By Dr. James M. Dahle, WCI Founder
I am often accused by Bitcoin fanatics of being negative about Bitcoin. I don't think that's fair at all. I'm not negative; I'm completely neutral. I really don't have a dog in the fight. I don't own any Bitcoin, I don't own any of its competitors, and I am not short any cryptocurrency. I fully admit I have no idea where the price is going on Bitcoin over any time period. I am also often accused of knowing nothing about Bitcoin or about blockchain, its underlying technology. The argument mostly goes “If you just understood it better, you would not only buy a little, you would buy a lot.” I hear that one all the time from whole life insurance salesmen too. I assure you, with both products, that I understand how it works just fine. I'm still not interested in putting either one into my portfolio.
However, none of that means that there are no uses for either Bitcoin or whole life insurance. I've written about some of the reasonable uses of whole life insurance before, including the Bank on Yourself/Infinite Banking concept. Today I'm going to do something similar for Bitcoin; I'm going to talk about the reasons people use it, and debunk a few reasons why people say they own it.
7 Ways People Use Bitcoin
Bitcoin is the world's most popular cryptocurrency, and in some ways represents the others. What I write about Bitcoin in particular here also applies to most other cryptocurrencies. However, as I type, there are over 2,000 cryptocurrencies, so obviously there are going to be some differences from one to another.
#1 Speculation
The # 1 use for Bitcoin and the reason most people buy it, no matter what they tell you, is speculation. That is to say, they think they will be able to sell the Bitcoin they bought at a certain price later at a higher price. They buy it because they are convinced it will go up in value. They may be right, they may be wrong; I honestly have no idea, and the truth is that no amount of reading or study is going to help me nor anyone else to know. You makes your bets and you takes your chances.
However, you should at least be aware of how a functioning market works. The price for Bitcoin is set on the open market, just like a stock, a bond, a house, or a car. It is the price at which, at least among those willing to buy and sell at all, the number of people willing to buy matches the number of people willing to sell. That's how markets work. So before you convince yourself that Bitcoin must go up, keep in mind that there are precisely the same number of people who believe the opposite. That's why the price is what it is. And all earthly experience indicates that the market, that is, the collective opinions and knowledge of all of humanity, is a lot more accurate at determining the right price than you, as an individual, are. So no matter what you read on a Bitcoin fanboy forum, there is no guarantee the price will go up.
Essentially, those who are speculating on Bitcoin, and hopefully doing so in full knowledge of what they are doing, are trying to do one of two things. The first is to make some money. Assets with a positive return contribute to the overall return of a portfolio. At least in the past, Bitcoin has done this. The second is to have something with low correlation to the rest of the portfolio—something that will zig when the rest of the portfolio zags. Bitcoin certainly meets this second criteria. Although it hasn't been around very long, it doesn't seem to have any sort of correlation with dollars, yen, euros, stocks, bonds, real estate, commodities, precious metals, or the price of butter in Bangladesh.
Of course, once you own some Bitcoin, you're now in on the game. What downside is there in convincing everyone you know, in real life and online, to buy some? None. It's just like a pump-and-dump penny stock scheme. You buy, then you convince everyone else to buy, then you sell at a higher price. Whether anyone wants to admit it or not, there's a lot of that going on out there, and it often does not end well. I told people at the end of 2018 that if they liked Bitcoin at $20,000, they should really like it at $3,000. But if your goal is to speculate, buying something AFTER it has gone up 1000% in the previous year might not be the best idea.
#2 Gamble
This is slightly different from speculation. People speculate to make money. People gamble for the same reason they jump out of perfectly good airplanes—for the thrill of it. Some people go to Vegas to gamble. Others do it online. Still others do it with the stock market. And yes, there are lots of gamblers dabbling in Bitcoin. If you have a gambling problem, seek help. If you are not sure, consider the following symptoms of a gambling addiction:
- Did you ever lose time from work or school due to gambling?
- Has gambling ever made your home life unhappy?
- Did gambling affect your reputation?
- Have you ever felt remorse after gambling?
- Did you ever gamble to get money with which to pay debts or otherwise solve financial difficulties?
- Did gambling cause a decrease in your ambition or efficiency?
- After losing did you feel you must return as soon as possible and win back your losses?
- After a win did you have a strong urge to return and win more?
- Did you often gamble until your last dollar was gone?
- Did you ever borrow to finance your gambling?
- Have you ever sold anything to finance gambling?
- Were you reluctant to use “gambling money” for normal expenditures?
- Did gambling make you careless of the welfare of yourself or your family?
- Did you ever gamble longer than you had planned?
- Have you ever gambled to escape worry or trouble?
