns of the stock market, you are probably correct. Call this speculating if you want, but we were betting on a stock or collection of stocks value to increase over time and sell it to someone else.
Bitcoin is a currency, but it’s not that useful today, in the sense that I can’t go to the gas station and fill up by transferring coins from my account to Chevron. However, I also can’t give the attendant the Australian dollars in my wallet from my last trip there. Hard to argue the Australian plastic money isn’t a currency.
The bet here, by people that are studying this, is that the cryptocurrency will be worth more because our society is becoming increasingly cashless. And this particular currency can’t be controlled by any government. When it doesn’t matter what account ApplePay uses for that transaction at Chevron, Bitcoin will be worth even more.
Which brings us to your 3-5 points, which are valid reasons why YOU might not want to invest your time reading about cryptocurrency and your money betting on it. It’s probably a safer bet to bet on stock market index funds. However, the posters above may continue to see asymmetrical returns as the rest of the world catches up to the intelligence of blockchain.
I agree that anything can be an investment; I’m confused how WCI can call Bitcoin not an investment when there’s been $500billion of investments in cryotocurrency itself and and the technology (including Amazon, FaceBook and Yale University recently announcing their investment). It’s being used daily as currency–my neighbor bought his truck last month with Bitcoin, and Starbucks just announced they’ll accept Bitcoin at locations around the world. Apps are being developed to use it for any and all purchases made.
Yes, it’s volatile, extremely risky, and still a relatively new idea–which flies in the face of the WCI ethos, but in my mind, it does have the *potential* of being a more stable investment, currency, and place in portfolios….but by the time it is, and gets the WCI stamp of approval, most of the big gains will have already been made, as has been the case for the past 10 years already. I’m just confused how it can be so hated by WCI when the technological momentum, adoption, institutional demand, price action, and success have all pointed in one direction more than the other over the past 10 years, and is showing zero signs of slowing down?
Perhaps it is better said to say “don’t invest in speculative investments, invest in productive asset investments” but frankly, I don’t even consider investments that are primarily speculative to be investments at all. They’re just speculative instruments.
I disagree with your definition of investment.
I am not investing in stocks “in hope they’re worth more to someone else later.” I am buying a portion of successful, profitable businesses and reaping the reward for doing so.
Your argument about Australian dollars is equally bizarre, but needless to say, I don’t speculate in Australian dollars any more than I do in Bitcoin.
I agree with you that I’ll likely be better off buying stocks than Bitcoin in the long term, so I do so and recommend such to my readers.
10% in Bitcoin and 90% in Cash rebalanced monthly outperformed the S&P 500, over the past decade where Bitcoin experienced multiple 70-85% crashes. Proof below.
The stock market can and does crash >50%. But a 90% cash portfolio can’t really crash.
After checking out the link, enter your own portfolio and then add 2% in Bitcoin to it, and compare the difference.
Why would you pass on all that potential upside, when the worst case scenario is you lose 2% if Bitcoin goes to zero? Serious question.
We need to take emotion out of this and just look at the numbers.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=4&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=%5EBTC&allocation1_1=10&symbol2=CASHX&allocation2_1=90&total1=100&total2=0&total3=0
So…is that your portfolio? 90% cash and 10% in Bitcoin rebalanced monthly? Shoot me an email in 20 years and let me know how that worked out for you.
There’s a reason most investors do not use that portfolio. But if you want to throw 2% of your portfolio into Bitcoin, knock yourself out. Just be aware that if you continuously rebalance into anything that goes to zero, your portfolio eventually goes to zero.
“So…is that your portfolio? 90% cash and 10% in Bitcoin rebalanced monthly?” Basically but I’m a little heavier in Bitcoin than that. Not recommending that high an allocation for others. Did you try adding 2% in Bitcoin to your portfolio at portfoliovisualizer.com?
Yes, rebalancing into something that goes to zero could theoretically cause your portfolio to go to zero. However that doesn’t happen in practice with Bitcoin, because when it crashes it crashes fast, so you probably don’t rebalance many times into the crash. It spends most of its time rising substantially which is a very nice thing to rebalance into.
I answered your questions. You did not answer mine.
Thanks.
Why add 2% instead of 90% if I’m going to try to maximize past returns? 🙂 Seriously, it’s easy to pick things that have done well in the past. The trick is picking things that will do well in the future.
I’m not sure you understand how rebalancing into an asset class that goes to zero works. If it goes to zero, and you gradually swap your cash for the asset going to zero as it goes down, you eventually lose everything.
I have no idea what questions you’re referring to that you want me to answer. Please repeat.
Sigh. I already granted that rebalancing into an asset that goes to zero can cause your portfolio to go to zero. Then I brought up the fact that relatively fast crashes vs. relatively gradual bull markets cause that not to be a worry. Not to mention having 90% or 98% of your assets in something else/safe. But you chose to ignore that and went back to repeat your first point. You’re smart enough to know this. You’re a doctor. You’re willfully choosing not to engage. So I’m not sure why I should.
Not to mention: I provided PROOF that Bitcoin can crash 75-85% multiple times and the 90/10 portfolio still outperforms the S&P 500. Yet you ignore the proof and twice argue that rebalancing can cause you to go to zero.
As to WHY I think Bitcoin will continue to rise, that’s a very long subject and will sidetrack the debate. I’m simply trying to understand why someone wouldn’t risk 2% of their portfolio in the best performing asset of the last decade…because 2% is not a risk.
Here’s a shocker: What ultimately led me into Bitcoin is that I cannot stomach the risk of the stock market. Not after the financial crisis. Bitcoin can go to zero tomorrow and because of my cash position the “ulcer index” of my portfolio is far more comfortable to me than that of the stock market: 50% crashes that take many years to recover. Bitcoin crashes harder but recovers in a year or so. If my choice is a 7% return in the stock market with the risk of a 50% crash, and a 100%+ return in Bitcoin with the risk of an 85% crash, I’ll take the latter along with a healthy cash position thank you very much. And I consider it much less risky.
This is basically Taleb’s argument: A 60/40 medium risk medium return portfolio is in reality a high risk medium return portfolio. The barbell portfolio that’s 90% cash-like and 10% hyper aggressive achieves the desired end much better and helps me sleep at night.
A final note: The graph you showed was not a good representation of Bitcoin. You have to look at Bitcoin on a logarithmic scale, and go back farther in time, and you’ll see that the latest crash was just part of a regular 4 year cycle that matches up to the “halving” events Bitcoin experiences every 4 years or so.
So you have a problem with my asset allocation? That’s bizarre. I don’t have a problem with yours. Do whatever you want with your money. It’s yours. You get to choose what you want to invest in and you’re stuck with the results. I’ve explained WHY I invest as I do many times on this blog, podcast, books etc. I’ve explained in the post above specifically why I do not invest in Bitcoin. So if this is about me and my portfolio, I always win any debate because it’s my decision what I want to invest in.
I do find it fascinating that you find the stock market risky but Bitcoin not risky. I disagree with your use of the words “recovers” and “experiences.” I think you should be using the words “recovered” and “experienced.” I think you’re making a common investment mistake of assuming the future will resemble the recent past. I think it is especially risky when you are using a VERY small set of data to make predictions about a future many times longer than your data set!
Good luck. I hope you reach your financial goals with your very unconventional portfolio. Maybe you’re the next Taleb. Maybe you’re not. I have no idea. But I find your portfolio extreme and foolish despite the fact that I sincerely hope it works out for you. It certainly doesn’t hurt me if you happen to also reach your financial goals in your own way. But I wouldn’t be surprised if I use your comment in a blog post in a decade as an example of crazy ideas people had about investing a decade ago. Or maybe you’ll be a billionaire. Who knows?
I never claimed to be able to predict the future. Of course past results don’t guarantee future results. That’s a given, regardless of the tense used. But there has been several Bitcoin cycles now, not just the one you showed in the graph. And there’s a reason for the cycles.
So let me ask you this: After how many years of its success are you willing to admit that Bitcoin would’ve been a good addition to a portfolio? How many cycles? What dollar amount? So we can go back and check your comment in 20 years like you’d like to check in on my portfolio.
