By Dr. Jim Dahle, WCI FounderI 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.
[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.
- 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
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?
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.
I’m not sure I see why another currency solves the problem. Ugandans can’t go down to the grocery store and buy carrots and pigs with cryptocurrency either just like I can’t. Nor would they want to store their money as crypto if they want a stable store of value.
Nigerians can as well as Venezuelans. It’s simply a matter of time.
There are use cases proving quite just that. People are in fact using digital assets such as bitcoin and pegged stable coins to engage in commerce between themselves outside the bolivar system in Venezuela. Wether for unit of account or store of value it seems that the market in these areas have assessed the volatility of the underly asset and deemed the present risk a hedged one.
If I lived in Venezuela and still had any wealth, I’d probably put some of it in Bitcoin. Then I’d try to escape.
US is my home and will likely always stay that way. I love my country dearly and do not see the petro-dollar system being allowed to collapse to any significant degree anytime too soon but the status quo is not immutable while bitcoin’s network is. Waiting for our government to resemble Venezuela is not the only reason to carry a little schmuck insurance especially in time where modern monetary policy is now pushed as the new gospel of the body politic. Gold and other hard assets would assist you too but I’m a millennial not a dinosaur haha
“ 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?”
Apparently quite a few. Seems that with each back and forth we have, more and more join Physician Cryptocurrency Group. Many of us were happy to have had these discussions on subs at WCI until your recent edict essentially banning them.
I cannot help but think that before long you’ll come to find the two rails: the fiat based investor rail and the decentralized based opt out rail are not parallel. They will converge. I’m wanting that intersection to be as smooth as possible for the later adopters in the healthcare industry by providing access to individuals and resources that have navigated the waters of this new, disruptive technology.
If you will not agree to a debate, will you be willing to take a phone call or private Zoom meeting to discuss the possibility of adding a digital asset limb to WCI if you feel it appropriate in the future? In all honesty, I am committed to and passionate about helping others learn and understand the novel use cases and potential of digital assets and blockchain technology. I am currently working on launching a digital asset based HSA with tax advantages.
Sincerely,
Quentin Lobb, MD
Quentin, I’m curious about your digital asset HSA plan. Jim is averse to the idea of Crypto Currency. Even though BTC has been getting some press, I do not think it is going to be accepted by the risk-averse people in finance for quite some time. I used to want to try and teach people about it, but I’m tired of that now. Thanks to the internet, and free information, everyone has access to the knowledge about BTC. However, it takes a considerable amount of work to unlearn what you have learned and see the new reality. Think about how hard it is for people to leave a religion. This same sort of mental obstacle is present regarding BTC. At this point, I’m just content to know that the smartest guys in the room have figured this (blockchain) out and I got on board.
I am academically curious, though, what piece of information the naysayers need to stop doubting BTC. I wonder if it is a particular USD value, or bank support, or global crypto or BTC market cap. It may be ubiquitous adoption of wallets. I think we are far from that, however. I am continually surprised how many people that I interact with on a regular basis haven’t even gotten a PayPal or Venmo or Zelle address. Considering THAT, I’m very confident BTC has a long runway.
Rich Lassiter, MD
It’s not fair to say I’m “averse to the idea of cryptocurrency” nor that I “doubt it” or “refuse to get on board.” I do agree with you that there is a religious aura around Bitcoin though. I think your comment demonstrates that well.
Now it is fair to say I don’t invest in it because there is no consensus that it has a positive long-term return. It’s purely a speculative instrument. If you need to speculate to reach your financial goals, go right ahead. I don’t need to.
It is also fair to say I don’t see it as a useful currency nor a useful store of value. If it becomes either, it’s entirely possible I would use it for one of those purposes. But there is no current use for cryptocurrency that fills any sort of need in my financial life.