- Have you ever committed, or considered committing, an illegal act to finance gambling?
- Did gambling cause you to have difficulty in sleeping?
- Do arguments, disappointments or frustrations create within you an urge to gamble?
- Did you ever have an urge to celebrate any good fortune by a few hours of gambling?
- Have you ever considered self destruction or suicide as a result of your gambling?
Most compulsive gamblers will answer yes to at least seven of these questions.
Even if you don't have a gambling problem, you may be using Bitcoin to entertain yourself. Just like we look forward to the football game between our university and another all week and then cheer on Saturday afternoon, some people find watching the price of Bitcoin change to be endlessly entertaining, especially once they own some.
#3 Conceal Illegal Business Activity
Another use of Bitcoin is to conceal illegal business activity. One of the greatest benefits of a cryptocurrency is that it is particularly difficult for governments and law enforcement to track. It is anonymous and requires no government to back it with its military or taxing authority. Rather than having to obtain and move crates of Benjamins around, an arms dealer or drug king can simply use Bitcoin. Easy—peasy. If you don't think this is a significant use of Bitcoin and other cryptos, you're fooling yourself. As much as 46% of Bitcoin transactions involve illegal activity. There is at least one report out there suggesting only 1% of Bitcoin transactions are illegal, but most reports suggest the number is at least 25%. Obviously, it's notoriously difficult to track illegal transactions, and most criminals, like most regular people, still prefer to do their deals with dollars.
#4 Squirrel Money Out of a Country
Perhaps the most reasonable use of Bitcoin involves escaping with at least some of your money in a failed currency or failed country scenario. Fanatics Proponents like to point to historical episodes, like the hyperinflation of Zimbabwe, the economic and political troubles of Venezuela, or even the rise (1918) and fall (1989) of communism in Russia. Bitcoin is a “carrier asset”, meaning you can easily take it with you. Gold is also a carrier asset, of course, but Bitcoin is easier to hide and, frankly, lighter to carry. However, many of the same risks apply. When you have Bitcoin keys physically on you, they are subject to being stolen. Even if you somehow memorize them (good luck, it's typically 64 digits), you can still be forced to spit them out with a gun put to your head. You can store them online, but they are also subject to being stolen by hackers there. You are reliant on your ability to hide the asset or pay to secure it. Heck, 20% of all the Bitcoin in the world has already been lost.
At any rate, if you have a $10 million portfolio, is it crazy to have $100K in Bitcoin that you can take with you (along with your canned goods, ammo, $10K in dollars, $10K in pesos, and $10K in euros) as you escape to Costa Rica in your Range Rover? No. You may view it as the cost of insurance. I keep a generator, gasoline, camping gear, and months worth of food at my house. Some people include some Bitcoin in their emergency stash.
#5 Impress others
Everybody loves a good cocktail party brag session. You can brag about the Tesla you own (not only are you rich, but you care more about the environment than they do) or the Tesla stock you own. Or you can brag about your Bitcoin. Either way, you can spend a half-hour discussing all the intricacies of the blockchain, what business now accepts cryptocurrency and what hedge fund now owns some. You'll look so smart and savvy, and if the price of Bitcoin seriously tanks, as it seems to frequently do, you can simply not mention it and talk about the football game this week and how the team should have used the double-wishbone offense instead.
#6 Get a Head Start on Possible Future Currency
Some people are absolutely convinced that we will all be using cryptocurrency regularly in 2 years, 5 years, 10 years, or 100 years. Not only that, but they are convinced the cryptocurrency we will use is Bitcoin. They figure they'll get a head start on it by buying some now. Now this doesn't really make a lot of sense when you think about it, but if you ask Bitcoin owners, this is often a reason they own it. The reason it doesn't make sense is that if we are really going to use Bitcoin instead of dollars, I can just trade what I have of value (my stocks, bonds, real estate, services) for Bitcoin at that time. The enthusiasts are so excited about this new technology they just can't wait, though, so they buy some now in anticipation. Frankly, I think most of the people using this as their reasoning just don't want to admit they're speculating on its price. They don't just want to spend Bitcoin in the future, they want to have more of it than they would have if they waited to get some until they actually needed to spend some.
#7 Hedge Against Bizarre Global Catastrophic Circumstances
This is where the Bitcoin enthusiasts and the gold bugs join forces. However, the same issues come up. In the Zombie Apocalypse, nobody cares about your gold coins. They want canned goods, a rifle, and lots of ammunition. Maybe a katana. So you have an exchange problem. Remember blockchain doesn't work without a functioning internet, so just like with gold, the circumstances have to be really bad, but not that bad, for the hedge to work.