You know what really scares me? I studied returns from stocks, bonds and commodities going back 200+ years, and several times during that period both stocks and bonds crashed at the same time. Those of you who hold a 60/40 type portfolio with nothing to rely on if that happens AGAIN are the ones who are really exposed. But nobody talks about it, as if it never happened. But it has, multiple times. Yet folks like you recommend stock/bond only portfolios to people. Interesting the that the two most successful hedge fund managers, Dalio and Asness, both recommend about 15-17% in commodities after studying that same history.
Nothing is scary when you’re holding 90% cash. If the 10% in something very aggressive like Bitcoin stops working, you can simply move on to another portfolio and remain relatively unscathed. But you have to keep taking your Bitcoin profits, and soon you’re playing with the house’s money, so to speak. So even if the Bitcoin allocation goes to zero it was just winnings anyway.
Which is why I can’t understand why someone wouldn’t make a small allocation to bitcoin, even someone who is convinced it will ultimately go to zero. Not only can you limit your losses to the size of the position, but because it rises to quickly, you can soon take your initial investment off the table and then it’s not even “your” investment you’re losing.
I’ll admit right now that Bitcoin WOULD HAVE been a good addition to a portfolio in the past. I doubt I’ll ever say I think it would be a good asset class to add to a portfolio based on the reasons in the post above.
Feel free to send me emails every time Bitcoin goes up. You wouldn’t be the only person doing so.
You know what’s scary when you hold a 90% cash portfolio? Hyperinflation. Heck, regular inflation. Heck, just the need for your money to make money because you don’t have an 80% savins rate. Lots of good reasons not to hold 90% cash. That’s a massive bet to put all of the need for your portfolio to provide growth into cryptocurrency, and only a single one at that. I hope yours pays off. I’m certainly not risk tolerant enough to make that bet. “Very aggressive” sounds so positive. I’d probably use a different term for a bit bet like that.
By the way, house money spends just like all the other fungible money out there. That’s a well known behavioral fallacy “I’m playing with house money.” Nope. You’re always playing with your own money.
If I’m not willing to commit to an asset class for decades, I don’t invest in it. No way am I committing to cryptocurrency for decades, much less a single one. But you don’t need my approval for your investing scheme. It’s your money. I hope it allows you to reach your financial goals like my investing “scheme” has already allowed me to reach mine.
Hyperinflation was my first main fear for years after the financial crisis. That’s what got me into holding commodities. I was on a Dalio/Asness type portfolio for a few years. Also, Bitcoin is likely to soar in the event of hyperinflation.
The thing is, hyperinflation starts with increasing inflation. You have time to adjust. But you are not likely to have time to adjust before a crash. Especially if you’re committed to “time in the market” and can’t change your ideology fast enough.
But you completely IGNORED my warning about how stocks & bonds can crash at the same time, and have every couple of generations in US history. Commodities would protect you against that and against hyperinflation. But you’ll just let yourself and your readers be exposed to evisceration, not to something unforeseen but to something that happens regularly and is “overdue” to happening again.
But you’d rather continue to ignore actual debate. So I’m done.
P.S. Re house more, that’s why I put “your” in quotes in my last sentence, to acknowledge that yes it’s your money. But there’s a psychological benefit in sticking to a 10% hyper aggressive position when you know you’re ahead even if it’s gone.
Thanks for the warning. I’m quite familiar with the history of the public financial markets and am fully aware that correlations change over time. I am also aware of the benefits (or lack thereof) of adding commodities to a portfolio. As you can see, I don’t have commodities in my portfolio either.
I’m not sure you understand the meaning of evisceration. I wouldn’t use that word to apply to financial losses. I typically use it in the trauma bay of a knife and gun club.
I’m not ignoring any actual debate. I’ve addressed each of your concerns. What you are failing to do is convince me that your point of view is correct. I’m not going to approve your views or your method of investing, much less recommend it to readers because I think it’s foolish. I think you’re wrong. The difference between you and me is I don’t care if you agree with me or not. So I don’t blame you one bit for being “done.”
Good luck investing.
Here’s the backtest I should’ve started with: 2% bitcoin + 98% 60/40, vs 100% 60/40.
The former beats the 60/40 by more than half with about the same risk.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=4&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=VBINX&symbol1=%5EBTC&allocation1_1=2&symbol2=VBINX&allocation2_1=98&total1=100&total2=0&total3=0
You mean “beat” not “beats.” You seem unknowledgeable about the limitations of backtested/retrospective data, at least in your use of grammar.
Once again you’ll be eating your words when Bitcoin breaches $16k in October and $25k in the near future. No one is advocating for investing a huge portion of one’s portfolio. Just 1-2% as a possible hedge. You seem to fail to understand these concepts including the concept of mathematical scarcity and the concept of alternative stores of value. It’s no coiners like you who rail against bitcoin…instead of acting butthurt, you could’ve ridden these waves upward this year, making a sizeable roi that outperformed anything you picked this year. You’ll be left behind again (lol your 2013 bitcoin post is cringeworthy).
You may or may not be aware that there are no called strikes in investing, nor that I’ve already reached all of my significant financial goals. So don’t spend too much time worrying about my personal financial success or lack thereof.
Amazingly, I did it without investing in cryptocurrency. I know you find that hard to believe, but it is true.
At any rate, I’m gad you’re happy with your “investment” and hope red keeps coming up on your roulette table. Frankly, you can do whatever you want with 1-2% of your portfolio. If you really believed in your ability to predict the future with Bitcoin, you’d invest a lot more than that.
Good luck investing.
So are we still not allowed to talk about Bitcoin as a “real” investment now that traditional investors like Paul Tudor Jones and his fund are investing in it, calling it a hedge against all the quantitative easing that is currently going on. I’m a BIG fan of the WCI site and have gained a wealth of knowledge from it, but I’ve been quiet about my investments in crypto because of the overall anti-crypto sentiment. Just wondering when I can come out of the closet. What will it take to convince people that bitcoin is a sound investment? Legitimate question – what do you need to see to change your mind about having a small portion of your portfolio allocated to this very non-correlated, emerging asset class?
I would honestly like to reignite some good discourse on this topic here.
I don’t recall ever telling someone they weren’t allowed to talk about it. But don’t expect me to support your speculative activities just because you’re currently above water on your “investment.” My take is in the post above. Agree with it, disagree with it, I really don’t care. Like most docs, you can burn a small percentage of your portfolio and still be fine. A bitcoin investment will probably come out ahead of just burning the money, assuming you’re not in a survival situation. 🙂
As noted in the post, I don’t need to put any money at all into Bitcoin to reach my financial goals, and that’s the only yardstick that matters when it comes to my investments. If you feel the need to take on that kind of risk to meet your goals, knock yourself out. It’s a free country.
You certainly don’t have to agree with me on everything to read this blog. Take what you find useful and leave the rest.
If you think Paul Tudor Jones is infallible, you might like this article: https://www.afr.com/companies/professional-services/hamilton-scam-ensnares-billionaires-such-as-paul-tudor-jones-michael-dell-20170207-gu6y4j
Sorry, I think I came off a little harsher than I wanted to. I’ve had to be defensive a lot with regards to crypto on many forums so sometimes I get carried away. You have been very open and straight forward with your opinions on crypto which is commendable. I guess, like you said – agree to disagree.
That being said, you didn’t answer my question. When does something speculative, like bitcoin, become a reasonable thing to consider adding to a diversified portfolio. If the answer is never, that’s fine. If you’re going to stick to the old playbook cuz it works, fine. But if you consider yourself open minded to new investment opportunities, then what are the criteria that you would be looking for? Addressing your ” 5 reasons I don’t Invest in bitcoin” from your original post from a year ago:
1) Bitcoin isn’t an investment:
– Sure. Not like equities. But certainly like precious metals. Gold is a hedge against inflation and QE, and it is arguable that so is bitcoin.