What is a “digital asset limb” of WCI? You mean a blog, podcast, youtube channel, facebook group, forum etc? You guys are such fanboys that you seem to have an inability to place cryptocurrency into its proper place in the financial world. It reminds me of the whole life insurance fanboys that think whole life insurance solves all of the world’s financial problems.
I was perfectly content to have people discuss cryptocurrency all they liked all over WCI until it became so divisive that it crowded out discussion of anything else ont he FB group, created bitterness, and caused literally hundreds of people to leave the FB group. More information on that decision here:
https://www.whitecoatinvestor.com/why-your-facebook-group-post-was-closed/
Discussion of the topic is still permitted on the forum and the subreddit where people apparently have the ability to interact appropriately with each other that was lacking on the FB group. It’s also obviously allowed here.
Jim,
I stand corrected. I should have stated that you were averse to the idea of investing in cryptocurrency. At least, that is the sense that I get from reading your posts/emails. Those other quotes aren’t things I said.
I’m not mad, or going to beat on the door dragging people to my conclusions. I’m willing to answer questions if people ask, though.
I believe you answered my question, of what it would take for some of the risk-averse people to start trusting. Your answer was that if it was a useful store of value or a useful currency.
It does seem, to me, those are precisely what bitcoin does, so I’m confused why you chose those characteristics. I will certainly concede that it has been a volatile store of value relative to $USD, however, so are other items. The Euro, a VanGogh, and gold all fluctuate in price over time relative to their demand.
My personal opinion is that bitcoin will not become a day-to-day currency as it will become too precious. People will probably swap it for another currency on a network that settles faster.
As an experiment, why don’t you install a digital wallet on your phone. They are free and only take a few moments. You don’t even have to fund it. You could just post your wallet addresses for something such as BTC or Ethereum or a different crypto currency, if you prefer. You could allow someone to pay you for one of your services in crypto. That sounds to me like a low-friction way for you to try it out. You can also get paid in a digital USD stablecoin (there are about 4 right now).
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I am aware that these sound to good to be true. The rates fluctuate, but they are real.
Rich
I don’t care if someone wants to use a small portion of their portfolio to speculate or hedge or whatever in gold or oil or Bitcoin. I simply warn people not to speculate when they should be investing and point out that buying things because they have recently gone up tremendously in value usually doesn’t end well.
The fact that you think the volatility of the Euro is similar to that of Bitcoin is laughable.
So far, my business runs just fine without taking Bitcoin. For example, we just enrolled 800+ in an upcoming conference. Not a single person asked to pay using Bitcoin or said they wouldn’t come unless they could pay in Bitcoin. Why complicate my life?
Not a useful currency. Not a stable store of value. In my experience, a higher yield generally always reflects higher risk, whether you can identify the risk or not.
People use new stuff, whether it’s a phone or a currency or a transportation method or whatever when it becomes more useful or easier to use than what they were using before or does something they need that they could not do before. So far, no cryptocurrency meets that criteria. When it does, I’ll be glad to use it. I’m not on some anti-crypto mission here. I don’t have a dog in this fight. I don’t own a crypto company, unlike you I don’t get paid affiliate fees to plug crypto and crypto services on other people’s websites, I don’t own any cryptocurrency whatsoever. Its price movements are irrelevant in my own financial life.
But I’m going to call it like I see it. The primary reason that 99% of cryptocurrency purchasers buy cryptocurrency is to speculate on it. They’re buying it hoping they can later sell it for more money. That may or may not work out well for them. But it is irrelevant to me.
I didn’t say the volatility was equivalent. I said they were volatile. You tried to equate them.
I don’t need your affiliate fee, and I don’t think you need it, either, but it does grease the wheels, and I don’t know how much longer those services will offer a sign-up bonus. I would guess certainly for a few months, if not another year. I have no first-hand knowledge about their fees.
Like I said before, I’m tired of trying to convince people. I again apologize for misrepresenting your position. My only intent here was to help.
I believe you will eventually come around, just like I believe the rest of the financial world will. I’m not offended if you don’t agree with me.