#7 1/2 Assist with Some Underdeveloped World Banking Issues
Another use some proponents give for Bitcoin is to resolve some issues in the undeveloped world, specifically with people who don't have access to the banking system. This exists in the developed world too; US estimates are in the 8-18% range—best guess 55 million people are not using the banking system as you and I do. But it is a much bigger problem in underdeveloped countries, about 1.7 Billion people total in the world. The theory is that cryptocurrency is faster, cheaper, and more secure than conventional online banking. In particular, remittance payments can be expensive for the unbanked. These are generally people sending money home to an underdeveloped country from the developed country where they are working, but it occurs between underdeveloped countries, as well. For example, intra-African cross border transfers can charge as much as 17% in fees. I'm not sure you really need cryptocurrency to fix this issue, but as the system currently works, it seems to be a solution for some. The major issue that keeps the rest of us from using cryptocurrency as a currency (i.e. the volatility) obviously still applies. Speaking of which, let's get to what Bitcoin is terrible at.
What Bitcoin is NOT Good For
There are a few other reasons that people give for using Bitcoin. They're all bad reasons, though. Let's go through them one by one, and I will show you why.
Bitcoin is Not a Useful Currency
Lots of people think Bitcoin is currently a useful currency. That isn't true, at least outside the illegal guns and prostitution trade. It's not useful. I can't buy gasoline with it. I can't buy groceries with it. I can't even buy a used car with it. Bitcoin enthusiasts claim that 36% of small businesses accept Bitcoin. That's laughable. Go to your favorite online and brick-and-mortar businesses and ask them if they take Bitcoin. Report back with the percentage. If you actually look at lists of businesses that take it, you end up with a list of companies like these:
- Fight for the Future – Leading organization fighting for Internet freedom
- i-Pmart– A Malaysian online mobile phone and electronic parts retailer
- Curryupnow.com – A total of 12 restaurants on the list of restaurants accept Bitcoin in San Francisco
- Dish Network – An American direct-broadcast satellite service provider
- The Libertarian Party – United States political party
- Yacht-base.com – Croatian yacht charter company
- Euro Pacific – A major precious metal dealer
Even the companies you have heard of and would consider using (Home Depot, Whole Foods) require you to go through a third party to use Bitcoin there. Essentially these parties convert your Bitcoin to dollars before you spend them. The de facto currency in the US and throughout much of the world is the US Dollar. That will likely change at some point in the future, but nobody has any idea when that will occur or what will replace it. But Bitcoin clearly is not a useful currency for regular people at this time. Sorry, if you can't see that, there is zero sense in continuing a conversation about Bitcoin with you.
Bitcoin Is Not a Stable Store of Value
Even if you couldn't use Bitcoin as a currency, if you could exchange it for a useful currency and in the meantime it provided a stable store of value, it would still be useful. Unfortunately, Bitcoin is not stable in any way, shape, or form. As I write this in 2021, Bitcoin went up 50% in the prior month. It went up 40% the month before that. But during a 44-day span in the spring of 2022, it dropped 40.4%. It is massively volatile. Academics can calculate exactly how volatile it is and some have done so. Take a look.
Even if you don't go any further than the standard deviation, you can see that it is almost 6 times as volatile as gold, 4 times as volatile as silver, and dramatically more volatile than stocks. If you shouldn't put any money into stocks that you need in the next 5 years, what does that say about Bitcoin? That you shouldn't put any money into it that you need in the next 30? One glance at a Bitcoin chart tells you this is not a stable store of value and anyone who thinks otherwise is frankly missing a few brain cells.
This is a 2020 chart. The Spring showed a 50% drop. The summer showed another 20% drop. In stocks, we call that a bear market. In the fall, it had a 33% rise. All in the same year. Now nobody minds volatility when it is going up, but Bitcoin doesn't just go up. Take a look at 2018:
Yea, that's basically an 80% drop. In a single year. Remember when that happened with stocks? Then you're at least 100 years old because it occurred over a period of three years from 1929 to 1932. When the price of something is this volatile it indicates one thing—nobody is really sure what it is worth. At any rate, I think I've made my point. Bitcoin cannot be used as a stable store of value. Because its value isn't stable.
Bitcoin is Not an Inflation Hedge
A good inflation hedge goes up in value when inflation goes up. It generally goes down when inflation goes down or, worse, when there is disinflation. Commodities, stocks, real estate, TIPS, and even precious metals have been shown to have some positive correlation with inflation. Bitcoin? It doesn't correlate with anything, much less inflation. Don't believe me? Let's look at the charts:
This is a busy chart, but the key is to look at the red line, the 12 month moving average of inflation as measured by CPI. Basically, it has been between 5% and 0% over the last 30 years, mostly in the 2% range, and generally falling. What does the Bitcoin chart look like for the last decade?