2) Bitcoin isn’t even a currency:
– I concede this point. It isn’t the everyday “currency” that it was orginally billed out to be. But it is still advantageous over gold in several categories. (scarcity, ease of transportation, speed of transportation, divisibility, verifiability)
3) Cryptocurrency Volatility Exceeds My Risk Tolerance
– Volatility of bitcoin price has been steadily decreasing over time. Its market cap is relatively small to other asset classes and its markets are open 24/7, both of which contribute to highER volatility. But the volatility TREND is going DOWN. It’s still a very young asset class. (only 10 years old)
4) The Cryptocurrency Markets Have More Than Their Share of Scams and Scammers
– Fair enough point. There are a lot of scams in the crypto space. But there are a lot of scams in the financial space PERIOD. You, yourself, even point out in your opening posts how financial advisors look at us as sheeple to be exploited. That’s part of the premise of your whole blog/philosophy. You’ve encouraged me, and all of us, to be discerning investors. So, I would argue that with the proper education/direction (not much), one can avoid the scams/pitfalls in the crypto space as well.
5) I Don’t Need To Speculate To Reach My Goals
– I guess this point comes down to fundamental philosophies about the market and the concept of money. I’m younger than you, and I haven’t seen as many years of market-go-up as you have. It has worked well for you and I don’t deny that. But when I see kenesiean economics getting out of hand – the Fed printing money like never before, central banks creating hyperinflation in many markets, a blatant disconnect between unemployment and the equity market values, interest rates approaching zero domestically and already negative in many countries, consumerism changing from a global pandemic in possibly irreversible ways – I question that the status quo will continue. I start thinking that investing alternative, non-correlated assets may be worthwhile. I have never really invested in gold or other precious metals, but I am now very seriously considering doing so given the current uncertainty.
Just curious if there EXISTS criteria that might change your mind on the matter, or if it is essentially a “Never” on your part.
No. Never on speculative investments. Bitcoin is hardly alone in that matter. I don’t speculate in yen, gold, empty land, or roulette either.
Holding your money in cash is speculation. Putting your money in a total market index fund is speculation. These both speculate that the status quo will continue.
Chances are you are right in the short-term and maybe even for your lifetime. But, eventually, all systems fail. Adding a hedge against catastrophic financial collapse is not a bad thing. If you don’t think crypto is the right hedge, fine. But it is not foolish to put 1-2% of your net worth aside to hedge against a very real possibility of collapse of the US dollar.
Quantify the speculation involved in buying shares of every publicly traded company in the US versus buying an extremely volatile, seldom-used “currency” that has frequently been stolen from its exchanges in the past. Let me know how they compare. In my book, one is orders of magnitude higher than the other.
If you want to put 1-2% of your money into just about anything, I think that’s fine. Seriously. Lots of people talk about a “mad money” account where they trade stocks with 5% of their portfolio. If you want to do that, it’s okay. If you want to buy Beanie Babies or Bitcoin or whatever with that for whatever reason, I think that’s fine, especially if it helps you stay the course with a reasonable plan for the other 95% of the portfolio. I don’t care whether the reason is “just for fun”, to “hedge against a collapse in the dollar”, or because you think Green Martians have possessed the Secretary of the Interior. It’s fine.
But as far as YOUR specific reason, I think you should ask yourself a few things:
# 1 If you believe in Bitcoin so much, why only 1-2%?
# 2 Why cryptocurrency as a hedge instead of something else like farmland, bullets and canned goods, gold bars etc?
# 3 Why do you think the cryptocurrency(ies) you’ve chosen is the right one? Remember the late 1990s. Everyone wanted to bet on “the internet.” But most of the bets were not placed on the eventual winners. Honestly, most of the eventually winners did not even exist at the time. What if you put all your money on Excite, Netscape, or AOL? Pets.com instead of Amazon. Myspace instead of Facebook etc. New technology is cool, but even a winning technology does not guarantee financial success. Bitcoin has been around a long time now and still nobody is using it as a currency in any significant way. That should make even a diehard crypto fan hesitate a little.
At any rate, good luck investing. If your counterargument to my article is “well I only put 1% of my money in it so even if I’m wrong, it’s not a big deal”, it’s pretty hard to argue with that.
It’s like the guy who was bragging it up about his crypto in the WCI FB group. Well, it turned out he only put $400 into it. I mean, I spent more than that on an oar for my raft which will likely have a much lower return than Bitcoin. It’ll eventually become firewood. When I’m referring to avoiding speculation I’m talking about a serious amount of your serious money. Not $400. Not 1% of your portfolio etc.
You asked me to quantify the speculation in buying shares in every publicly traded company. Can you “quantify” the speculation in bitcoin? To my knowledge, there is no derived “unit of speculation”.
The speculative component of the overall market is equal to the difference between the price it is selling for on the exchange and the underlying value of the individual companies based on EBITDA and assets. There is a reason that large privately-owned companies with a healthy balance sheet and no need for growth-capital end up deciding to go public. They due it to capitalize on this speculative value and increase the market cap of their company. They can then divest some shares at a higher valuation.
The market holds this premium across all the companies in the total market index and is comprised of the money invested by 401Ks, IRAs, and brokerage accounts of millions of people. This price premium persists as long as the market is the primary investment vehicle for the masses. This has been historically true because it yields a better return than holding dollars or a regular savings account. The value of companies better keeps pace with inflation than does Fiat currency.
At this point, I don’t think it is reasonable to assume that the market premium will persist in the coming decades. There will always be some premium as long as it is used as a store-of-value or investment vehicle beyond the underlying value of the company. But, that will be reduced as people start to put their money elsewhere.
In the decades prior to going off the gold standard, a savings account yielded ~5%. On a gold standard assuming minimal inflation, that is very similar to the real return we’ve seen over the past 30-40 years with average 8% total market return minus 3% inflation. Gold, silver, bitcoin, real estate are becoming more and more attractive to the masses. The prices of each of those had been going up even prior to COVID and will continue.
The current market index is a complete illusion illustrated by the Fed and stimulus money. The real investors are taking their money out of the market and putting it elsewhere. When [email protected]! hits the fan, the market will drop down to the underlying value of the companies.
#1 ) I personally have much much more than 1-2%. I’m looking out for people who don’t have that same conviction, believing that if there is a major market turnover, that 1-2% will be enough to get them through.
#2) Why cryptocurrency? Well, I’m a bitcoin maximalist and believe that to be a crypto asset. However, I do believe we’ll eventually reach a bitcoin standard with all major transactions eventually being settled in bitcoin.
#3) Why do I think bitcoin is the right one? It is the most secure, has the largest market share, has the most decentralization and transparency, the largest ecosystem, etc. Do I think another coin will come along and supplant it? No, I don’t. Could something supplant Facebook? Theoretically, yes, but I’m betting you have money in Facebook. Why the confidence? because the value of the network is more valuable that the quality of their product on its own.
The fun part about investing is we get to “make our bets and take our chances.”
You’re convinced the market will do poorly and Bitcoin will do great. You believe Bitcoin will be the standard. So you’ve bet that way. You haven’t told us how much, but you’ve bet that way.
What are the consequences of you being wrong? Have you considered them?
On the other hand, I think the market will do well enough to meet my goals and I have no idea what is going to happen with Bitcoin. If I am wrong, then at some point in the future I’ll be able to trade my dollars and stocks and real estate and services for Bitcoin at some rate and then use Bitcoin to buy something else I want. I might miss out on some huge runup in the value of bitcoin, but I don’t need that to reach my financial goals. So there really are no bad consequences if I’m wrong.
On the other hand, if you have 50% of your portfolio in Bitcoin and it goes to zero or goes to $1,000 and stays there or it never really catches on. Or governments regulate the crap out of it. Or another coin ends up being the big winner in the cryptospace. Then you end up losing a whole bunch of money. Those seem like pretty bad consequences to me.
So when you make a big bet, consider not only the likelihood of being wrong, but also the consequences.
Good luck investing.
You might want to serious take another look at Bitcoin. I really appreciate you sharing your knowledges about everything else in this blog but I seriously think that are wrong to dismiss bitcoin.
One of the greatest macro thinker of 2020, Lyn Alden, wrote on her blog recently why she changed her mind to become bullish about bitcoin:
https://www.lynalden.com/invest-in-bitcoin/
A lot has changed since 2017 (which was obviously a bubble) and this is a perfect macro environment for bitcoin to appreciate. We are starting to see publicly traded company starting to use bitcoin as their reserve (Microstrategy) and a lot of institutional players are getting into the game recently.