Oh, I didn’t realize you edited out the invitations I included in my last reply. Sorry if I offended. You were the first person I shared those codes with apart from family members. It does, however, make my post read a little funny by removing them.
It’s not an offense since I assumed you just didn’t stop to think about what you were doing, but it’s basically the equivalent of me spraypainting “Whitecoatinvestor.com” on the side of your house without talking to you about it. Those sorts of posts always get removed and rarely does anyone post them again.
Come around to what? To knowing what Bitcoin is? Already there. Come around to speculating with it? Probably not going to get there. Come around to using it as a currency or store of value? Depends on what the rest of the world does with it. If everyone stops using dollars and starts using Bitcoin, then yea, I’m going to “come around.”
I feel like you guys are talking past each other. You’re point is clear Dr. Dahle.
Bitcoin for the average investor in a developed economy….
Speculative device – yes
Store of value – no
Means of exchange- no
Unit of account – yes
Your**
The religious aura you sense from bitcoin bumpers is annoying and I think all bitcoin holders might be guilty of it at one point or another. Greater fool theory doesn’t completely explain its adoption in developed economies though. Many buy bitcoin because of what it means to helping establish a trustless alternative financial system. One’s “speculative” contribution to bitcoin also indirectly contributes to the resiliency of the network from a technical standpoint and not just a speculative standpoint.
Is it a hybrid tool? Feels like something is being built? Is it consumption? speculative libertarian activism?
Sounds like the old “I bought a Tesla to encourage other car companies to make electric cars” or “I bought solar panels even though I’ll lose thousands on them just to decrease carbon emissions” arguments.
Fair enough. I agree.
But to be fair funding Tesla’s R dept is not the same as the fortifying effects monetizing bitcoin has on the network. The underlying sentiment is the same but the risk is completely different and unrelated to future output. Investing in the future adoption of an existing and functional tangible product isn’t greater fool theory if you assess fundamental value. If no one used the wheel would it still have value?
My point might be clear, but 4 or 5 times a week someone shows up to leave a comment that demonstrates they didn’t get it, so I try to explain it again.
https://twitter.com/100trillionUSD/status/1366300758036131840/photo/1.
Please open the chart above. I posted this chart back in October. Obviously, a lot has happened since then. I’m just not sure why this concept of the halving, limited supply, and stock-to-flow is a challenge for people to understand.
The price of BTC has never deviated >1 standard deviation from this price-prediction model.
And that price prediction model was developed and published when? I don’t recall hearing about it before the last year or so. Obviously a model made using retrospective data is going to fit the retrospective data very well!
The PlanB S2F model for Bitcoin was first published February 2019. And yes, retrospective data is useful in creating a model. For over 2 years now, the price of Bitcoin has followed the 463 MDA very closely. This is by no means insignificant, especially since it tracked closely throughout the economic turmoil of COVID.
Models have limitations. They are by design inherent inaccurate much like a weather forecast, and only work until they break. This goes for any model. I know of no such model in conventional finance that has forecasted the price for anything. Weather it be something as stable as gold, or something as volatile as GameStop. However, for 2 prospective years starting in March 2019, S2F has forecasted Bitcoin’s price quite closely.
It’s frustrating to listen to someone like White Collar go on and on about professional investors with a college degree in finance. Most of the population don’t know where to even begin to invest or who to trust. Investing in the stock market is for the upper class. It’s inside trading for polititions and other circles of groups. The peasants don’t know where to go.
Sad. Reading and educating yourself is not “reserved for the upper class”. The dichotomy you’re creating is self fulfilling. Believe it and it will be true.
It doesn’t take a genius to figure out that endless quantitative easing and fiscal irresponsibility (note: recently revealed 2T spending plan, on top of the 2T recent covid stimulus) does not bode well for the long-term dollar prospects.
Little of that is new of course. When’s the last time you felt the government was fiscally responsible?