It looks like this:
So unless I'm missing something, and we had massive inflation in 2017 and 2020, and a terrible depression in 2018, you don't need to run the numbers to see that the price of Bitcoin does not track the rate of inflation whatsoever. Now the enthusiasts fanatics will say “You're measuring inflation all wrong, the government is hiding it, and you need to weigh education and health care more heavily in your inflation indices.” Conspiracy theories aside, I still go to the store. It doesn't feel like it did in the 1970s US much less Zimbabwe. Nobody is coming in with wheelbarrows of $1 million bills. Sure, education is climbing at about twice the rate of average inflation and health care has lots of problems. But no reasonable inflation index looks anything like a Bitcoin chart. Sorry.
Not a Great Way to Show You Love Bitcoin or Blockchain
Some people just want to support the concept of Bitcoin or blockchain or cryptocurrency, so they buy some. This is also a dumb reason to buy. You can be the world's greatest proponent of blockchain without ever buying a Bitcoin. Put a Bitcoin sign in your front yard and organize fiat currency protests or something instead. You're just using this as an excuse to speculate. Just admit what you're doing and go on your merry way. It's your money and you can speculate with it if you like. As with any speculative asset, you would be wise to limit it to a single digit percentage of your portfolio. That digit for me is a 0, but you can do what you want.
What do you think? Why do you think people own Bitcoin? Why do you own Bitcoin? Comment below!
The easiest framework for understanding bitcoin’s potential is that of digital gold. Just as in the case of currency and traditional gold, these items have value because we agree as a society that they have value. Bitcoin is no different in that sense, but it has the potential to be a better store of value due its scarcity. It is worth mentioning since it is not mentioned in this article that unlike currency and gold, we know the final quantity of bitcoin that there will ever be — 21 million coins (this ability to definitively create digital scarcity is underpinned by the blockchain technology and is the reason we have not had true digital money before bitcoin and blockchain tech). Between the scarcity and other advantages of bitcoin, such as its portability and decentralized nature, there is a clear thesis to invest in bitcoin that any investor should at least be familiar with, whether they decide to actually invest or not.
There is no doubt that bitcoin is volatile, not ready for use as a currency, and risky. However, we are still in the very early days of cryptocurrency, and no early adopter or investor of new technology reaps exponential reward without the added risk that comes with any new tech. That being said, issues such as volatility can be expected to decrease over time — bitcoin has been around only 12 years and has a market cap around 2% of gold; as market cap grows volatility will decrease and use cases as currency will increase.
Maybe the most important thing to consider is the droves of institutional money going into bitcoin right now and the support of billionaires such as Jack Dorsey, Michael Tudor, and Elon Musk. If they believe in the value add of bitcoin, it is at least worth doing your research to see if it seems like a reasonable investment opportunity for you.
If you want to learn more from an actual expert in the crypto space, I strongly recommend this seminal paper describing the future potential for bitcoin: “The Bullish Case for Bitcoin” by Vijay Boyapati.
I don’t invest in Gold for the same reasons I don’t invest in Bitcoin, so arguing it’s like “digital gold” doesn’t exactly move the needle. Not to mention Gold at least has a few industrial uses.
How scarce can cryptocurrency be when someone can create a new one today?
I have never invested based on the recommendations of social media personalities or CEOs before, so why would I do so now?
You are right that Bitcoin is volatile, not ready for use as a currency, and risky. You are not right that it is becoming less volatile. It’s been around a decade and it still went up 1000% last year and fell 25% at one point last month. It’s not becoming less volatile.
Not trying to be argumentative, just pointing out that for every argument you make, there’s a counter argument.
I usually like your articles. This one is just very biased and not too open minded
Biased because it doesn’t encourage people to buy an “investment” that went up 1000% last year? Performance chasing historically has not worked out well as an investment strategy.
No, I wouldn’t say you’re biased because you don’t push Bitcoin onto people. I’d say it’s more that you’re only posting the negative aspects on Bitcoin when it has the potential to become something great one day. Of course, this is all speculation and no one should put their entire life savings into it, but surely buying $100 or $200 of Bitcoin wouldn’t hurt. And yes, performance chasing and FOMO is never good, so I agree with you on this.
I agree that buying $100-200 wouldn’t hurt any of my regular readers. Nor would buying a lottery ticket or buying a share of GME. But I can come up with a much more fun use of $300 than buying any of those things.
So essentially ARK’s Cathy Wood, MicroStrategy, Deloitte, Northern Trust are all uneducated and naive to invest in this asset? Maybe I am missing something.