Here is a mind blowing episode from the investor podcast over the weekend when they got the most talented macro thinkers (Luke Gromen, Jeff Booth and Lyn Alden) together and all agreed that bitcoin has a huge upside.
https://podcasts.apple.com/us/podcast/we-study-billionaires-the-investors-podcast-network/id928933489?i=1000488887755
Jeff was discussion that there are a lot of board members of multi-billion dollar company are seriously thinking to follow Microstrategy’s lead and allocate parts of their cash reserve for bitcoin.
These are a lot of updated information that reflects the status of bitcoin in August 2020 here.
Let’s define what you mean by “dismissing”.
You mean you don’t think I can reach my financial goals without it? That’s obviously bunk, since I already have.
You mean that Bitcoin must go up in value? I disagree that it must.
You mean that Bitcoin is a stable, useful currency? I disagree as discussed above. It is neither stable, nor useful for my purposes.
You mean that I should recommend white coat investors buy it? I don’t know why I would carve a special place out for Bitcoin while ignoring other speculative instruments like currencies, any of the hundreds of other cryptocurrencies, precious metals, art, empty land etc. I recommend the vast majority of a portfolio be made up of productive assets like stocks, real estate, and small businesses and interest bearing instruments such as bonds and CDs.
You mean that I should say it is okay to put some tiny percentage of your portfolio in Bitcoin? I think I’ve already said that multiple times. If you want to put 1-5% of your portfolio in Bitcoin, knock yourself out. I sincerely hope your bet pays off.
But this posting of factoids like “a lot of board members of multi billion dollar companies are seriously thinking about putting part of their cash reserves into Bitcoin” stuff is just fanboying. What does seriously thinking mean? What does part mean? Maybe it just means that a board member said “Why don’t we put 1% of our cash reserves into Bitcoin” and they discussed it for 2 minutes at a board meeting before voting it down.
As near as I can tell, your definition of “great/talented macro thinker” is someone who believes Bitcoin will go up in value.
I have no idea what Bitcoin is going to do in the future. It will be interesting to watch. But I suspect I will continue to do so from the sideline as I have the last decade.
I just don’t see that anything has changed. 5-10 years ago everyone said that Bitcoin would become a useful, stable currency that everyone was using. That has not occurred yet and I’m losing faith that it will ever occur. I suspect there will eventually be a cryptocurrency or two that becomes widely used in real life. I also suspect Bitcoin will not be it for the same reason you don’t use Excite or AOL. You use Google. Because it’s better.
As far as its stated purpose as a currency, it is dying. On December 19, 2017, 11,291 businesses accepted Bitcoin. Now in 2020, just 2,300 US businesses accept Bitcoin. That seems like a lot, right? Except there are 32.5M businesses in the US. 2300/32.5M = 0.007%. That might not be zero, but it certainly rounds there. This article from 2017 says:
If that is the case, I would be very worried about your favorite little asset class and its future performance. It’s been a decade. We all know about it. Yet, still nobody uses it. Because it isn’t useful for the vast majority of us. Might want to ponder why and what that means for this bet you’ve made.
Hey thanks for your response and I do really appreciate you taking time.
Yes, those macro thinkers are definitely bitcoin proponents and yes they are someone believe that bitcoin will go up in value but the interesting thing is how each of them arrive to the same conclusion that bitcoin is a great investment at this moment looking through different lenses. Lyn Alden who has a strong background in both engineering and finance also dismissed Bitcoin when it came out and thought it was a cool little micro asset but it really caught her attention in 2017 when the bubble bursted but still dismissed it back then and it was not until early this year after the crash in March that she took a serious look at Bitcoin and became bullish looking through her lenses of macroeconomics. The blog post I linked is probably the best article I ever read about why investing in Bitcoin is a good idea. (hey I am just a random stranger on the internet but I
hope this at least piqued your curiosity and I can’t recommend that post enough)
Jeff Booth is looking at this via technology disruption lenses as he described in his book “The Price of Tomorrow”. The essence of it is that technology and automation will take away many jobs very rapidly in the near future and the government has to fight it by printing a lot of money. Covid only accelerate this thesis and moved the timeline up quite a bit.
Essentially, there is no stoping the unlimited money printing machine and Fed will do everything it takes to keep the stock market afloat and keep the liquidity in our system. QE is here to stay and many people agree that U.S. will print the most money (per GDP) by far even after Covid is done. There are just too many problems in our debt-fueled society that QE just can’t stop. It’s a losing battle for the Fed and our currency will be losing value more and more.
I agree with you that Bitcoin hasn’t really made much progress by becoming a currency as most businesses still do not accept it and having to calculate capital gain tax every time you purchase something doesn’t help. The volatility of it can also be a problem. Nevertheless, bitcoin seems to have found itself a new role as a store of value as digital gold — that’s the reason why Microstrategy decided to put $250M of their cash reserve into bitcoin (that’s roughly half of their cash reserve), it’s quite crazy indeed and that’s why a lot of other companies’ treasury managements are seriously considering it (yes it’s anecdotal evidences — you don’t have to believe me but it’s game theory at play here — the race has begun and the first player as publicly-traded company has made the move )
There maybe other “hundreds of other cryptocurrencies” and some are definitely fancier and can do more things like smart contracts and etc.. but none have the same very important properties as Bitcoin — being decentralized, secure and have truly limited supply. (There is another coin called nano that seems to be quite promising but the network effect of bitcoin will be difficult to beat)
I think at least you agree that putting a small percentage like 1-2% of something that one really believe in in the portfolio probably doesn’t hurt and I am merely just to offer my perspective why I really do think it’s a true asymmetric bet that have a lot of upsides. (based on current market cap of bitcoin being relatively small and stock-to-flow model predictions).
You did state that you prefer to not include any “speculative investment” in your portfolio? I would argue that a lot of stocks these days also have speculative elements of pricing in addition to their real value. Is SPY reasonably priced at $342 at all time high today in the midst of the worst global pandemics? So if an investor decide to continue to put money into the stock market today, will this be considered a reasonable investment or a speculative one? We all know that the game is rigged by the Fed and most of us decided to play along in this game making an educated guess that the Fed will continue to support the market for a long time and the stimulus will be announced shortly. People buy AAPL and TSLA after the stock split because historically the prices tend to increase after the split. Are these speculative investment? I arrive a the conclusion that bitcoin is a good investment at this moment after researching a lot of macroeconomics factor, history of precious metal’s pricing and how many people perceive bitcoin as digital gold, the short-term and long-term debt cycles and where we are at this moment, the upcoming major technology disruption, the Fed’s fiscal policy and the government’s treasury policy, the stock to flow model of bitcoin and etc.. — we don’t have to come to the same conclusion after looking at all these but I would like to know if you would call my decision a speculative investment or an educated decision?
Speculation.
Good luck.
We are at the beginnings of another epic bitcoin bull run from now through September 2021. You don’t need a crystal ball to understand this. Bitcoin is open source. Macroeconomic factors play in to the short term and intermediate term price of bitcoin but over the course of years, the price is predictable. This is the least speculative investment available.
There is a speculative component to ANYTHING you own. Holding dollars, equities, real estate, etc is speculative and presumes that we will not have a major economic collapse. Historically, this was a safe bet. This is not a safe bet in our current situation. You need a hedge against run away inflation. We are at a point where buying a brand new HD3500 or SuperDuty truck for 75k may be financially better for you than holding that 75k in dollars for 5 years. I would bet that 5 year old truck will be worth more than the dollars you held.
Bitcoin gives you that inflation protection plus substantial upside. In most other asset classes, you would have to place a highly leveraged bet to get as much up-side. I agree it is not a currency as we know it because it cannot be debased or manipulated by a controlling centralized institution. It is a decentralized infinitely scarce digital asset which has been proven over the past 11 years.
Based on some of your responses, it seems you have only a superficial understanding of bitcoin and have not done due diligence. For an individual not interested in bitcoin as an investment for themselves, who cares. But, as a financial guru who educates thousands of professionals, I believe you have a duty to learn more about it if you are going to advise people regarding it.
You and everyone else will capitulate eventually. Might as well do it now so it doesn’t look as bad.
https://twitter.com/Croesus_BTC/status/1319734166557081600/photo/1
https://twitter.com/100trillionUSD/status/1318948317401911299/photo/1
A true believer. Thanks for stopping by. It’s the classic line used for all kinds of things…if you don’t love it you just don’t understand it or haven’t spent enough time learning about it.
Time will tell whether your crystal ball is cloudy or not. How big of a bet have you made on it?
I’m a fan and long-time reader but you are on the wrong side of this one.
So it sounds like you believe yourself to be well-educated on bitcoin?
I assume you’ve read the nick szabo’s paper “the origins of money”, “the bitcoin standard”, and all about metcalf’s law. I assume you’ve read “the bullish case for bitcoin”, and watched the michael saylor interviews? What did you think of all of the economic history, the analysis of network effects, the qualities of emergent monies and their adoption?
At what level of global adoption would you reconsider your position?
I came across this page while I am researching for bitcoin and while I find a lot of really helpful information on this site (great works), I have to say that I disagree with some of your points here:
One has to understand the most important use case of bitcoin at the moment — being a reserve asset or a store of value.
51 out of 52 countries that reached sovereign debt levels of 130% of GDP ended up “defaulting”, either through devaluation, inflation, restructuring, or outright nominal default, within a pretty wide spread of 0-15 years or so after that point. US is current at 136% what do you think will happen?
Almost every experts agree that the only way to get out of this is to inflate away the debts. One might say that we haven’t seen much inflation in the past several years in the U.S. — this is true if you look a metric like CPI. Chapwood index (https://chapwoodindex.com/) was created to address the shortcomings of CPI by reporting the actual price increase of the 500 items on which most Americans spend their after-tax money. No gimmicks, no alterations, no seasonal adjustments; just real prices.
Based on Chapwood index, cost of living has been increasing 8-13% in major cities of the U.S. (a major part of this was due to real estates, healthcare and education cost which is not properly accounted for in CPI)
Investors have been (knowingly and unknowingly) looking for a way preserve the value of money by putting their hard earned cashes into real estates, stock markets, precious metals, bitcoin and other scarce assets. Equities (esp tech stocks) have been used as “store of value” a lot lately as people keep pouring their money into them without caring much about fundamentals of the underlying companies creating inflated stock prices across the board in the past several months.
Money supply expansion is often driven by politics and it is known that those who are closest to the source of the expansion tend to benefit the most leaving everybody else behind.
The creator of bitcoin wanted to address this very problem by creating the soundest/hardest money that has rule-based monetary policy that reduce the new supply by half every 4 years. Bitcoin’s monetary policy doesn’t care about politics! That’s the real value of bitcoin.
Bitcoin provides an option for those who want to preserve the value of their money without having to chase the crowded trade of the stock market that is full of overvalued equities, without having to further inflate the value of real estates (so that people who really need it can buy homes).
Let’s address the points that you made:
# 1 Bitcoin Isn’t an Investment
An investment can be anything that one put money in and expect an increase in value of money. I think calling something not an investment is a bit misleading. You can say it’s a speculative investment or a high-risk investment but that will depend on one’s view and we all can assess the same asset and have different views.
To call the best performing asset in the past decade not an investment is a bit dismissive and misleading.
# 2 Bitcoin Isn’t Even a Currency
While bitcoin’s use case as a medium of exchange is somewhat limited and as you have point out, the number of stores that are accepting bitcoin may have declined, this doesn’t mean that it’s not currency — it’s just not as popular. Bitcoin is going through a phase transition and right now it found it’s most useful use case as a reserve asset.
With Paypal stepping in the game, things will definitely change as they will allow merchant to accept bitcoin payment acting as a second layer over the bitcoin network. However, people may still decide not to use bitcoin for commerce if they believe that it will hold the value up as time goes by. Visa also recently endorsed bitcoin and will be probably be following Paypal’s move shortly. (Interesting they were initially not so bitcoin friendly but decided to change their position)
Recently, there was a bitcoin transactions of $1.15 billion with around $3 fee. You can’t simply do this with any other form of currency with such low fee.
# 3 Cryptocurrency Volatility Exceeds My Risk Tolerance
This is a fair point and one should take this into account when investing. Higher risk assets is often associated with higher reward though.
# 4 The Cryptocurrency Markets Have More Than Their Share of Scams and Scammers
While this is true, it’s important to differentiate between saying that bitcoin is a scam and there is a lot of bitcoin-based scams. To me, the former is definitely not true while the latter is certainly true. It’s also important to differentiate between bitcoin and other crypto currencies in general. There are a lot of get-rich-quick schemes in ICOs, Defi Tokens and NFTs but bitcoin is definitely not one of those things and has very different goal.
The regulations are actually getting a lot better since the time you made this post in 2018. Now we have two crypto banks (Kraken and Avanti) that are full reserve bank — they are a lot of financially responsible than the fractional reserve banking system actually. National banks can also, for the first time this year, provide custodial service for digital assets and this is a big news as this allow institutional investors who need third party custodial service to get in.
No bitcoin ETF is approved yet but many believe that things are moving in a positive direction.
# 5 I Don’t Need To Speculate To Reach My Goals
This a fair point. The thing is there is no guarantee that the US stock market will continue to offer the same growth as it has been in the past decade or two. With tremendous amount of debts that we have, many analysts think that we will enter a phrase of slower growth.
Interest rates will remain low for a prolonged period while stock market is a crowded trade and many investors feel that many stocks are overvalued these days — it’s more important than ever to look for alternative assets.
Doesn’t sound to me like you’re researching, sounds like you’ve already made a decision.
Good luck.
Bitcoin is not speculation and its comparison to gold is misleading. Gold is a speculative asset. Gold’s industrial use has little to do with its value. Bitcoin’s inherit value essentially comes from its representation as an equivalent unit of energy.
” On Monday, the CBECI indicates that there is 7.46 GW running the BTC network which equals around 63.32 TWh or terawatt-hours of energy consumption. The amount of power consumed by bitcoin miners is equal to more than seven nuclear power plants or 21.8 million photovoltaic (PV) solar panels.” – news.bitcoin.com
Energy is used to secure the bitcoin’s network and maintain the resiliency of the distributed ledger system. This allows every user of the network to know (and more importantly believe) that “joe has 2 btc….joe sent 1 bitcoin to Jane….Jone and Jane now have 1 btc each”. Trust in a central bank is now traded for a trustless based value recording system secured by complex crytopography, powered by raw energy represented by a funny abstract thing called Bitcoin.
Slam dunk moment – Bitcoin’s network is the only value recording system on the planet that doesn’t inflate – its preprogrammed immutable monetary policy is disinflationary. 18million in circulation, 21million can be mined. Issuance rate cuts in half ever 4 years. Now this doesn’t make it an “investment” but its sure pretty cool from the view of a basic value recording system and sexy as a reserve.
Don’t get me started on its social “value” in restructuring the way we finance the world. It’s the biggest decentralized experiment since the American constitution was engineered.
For now, its fundamentals are enough of a reason to diversify into btc and maybe above 5%.
I disagree. It’s a speculative asset and I don’t recommend anybody put any sort of serious money into it. It might be sexy and fun to gamble with and fun to ponder what its role might be in the future, but it’s not an investment for your serious money.
It’s understandable that you disagree — many people still are not convinced.
I am curious to hear what are your thoughts on currency devaluations though? Don’t you think that the tremendous increase in money supply is a problem? Debts need to be inflated away, don’t they?
https://static.seekingalpha.com/uploads/2020/9/5/saupload_full-c93be7f0282dc0a4485ea55393204fe14a11b92c.png
Do you think US stocks market will continue to go up at the same rate as before? A lot of popular stocks look like this:
https://static.seekingalpha.com/uploads/2020/9/5/saupload_full-c93be7f0282dc0a4485ea55393204fe14a11b92c.png
I think you don’t believe in gold either. What are other options besides bitcoin, gold and stocks? Bonds have no yield. Real estate?