The above comment from a little over a year ago nearly caught the exact moment of ARKK’s peak, and it has been a disaster since then. It’s really quite impressive what happened after mid-February 2021.
Kind of ironic eh? Here’s the post about ARK written at the same time. I guess my crystal ball was a little less cloudy than usual then:
https://www.whitecoatinvestor.com/ark-etf/
I love the blog and been a follower since day 1. While I own no cryptocurrency because I am wci to the death, I think you steered us wrong on cryptocurrency. Major banking institutions like chase are establishing stable coins. At this point, at the very least, it’s not speculation. Cryptocurrency is here to stay, but to your point, who knows if it’s bitcoins or something else. But I think it’s time to reexamine your position on it.
I’m not sure you understand the definition of speculation. Speculation relies on getting someone else to later pay you more for what you bought for your return. By this definition, Bitcoin is very much a speculative asset. It produces nothing. No product. No service. No earnings. No rents. No interest. Your only hope to make money is that a year from now, 10 years from now, or 30 years from now someone else pays you more for it than you paid. It might work out for you, but you’re in uncharted territory here.
I just reexamined my position on it. I feel exactly the same way I felt about it in December 2017 the last time it went up 1000% in a year. It subsequently dropped in value over 80% and amazingly, nobody wanted to talk about it for a year or two.
Bitcoin and many other digital assets can indeed produce yield (even in dollars). I recently heard this “no yield” argument on the podcast as well. Dr Bernstein stated he knows of no crypto that produces yield and therefore are speculative only. I am earning 3 to 5 thousand a month in interest on a portion of my digital assets. I did not originally obtain Bitcoin as an investment, it was more of a hobby. Over the years the no yield argument resonated with me and I never considered my digital holdings part of my net worth. Within the last couple years, that has changed and in a big way. Yields can range from 5% to over 10%. I still agree with WCI that single digit allocation is appropriate, but the no yield argument is dead.
Semantics I suppose if you’re referring to what I think you are, which is being paid interest by a “crypto savings account”.
Just like a dollar doesn’t pay yield, neither does Bitcoin. The savings account does.
Remember as you entertain using these accounts a saying from Larry Swedroe about fixed income investments. I’ll paraphrase: “When you see something with a higher yield, it’s because it has higher risk, whether you can identify the risk or not.” Some discussion here:
What are the risks?
Like any financial investment, depositing your assets into a crypto savings account comes with risks regardless of whether it’s CeFi or DeFi.
Risks with Crypto Lenders
Loan Defaults
As we mentioned before, the risk of default on the borrower side is limited because lending platforms use “over-collateralization” to reduce credit risk. If the value of the collateral backing a loan falls under a certain threshold the provider sells of the collateral. However, in the event of a black swan event where the market crashes extremely rapidly and many liquidations happen in the same time, the proceeds of the assets sale could be insufficient to pay back the lender. While this is certainly a possibility it’s important to stress that this has never happened in real-life even when markets crashed 50% on a single day.
Custodian Hack
Probably the largest risk factor is that the lending company’s custody provider (where your assets are stored) gets hacked. If someone penetrates one or multiple of the crypto lender’s wallets containing the collateral, loans wouldn’t be secured anymore and lenders could lose all their deposits. To offset this risk, many custody providers have insurance policies to protect users in case they do get hacked. Unfortunately, these often have a ceiling amount so whether you get reimbursed or not in the case of a hack depends on the size of the hack. Moreover, if the attack affects all the custody provider’s clients (exchanges, institutions, crypto lenders etc.) and not just one, the insurance amount would certainly not cover all the losses. BitGo for instance, one of the most important custody provider’s has a $200m insurance policy in the case of a hack but has x amount of assets under management (AUM).
Intransparency
The crypto lending space is fairly unregulated and it’s almost impossible for lenders to know what happens with their deposits. It’s entirely up to the provider to provide transparency. There are concerns that crypto lenders provide more risky (e.g not sufficiently collateralized) loans to specific clients. Some crypto lenders also rehypothecate some of the collateral their borrowers deposit as security, to earn additional money. This practice was widely used in 2008 and eventually led to the infamous Great Financial Crisis.
cefi
Legend:
Insurance policies: Look for providers that have a direct insurance policy, in addition to their custodians’, which protects only their users’ funds.
Proof-of-reserve: Some crypto lenders (Ledn, Unchained Capital) give segregated wallet addresses for each user allowing for real-time checks on-chain and preventing funds from being rehypothecated.
Transparency: Transparent crypto lenders put all the relevant information forward on their site to make it easy for users to find out what matters. This includes contract terms, the providers licenses, where the company is incorporates, insurance policies and other information.