Where should people park there money? VTSAX?
So far we seem to be okay as far as the tremendous increase in money supply. I saw an argument recently that every hyperinflation episode has NOT been due to a rapid increase in money, but rather in a decrease in services/products produced.
I have no idea if stocks will continue to go up at the same rate as “before” (whenever before is.)
I invest my serious money in stocks, bonds, real estate, and small businesses I have significant control over and know well. It certainly helped me reach all of my financial goals and then some. How about you? Has investing in Bitcoin helped you achieve all of yours yet?
I agree that we have not seen much effect on prices of everyday item but prices of scarce assets like housing, stock markets, gold and etc.. have risen considerably.
I think stocks will probably continue to do well for a while and I still have most of my portfolio in stocks (50-60%) but I carved out a portion to allocate to bitcoin (5-10%). I am a bit concerned about stocks being overvalued so I am actively looking for other investments (outside stocks and bitcoin). Real estates is always a good options but I don’t want to be a landlord so I am researching more on something like Fundrise or just REIT that focus on residential. I have a small business and plan to inject some capital into it too.
Bonds have a very low yield right now and sometimes it also got crushed (like during the March sell off and also on last Friday) so I am not really sure about it right now.
For most investors who have full time job, they might have time to be a landlord or run another small business so if they want a place to passively park their money, their only options will probably be stocks or cash (if they are not interested in bitcoin)
I have gained quite a bit on bitcoin as my cost basis is around $7-$8k but my overall investment time frame is relatively short and I still have 25+ years to retirement.
I think “got crushed” is probably a little hyperbolic don’t you think? VGIT, Vanguard’s intermediate treasury ETF traded at $70.05 on March 16th, $68.53 on March 18th, and $70.29 on March 23rd. That barely qualifies as noise. High quality bonds were quite stable in March.
Good luck with your portfolio. If you fund it adequately I’m sure it will do fine.
You are probably right. I just always felt bond was the safest place to be while returning some yields. Right now I would think bond and cash is almost the same asset class, don’t you think?
Yes. But both very different from cybercurrency!
I am also against purely speculative assets btw. Can you explain why you disagree with the points I made as defense for it being a value asset? Its future use is of course fun and sexy but that’s not why I think it’s not just a purely speculative asset. Its value is in being an asset in the bitcoin network monetary system. I agree that there is absolutely a component of speculation because price is still being discovered but there is fundamental value. Maybe it’s just beyond the scope of traditional financial systems and too abstract. Value comes from the fact that a bank is no longer needed.
Another point of view when it comes to the absolutes of speculation and investment. I’m curious how many companies in a total market index fund are not producing a profit only projecting them.
If the bitcoin network monetary system ever achieves widespread use, why would I not be able to buy Bitcoin then using dollars, stocks, bonds, and other valuable assets I own or can produce? Why would I need to buy it now, before it achieves widespread use? There’s only one reason, and that is to speculate.
I’m curious how many companies in a total market index fund are not producing a profit only projecting them.
Why would it matter if the overall market is profitable?
I’m getting confused on your definition of speculation vs investment. To me they aren’t absolutes but more of a spectrum. I can understand if you want rephrase your opinion as btc being too speculative of an asset but it surely isn’t ONLY a speculative asset as gold or silver or even cash is unless you see its inherit value in paying taxes.
Every asset including stocks have a speculative component. Do you believe high double digit and triple digit PE ratio’s on companies that might not be even turning a profit are based on fundamentals? I’m sure you don’t and a total stock index I bet has a bunch of them. Thats of course based off speculation that a company will one day grow and/or make profit based on its perceived potential value. Gold has not inherit value, it’s a worthless metal with little industrial use thats heavy to transport and expensive to custody. That by definition is all spec. Bitcoin as I’ve stated has inherit value based off it use on bitcoin network in preserving capital. Gold doesn’t preserve value when we haven’t dug deeper than a few km in to the earth’s crust.
Thats like saying why buy value stocks now when I can buy them in the future.
Fair enough. I agree it’s a spectrum. But Bitcoin is WAAAAAY out on it compared to a simple stock index fund, a cash flowing apartment building, or my small business.
Just because you can find a speculative stock in the market doesn’t mean the overall market is nearly as speculative. Any simple comparison of the volatility would tell you that. Bitcoin went up 40% in October. It could give it all right back in November. Why is that? Because nobody really has any idea what this thing is worth. They’re just speculating. It’s the modern equivalent of a Nevada silver rush 150 years ago.
Don’t disagree with its volatility but thats a product of any small cap emerging asset and my risk tolerance is aggressive.
Just think that the the gap in speculation between digital and traditional assets are becoming closer than one might typically assume when central banks are propping up all those those markets you stated with funny money(not bitcoin), a major debit cycle looming ahead and global productivity slowing pre-covid. Double digit inflation is here and it’s all in traditional equities. Relying solely on traditional equities to preserve wealth over the next decade might be more “risky” than Bitcoin.
Your crystal ball seems to function better than mine.
I also see no evidence of double digit inflation. I don’t know how old you are, but the last time he had inflation of any significance was in the 1970s. It was still only 6.85%. And it felt VERY different from now. https://www.nber.org/system/files/chapters/c11462/c11462.pdf
No crystal ball. The macro debt cycle burst I’m concerned for is more speculation but the inflation we have is tangible. Do you really believe the CPI is an accurate representation of inflation?
College tuition goes up 8% a year.
Medical insurance premiums goes up about 5-8% a year.
Median home values go up about 6-7% a year.
Average rent increased by about 3-5% a year.
High double digit and triple digit PE’s on over leveraged companies being held afloat by monopoly money and artificially low interest rates.(MMT is a religion not a policy and we can’t keep this ponzi scheme going forever despite political addiction and sadly even some economist support)
Those are all way more important things than pop tarts and Samsung TV’s being cheaper. The CPI is at best misleading and at worst disingenuous. Interesting how all these things most important for living and “protected” by the government are the beings inflated the most. But I digress 🙂
Just saying diversifying a little out of traditional markets might help specifically a new portfolio starting out. I wouldn’t put my 67 yo father into bitcoin cuz his horizon is too short of course and like you said, too much volatility for the near term(but improving). By the I’m early thirties, just started practicing. This was my first crash, 2nd if you count 2008 but I wasn’t much “aware” at that time. I’ve manage my fathers portfolio for the last couple years and managed to hold the course with your principles . Though I admit I added 5% SLV to his portfolio earlier this year from his cash holdings when it was around $12-13 a share which worked out very nicely.
Thanks for all you do!
What’s happened to your grocery bill over the last decade?
Gasoline?
Electronics?
For everything you can point out that went up in cost, I can point to something that went down. The only inflation that really matters to you personally is your own personal inflation rate, i.e. the inflation rate on what you buy. For example, in my case I don’t care one bit that the cost of rent or the price of houses is going up. I don’t plan to have either of those expenses ever again. Nor do I care what the average medical insurance premium went up. I know what mine went up. Actually, it was flat this year.
If MMT is a religion, Bitcoin enthusiasts certainly share one.
I’m pretty hesitant to invest in anything I wouldn’t put my parents’ money into. Your dad might have a 30 year time horizon. For all you know, yours might be shorter than that.
Good luck trying to invest by predicting the future. I sincerely hope you’re better at it than I am, because I’m terrible at it and if I tried to do that I might not even be FI yet. Do you and your father really need to speculate to meet your financial goals? I bet you would find you don’t if you ran the numbers.
Not sure what your point is. Most WCI’s are prob millennial generation and younger do have major big ticket liabilities like education and new homeownership which are inflating at near double digit rates. Amazon is amazing, many things are cheap and it’s a blessing but like you said inflation is variable to different socioeconomic groups as well as different generations and many are sinking without even knowing it.
As far as my father. Not sure if that’s fair. Its a decision based on general short term volatility not bias of an asset class one way or another. I don’t put him in bitcoin for the same reason he’s not in 90% equity at his age.
Comparing bitcoin to a religion is like comparing free-market believers to a religion. If it is we should all get baptized lol
Also, are you suggesting a 67 yo man should have a risk profile in his portfolio based
on a 30 yo horizon?!