Risks with DeFi protocols
Smart Contract Risk
Smart Contract Risk is the main contributor to counterparty risk in DeFi. While DeFi is often referred to as “trustless”, a user of a DeFi platform must trust the smart contract they are interacting with. A smart contract could be opaque to a user who is not tech savvy, which means a user is trusting the contract code in the same way a user trusts the code of a traditional web application. This could potentially be exploited by malicious smart contract developers although users can protect themselves from this risk by only using protocols which have been audited by the community and professional audit firms. The far bigger risk however, is that the smart contracts get hacked because of a loophole in the code. This happened in February 2020 when DeFi lending protocol BzX lost $645,000 dollars in an attack (all funds were returned by the hacker in the end).
Loan Default
As with centralized crypto lenders, over-collateralization doesn’t completely remove credit risk. For example, during this year’s biggest market crash the Maker protocol lost $4m of collateral because liquidators were able to submit $0 bids for ETH collateral held in users’ vaults. In short, the Maker protocol relies on a system where users/liquidators can submit bids to acquire collateral-at-risk for a small discount relative to the market price. Since this represents a relatively risk-free profit opportunity, these auctions are usually very competitive. However, in this particular case there were no other bids due to unprecedented Ethereum network congestion and liquidator bots not being set up adequately for this scenario. With no other bidders being around one participant was able to buy the collateral for virtually nothing. The problem has since been fixed and the collateral has been refunded after new Maker tokens were issued by the protocol and publicly auctioned (effectively diluting existing MKR holders), but it’s a good example to understand the types of unexpected events that can happen in DeFi.
Another factor to take into consideration, is the type of assets being used as collateral in a protocol and its respective liquidity. Ether (ETH) collateral for instance, is more secure than an illiquid ERC-20 token, which can lose value very rapidly during a market sell-off event. This is why there’s currently a big debate in the Maker community over which types of assets can be added as collateral. Protocol purists would like to keep the protocol simple using only Ether while others want to add new types of assets to attract new investors and increase the addressable market size. In liquidity pool based lending protocols such as Compound it’s easier for a user to assess the riskiness of the collateral, since liquidity pools are segregated by asset type. If you lend ETH to Compound’s ETH pool, you can rest assured that the collateral deposited in the pool by borrowers likewise only consists of ETH.
One way in which DeFi is strictly superior to centralized crypto lenders is that all funds are visible on chain so there’s no risk of users’ collateral being rehypothecated without users knowledge. Since collateral requirements are expressed by code in smart contracts, users also have guarantees that the collateral requirements are set in stone, unlike with crypto lenders, who as we mentioned earlier, may negotiate custom deals with large institutional investors.
Centralization Risk
One of the biggest contributors to centralization risk in DeFi protocols is the use of admin keys. Admin keys allow protocol developers to change different parameters of their smart contract systems like oracles, interest rates and potentially more. Protocol developer’s’ ability to alter these contract parameters allows them to cause financial loss to users either voluntarily or involuntarily if their keys get compromised. There are different measures to mitigate this risk somewhat, such as timelocks and multi-signature wallets, which distribute control to a larger number of people and introduce time delays, allowing users to move their funds out of the protocol before a change takes effect.
Although there’s no one size fits all approach to protocol governance, it’s important that protocols disclose this information in a transparent manner. As Jesse Walden wrote in his article on ‘Progressive Decentralization’ , it’s impossible to expect from younger protocols to start being 100% decentralized from day one. Instead, it’s common for protocol teams to start with a relatively flexible set-up, which allows them to iterate frequently until it reaches product market fit and leaves governance to its community.
defi (2)
Legend:
Code Audits: Trustworthy protocols receive regular code audits by specialized security firms and consequently made available to the public.
Maturity: The longer a protocol has been live on chain without being hacked the more likely it is it’s smart contracts have been thoroughly scrutinized by hackers.
Value Locked: The more value is locked in a protocol the bigger the incentive for hackers to hack it. If users trust a protocol with their money it’s a healthy sign that the protocol is battle-tested.
Governance: Protocols are controlled by Admin Keys that can upgrade smart contracts. Admin keys can be held by a centralized company or by a Governance contract which is controlled collectively by the community, in which case it is referred to as “decentralized”.
https://cryptotesters.com/blog/understanding-crypto-savings-rates
Bottom line: Not a free lunch, but not necessarily a bad risk to take.
Jim,
Did you write this? If you did, I am impressed that you have this level of understanding of the crypto world and simultaneously astonished that you still think bitcoin is not worth owning.
This is outstanding analysis.
Rich Lassiter
I guess you place more value on those 7 uses than I do.
I’m not talking about the original 7 things you wrote about, I meant the post I replied to, which is attributed to you, posted on May 13 2:57pm MST and the author clearly has a very nuanced understanding of cryptocurrency and references multiple types of coins. It is substantially different in tone and concept from your prior posts, which is why I asked if you wrote it. It is, however, according to your website, authored by you.
Load this comment on the website instead of your email program and you will see what I mean.
No, I provided a citation for that quote if you read it carefully.
Thank you for the very informative post.
Investing in Bitcoin does not even peak my interest.
It’s ok to not write articles about things you don’t fully understand.
I think you’re proving my point. “If you don’t invest you must not understand it.”
I owe a lot to you as I used your book and advice to guide me through financial landmines early in my career. I have sent copies of your book to new physicians as they join my practice as I hope it will help them as much as it helped me.
With that said, I really think you are missing on the key point of ‘why’ bitcoin. I also think you dismiss people who like bitcoin as fanatics or nonsensical rather than trying to see it from a different point of view.
Bitcoin can be thought of easiest as a digital gold but has potential to be much more. It was engineered to be better than gold in every sense. It is the only fixed supply monetary asset. It is more transparent and verifiable than any other asset.
I could attempt to expand further but I believe others can do it much more eloquently than I. I recommend listening to Preston Pysh on The investors Podcast. This is a good episode to start with: https://www.theinvestorspodcast.com/bitcoin-fundamentals/bf-001-bitcoin-common-misconceptions-w-robert-breedlove/
I also recommend Lyn Alden who details a very analytical perspective here:
https://www.lynalden.com/invest-in-bitcoin/
Better than gold in EVERY sense? Really? Does it look better on your lover’s finger? Is it a highly efficient conductor? Does it have a 2+ millenia history of being used for money and, at least in the long run, being a relatively store of value? Last I checked, you couldn’t lose your gold just from a hard drive going bad either. Imagine if 20% of the world’s gold had been lost in one decade.
Nor is Bitcoin the only “fixed supply monetary asset.” In fact, over 1400 cryptocurrencies have a fixed supply: https://cryptoli.st/lists/fixed-supply Although one might reasonable argue that if there are 1400 of them, the supply isn’t really fixed.
I’m sorry. There are arguments for Bitcoin, but “better than gold in every sense” and “the only fixed supply monetary asset” are not two of them.
All cryptocurrencies are not equal. Consider a decentralization spectrum and on the extreme end of that is bitcoin. Other cryptocurrencies are governed and/or in the process of being developed. They are not finished products and therefore there is human risk. Bitcoin is essentially ossified and cannot be changed. Can look at the 2017 hard fork battle for example. Other cryptocurrencies can ‘decide’ to change the hard cap and therefore it is no longer finite. With bitcoin, it has passed that point and is essentially a finish product.
If you disagree with this then you are essentially disagreeing with what the crypto market has stated when valuing bitcoin versus other cryptocurrencies.
I apologize for misspeaking when I said in every sense. The 2 areas I think gold is better than bitcoin are longevity as a store of value (big advantage) and also you are correct there are jewelry and industrial use cases for gold that bitcoin will never have. I should have stated the monetary premium gold has is probably >90% of its value and the tangible value is < 10%. Therefore, bitcoin is attempting to disrupt the monetary premia that gold has a grip on.
If you’re using past investment performance to choose a cryptocurrency, NEM, Ethereum, and Cardano all beat the pants off Bitcoin last year.
Of the 8000+ cryptocurrencies, bitcoin is worth more than all of the others combined. It trades ~$25 billion USD daily and the CME(Chicago Mercentile Exchange) is one of the fastest growing markets.
Historically, when a network(in this case monetary network) reaches this size it has reached escape velocity and the competition is over. You may say what about Myspace or Yahoo or AOL…they lost their leads fairly quickly and bitcoin has dominated this space for 11+ years.
Can also look at what people with skin in the game are doing. Microstrategy invested ~$1.1 billion in bitcoin beginning 2nd half of 2020 with a few other tranches and this investment is now worth $2.39 billion. The stock price has gone crazy from low $100s to over $600 today. They are hosting a ‘Bitcoin for corporations’ this week for corporate executives and word is over 2000 execs will be there from various companies. It doesn’t take a genius to see what will happen if a few more companies convert their corp treasuries into bitcoin.
https://www.microstrategy.com/en/resources/events/world-2021/bitcoin-summit?CID=7014W0000014yhJQAQ
https://bitcointreasuries.org/
Few other notes:
Mass Mutual insurance giant has invested $100 million in bitcoin.