Yes I can die any day? Why invest at all then lol
Millenials are currently between 24 and 39 years old. Certainly many WCIers are millenials but I’m not sure most are. At any rate, measure inflation however you like, I really don’t care how you measure it. But you certainly can’t argue that a volatile asset like Bitcoin somehow matches it. It’s gone from $10,000 to $5,000 back to $14,000 this year. If that’s your idea of a stable currency, I’ve got a bridge to sell you.
And no, I’m not suggesting AA at 67 should be the same as at 30. But the components of the portfolio can certainly be the same. If it’s good for the goose, it’s good for the gander.
You probably know by now that true Bitcoiners (aka Bitcoin maximalists) are very passionate and have very strong opinion about monetary policy and inflation/currency devaluation. I don’t know what to call it but I know that there are a lot of good reasons to fight for bitcoin success.
You have to understand that Bitcoin was created as a direct response to the unfairness of our financial system that seems to report those who are closet to people who have ability to inflate the money supply (The Cantillon effect)
You can argue that ok your personal inflation may not have risen but maybe it’s because you have already bought a house a long time ago and maybe you have been with employer who have been trying to make it work for employees by not passing the cost of health insurance premium to you. Maybe you finished your education a long time ago when the cost of tuition was half of what it is today and you don’t have to worry about it.
I personally have been savings for a new home and was able to save about $50k per year for the past 5 years but was priced out because the home prices in my are has risen 20-30% in the past 4-5 years. I had to settle for a much less desirable option. I am paying the same but getting less — no matter how I look at it, my money is getting devalued at a much higher rate than the interest rate that I can get from safe options like high-yield saving account or bond.
I could say that my personal inflation is roughly the same as 5 years but I have to eat chicken instead of steak, live in a 1BR apartment instead of 2BR + office apartment, have healthcare with higher deductible and etc.. but is this really the right direction we are heading towards?
Chapwood Index was created to try to identify the real cost of living increase — unlike CPI, it really track cost that really matter to most people and it revealed that the true cost of living has been increasing 8-13% annually in almost every major cities in the U.S.
The problem is even much more pronounced in developing countries where their currency is getting destroyed like in Turkey, Argentina and Zimbabwe. For us in the U.S., we are lucky that have USD as the world reserve currency so we can print tons of money and still be seemingly ok as the world will still need USD to service debts everywhere. The interesting question is how long will the other countries let this going?
These are some of the main reasons that Bit coiners are so passionate about the idea — many of us really do think that Bitcoin is really the only chance to fight against the unfairness of the financial system. To me, Bitcoin is not a get rich quick scheme, rather Bitcoin’s purpose is to prevent you from getting poor slowly but surely over time because of the current monetary and financial system’s flaws. I don’t see any other peaceful way to fight against the system but buying and holding bitcoin. To me, as Nic Carter elaborated in the article below, bitcoin is the most peaceful revolution.
https://medium.com/@nic__carter/a-most-peaceful-revolution-8b63b64c203e
https://tsi-blog.com/2015/07/beware-of-bogus-inflation-indices/
I doubt you’d be so passionate about Bitcoin if it had dropped 80% this year instead of gained 80%. Your arguments sound like carefully crafted justifications to indulge your FOMO and dream about the possibility of getting rich quick and being able to move out of your 1 bedroom apartment into something more comfortable.
Even if Bitcoin at some future date actually becomes practical to use in my every day life, why couldn’t I just buy it then? Up until that point, it is merely an instrument of speculation and I’m not going to put serious money into it.
One can be fully supportive of block chain technology and the move toward widespread use of a cryptocurrency without betting your retirement money farm on it. If you truly cannot see any other peaceful way to “fight against the system” than by buying Bitcoin, I doubt there is anything I or anyone else could ever tell that would cause you to change your beliefs on the subject.
So that leaves me to wonder why you keep making long posts about it here. Are you trying to change my mind? To convert me to the Church of Bitcoin Maximization? Would you somehow feel better about your beliefs if I shared them? Or are you trying to save my financial soul? If that’s the case, it seems bizarre that the guy in the one bedroom place is preaching to the multimillionaire. Or are you trying to help my readers, in which case I can assure you that only 13 people are subscribed to this 5 month old post and most of them already agree with you that Bitcoin is the cat’s meow (and very few casual readers who wander in here will read through 103 comments to see yours.) Or maybe you’re doubting your beliefs because you found someone who you thought knew something about finance but doesn’t share them.
Only you can answer.
It’s certainly possible that bitcoin will crash again and then also rise again. It’s kinda expected at this point by many people actually — I am looking at long term trend, it’s a bizarre chart unlike any other asset but the yearly lows keeps increasing every year for the past 10 years.
Of course, one can be supportive in bitcoin and blockchain in other ways too but I am doing what I can — buying in holding will help the market cap of bitcoin grow and you know people will take it more seriously when the size of the asset is at certain level. I put money where my mouth is so that’s why I am putting around 10% of my liquid asset in bitcoin. By continuing to invest in it, I keep myself educated about fintech technology, finance and macroeconomics that are related to bitcoin — just like if you invest in TSLA, you would be interested in learning about batteries, self-driving technology, solar power and etc..
Why not more? because I also recognize that it’s still a relatively higher risk comparing to other assets but recent developments this year reduced the risk significantly. To be honest, I probably sleep better at night with 10% in bitcoin than 10% in cash provided that I don’t need to use this money for several years — that’s what I really believe.
Of course, I can change my mind if there are bad news like the U.S. suddenly decide to impose 50% capital gain tax on crypto or government declare that they will use extreme austerity and try to balance the budget — both of which are extremely unlikely to me though.
Why keep making a long post here?
First of all, bitcoin is a very complicated and polarized topic. There is no easy short answer to most of the questions related to bitcoin. I think the only way for someone to really understand it and believe in the value of it is to dig down the rabbit hole. The reason I found your website is because I was trying to research the best reasons why I shouldn’t invest in bitcoin (steelman arguments rather than strawman ones) and I am thankful that you have been kind enough to engage in responding though we may share different views.
Believe it or not, this thread maybe old but google still send me here. I myself learned a lot by reading long comments of a thread like this. When someone is really curious about something and made their mind to do research, one might be surprised that these comments may get read.
The one BR is a hypothetical situation perhaps for a recent grad out of medical school. I myself live in a brand new 3BR townhome in a good area in Northern VA — nothing really to brag about but I have been questioning why does it has to cost $1.3M to purchase a townhome here.
I think it’s healthy to doubt our own thinking/reasonings but to doubt one’s beliefs is another story as it should be based on fundamental thinking. My belief is we should have a sound financial system and my current thinking is that bitcoin is the best thing that we have today to help get us there. My current thinking could be swayed that’s why I keep engaging with other people who think differently but it will be a lot harder to change my beliefs.
A 3 BR townhome in Northern VA might make you a millionaire all on its own. Expensive place that.
There are a lot of zombie companies for sure. People are using index fund as a store of value these days — they put money into it without looking at fundamentals (because they are told to “stay the course”) when they have some cash that they don’t need for a while and take it out when they need it.
Mike Green talked in great length about the problem with Index fund here:
https://podcasts.apple.com/us/podcast/the-end-game-ep-3-mike-green/id1508585135?i=1000483139066
The thing is people need to put money somewhere to preserve the value of their hard earned money. Stock market isn’t really created for this purpose of being a store of value.
I think it’s difficult to argue Bitcoin is a good store of value given its volatility.
Depends on your time frame.
It is indeed volatile but there have been a period of long consolidation when prices don’t move much too. Crypto also trades 24/7 with no circuit breaker — price discovery doesn’t get more real than this
What do you think about the recent institutional adoption of bitcoin? For example, MassMutual just bought $100 million. Very interesting times. Reportedly they have been historically conservative with investments.
What percentage of MassMutual’s portfolio is $100 Million? When you figure that out, you’ll have your answer (it’s well less than 1%). Not exactly a huge commitment.
I think like most people buying bitcoin they’re just hedging their bets and doing a little speculating.
But if you want to go buy some Bitcoin, you don’t need MassMutual’s or my permission. It’s your money. You makes your bets and you takes your chances. I don’t plan to buy any until it becomes a currency useful to me. Well, maybe I’d buy one or two as part of a SHTF kind of scenario and put it with my guns and ammo. But it’s not going into my asset allocation and being rebalanced every year.
Bitcoin currently has basically three uses:
1) Speculation
2) Hide illegal activity (currently about half of Bitcoin transactions)
3) Take wealth with you if you need to flee your country
Maybe some day it will be a stable store of value or a useful currency. But it isn’t today. I’d say of the people posting here about it 99% fall into # 1 above.
1. The speculative moniker is fading with each passing year.
2. Can you cite your source to your claim that about half of Bitcoin transactions are associated with illegal activity?
3. Your #3 would make a great movie. My #3, and I would argue a large portion of Bitcoin holders, is as an absolutely scarce store of wealth with high liquidity, fungibility, and transportability.
Any chance you would care to have a moderated debate with me on Bitcoin? Podcast, YouTube… you can choose the format.
1. You have an interesting view of the definition of speculative.
2. https://cointelegraph.com/news/us-fed-official-says-50-of-bitcoin-transactions-associated-with-illegal-activity
3. Not sure what you’re referring to.
Glad you’re happy with your Bitcoin. Its increase in value has been spectacular over the last year.
Want to have a debate with me about proper canyoneering techniques instead? It’s far more interesting to me. No? Weird that no one would want to debate me about my pet subject. Have you had that reaction too when you wander around the internet challenging people to debates? 🙂
1. By “interesting,” you mean verifiable? Dollar cost averaging from any date, to include the ATH reached in 2017, would have yielded the investor a minimum, MINIMUM of a 50% ROI in one year. Again, that includes buying the last top. All time highs in Bitcoin have proven to NOT be the time to sell and walk away, merely a validation of the network protocol.
2. The following is a quote from a more recent paper, contrasting your cited paper: “Back in 2017, a study by the University of Oxford found that an extensive 44% of all BTC transactions were felonious in nature, associated with financing criminal activity. In contrast, in July 2019, a Chainalysis report suggested that less than 1% of Bitcoin activity involved crime. ” https://cointelegraph.com/news/criminal-activity-in-crypto-the-fact-the-fiction-and-the-context
I chose this article from the same source you cited in the spirit neutrality. Things move fast in this world. Your article from 2017 fails to cite blockchain analysis and falsely associates all transactions on exchanges which do not adhere to KYC and AML policies as criminal activity. That’s the problem with citing a 4 year old article based on a study by a university (Oxford) that was not an authority on blockchain analysis.
3. I am referring to one of the most evident use cases for Bitcoin.
The increased value you mentioned has been spectacular since 2011 (when its value was first documented and tracked) not just over the last year.
While I am sure there is an audience for your canyoneering hobby, it’s undoubtedly much smaller than those that are interested in Bitcoin which as a $724.3 billion market capitalization at the time of this reply.
You are in fact THE FIRST person I have asked to debate. If your answer is ‘no,’ please feel free to simply state so. No judgement, no hard feelings. I am not an unreasonable individual, nor want to see this engagement as anything more than an intellectual discourse in which the audience stands to benefit… no matter who appears to win. Again, a simple yes or no. That’s an easy enough request.
Thank you for your consideration,
Quentin Lobb, MD
1) A positive return does not mean something is not speculative. A speculative investment is something that produces nothing and requires somebody down the road to pay you more for it in order to have a positive return. Oil, gold, yen, and Bitcoin are examples of speculative investments.
2) https://academic.oup.com/rfs/article/32/5/1798/5427781
https://www.nytimes.com/2020/01/28/technology/bitcoin-black-market.html
https://www.forbes.com/sites/rachelwolfson/2018/11/26/tracing-illegal-activity-through-the-bitcoin-blockchain-to-combat-cryptocurrency-related-crimes/?sh=1819f9a033a9
https://thenextweb.com/cryptocurrency/2018/02/07/study-44-of-bitcoin-transactions-are-for-illegal-activities/
https://www.prnewswire.com/news-releases/nearly-one-third-of-people-believe-cryptocurrency-is-used-primarily-for-illegal-purchases-but-actual-purchases-may-be-more-boring-301037317.html
Nobody but the fanboys believe the number is 1%.
3. I’m going to tell you the same thing I’ve been telling the whole life insurance salesmen challenging me to debates for years so they could tell their friends The White Coat Investor “refused to debate them.” No. That would be a very poor use of my time given my current life goals. Surprised it would be a good use of yours.
1. The investment has helped produce the most powerful computer network the world has ever known (>160 quintillion hashes/second). This network can be used for more than simply transacting BTC. This network has powerful attributes due to is decentralization: immutable, incorruptible, transparent, scalable, etc. Your definition of SPECULATIVE differs from that of general economics. Take Investopedia as just one example. As such, would you mind giving an example of a nonspeculative investment using your definition? According to your definition, all investments are speculative if the intent is to realize a profit.
2. The fact is USD is used for illegal activity by an order of magnitude greater than BTC. There are only so many criminals/would-be-criminals in the world. Criminals taking advantage of new technology is not a novel event. If a criminal uses a burn phone to traffic a child internationally in no way does that make me a criminal for using one on vacation to avoid the theft/loss of mine.
3. While pursuing life goals is an admirable thing, I personally can easily find time (1 hour) to have an intellectual discourse with another professional in the name of furthering everyone’s understanding of this nascent financial technology. I respect your answer of NO. I personally feel helping others understand something in which they have a paucity of knowledge is a great use of time.
More use cases for Bitcoin currently….
4. Banking the unbanked. 1/3 the world doesn’t have access to any financial tools and also may not always have the ability to comply with KYC rules. With a smart phone you now have access to a borderless and immutable network. There are countless centralized and decentralized financial platforms forming around both bitcoin, Ethereum and fiat-peg stable coins every day it seems. Many in South America for example use companies like Ledn.io in high volumes to gain access to micro-loans at fair rates. Countless other examples around the world with a simple search. I actually use some platforms myself for return on digital assets.
5. Store of value in unstable nation states. Countless examples of the people escaping the tyranny of runaway inflation in places like Lebanon and Venezuela and in literal terms saving their families lives with bitcoin.
Agree with 5. So many other and probably better options for 4 though.
I’m not sure if there is a better option for 31% of the world that doesn’t have access to the USD monetary system. People are now currently using crypto-centric financial services not because they don’t know there’s perhaps something better out there it’s because they can’t use what 2/3 of the world do.
Not sure if any you caught this. Very interesting.
https://www.nasdaq.com/articles/us-government-enlists-usdc-for-global-foreign-policy-objective-in-venezuela%3A-circle-ceo
I guess I’m skeptical that you can somehow do something with Bitcoin that can’t be done with Venmo, Paypal etc.
Thats a fair thought but the reasons why these systems won’t work for everyone is because you still need access to a fiat based monetary system to access those remittance networks. Can you fund your Paypal or Venmo account with the Lebanese pound , Venezuelan Bolivar or Ugandan Shilling? Can you fund these fiat-centric networks without an approved fiat based bank account? The answer is historically no to my understanding. And while Paypal has recently added bitcoin their basket of currencies for remittance purposes there are caveats to this service that make it counterintuitive and it doesn’t solve the problem of access to more sophisticated, though still quite basic, financial services such as loans and interest bearing savings accounts.
Bitcoin is immune to censorship and third-party intervention/manipulation. Sovereign governments (like China, Iran, North Korea) can prevent access to entities such as PayPal, Venmo, Google, Twitter, etc.
Due to it’s decentralized design and with most nodes running on Tor/VPN technology here on the ground and in a series of satellites (Blockstream), Bitcoin cannot be interfered with by a third party. No middleman so to speak of, no interrupter, no ability to deny access. This essentially allows for a separation of Money and State.
Who are you trying to convince by posting several paragraphs here every day for a week? Do you know how few people read 126 comments below a post or subscribe to a post like this that don’t already agree with you that Bitcoin is the cat’s meow?