Harvard/Yale endowments are invested in bitcoin.
Paypal has adopted bitcoin and a few other cryptos to allow payment to their merchant base.
Square/Cashapp have invested $50 million in bitcoin, now worth $169 million
Ethereum is in my mind the only true competitor and in my opinion is more complementary for bitcoin and is not competing to be the best form of money. Ethereum will begin trading on the CME a week from today. Can view ethereum as digital oil to bitcoins digital gold.
Lastly, you do own a little bit of bitcoin via Microstrategy (MSTR) as it composes approximately 0.01% of VTI 🙂
Thanks for the open mind and the blog post.
You claim to be neutral and then all of your main points are negative. Come on… When guys like Elon Musk who is known this generation innovator in the mold of Steve Jobs convert to be BTC supporter, I like to believe that there is something more underneath the surface. It is ok to claim partial bias to traditional finance as a disclosure considering that you are profiting massively from this blog to traditional finance vehicles.
I love that you think I somehow make more money by arguing against cryptocurrency as an investment. My portfolio is 85% index funds, but I don’t have a single mutual fund, stock, bond, or brokerage advertiser. I have a few real estate advertisers, but they only account for a low single percentage of revenue around here. I’m not sure you understand the business model here. I could certainly pump up the pageviews and make more money by pumping up Bitcoin and GME and encouraging performance chasing. I’ve turned down dozens of crypto-related advertisers, so in fact, I’m losing money by taking this position. Nice try though.
As far as Elon Musk, in the last month he has encouraged investors to pile into Signal and GME. Of course, he didn’t even mean for investors to pile into Signal Advance. He meant for them to use WhatsApp’s messaging platform Signal. But never mind that, Signal Advance went up 1500% on the tweet.
https://finance.yahoo.com/news/elon-musk-tweet-sends-this-stock-up-1500-in-24-hours-may-be-a-sign-of-market-bubble-175845075.html
Be careful investing according to Elon Musk or any other guru, especially if they’ve already been charged by the SEC for securities fraud:
https://www.sec.gov/news/press-release/2018-219#:~:text=Elon%20Musk%20Charged%20With%20Securities%20Fraud%20for%20Misleading%20Tweets,-FOR%20IMMEDIATE%20RELEASE&text=The%20Securities%20and%20Exchange%20Commission,transaction%20to%20take%20Tesla%20private.
I think there’s value in having a strong opinion about a topic, and bravery in stating it so emphatically. This is true if you’re talking about Tesla, whole life insurance, and certainly bitcoin. I’m too naive about cryptocurrency and too chicken to write about it myself, but I enjoy reading different takes on the subject.
Before you can appreciate bitcoin we need to acknowledge a problem: The stock market has become dislocated from the economy. Traditional valuation methods are no longer accurate. Instead, meme stocks like GME, AMC etc skyrocket and companies that are unprofitable stay in business.
Why: The cost of capital is artificially cheap, which has led to inaccurate risk/benefit analysis.
Why is the cost of capital cheap: Accomodative policy by global central banks.
Why bitcoin? Defensive diversification call option into a alternative financial system that is not up to the discretionary whims of populist movements or politicians. Rather, bitcoin is governed by a transparent protocol that anyone can see and nobody can manipulate.
If you hold only traditional assets, you expose yourself to complications within that system. That is why bitcoin is valuable because as Chamath says, its Schmuck insurance in case the powers that be screw up.
In the long run the effect of meme stock gyrations on a broadly diversified stock portfolio is zero. It’s simply irrelevant. Over a decade or two, the speculative component will be cancelled out. As Graham said, in the short run, the market is a voting machine. In the long run, it’s a weighing machine.
I guess I’m trying to express that there are real life signs that things are not right in the world with the extreme right and extreme left fighting. With rebel Redditors plotting to take down hedge funds. With US citizens storming the capital etc. We seem to be living in a dividing society.
One could argue that this division is secondary to inequality. Inequality that is a symptom of distorted financial markets and unequal access to capital and therefore unequal access to opportunity. This is leading to populism.
Another issue I have is we all assume central banks know what they are doing. We have no Plan B if their plan screws up. In any other industry we always have a backup plan. They are running the biggest financial experiment ever (and with zero precedent) and there are is no oversight. In fact, they are all on the same side of the trade as their policies are essentially identical. What if the global monetary QE / accomodative policy is not the right path to get out of the debt problem we are in?
Maybe it isn’t. Maybe the world does to go hell in a handbasket. Now explain how Bitcoin solves the problem of global economic collapse, rioting, war, and splitting into rival tribal factions?
Let me start by saying I don’t know the future we can only speak in probabilistic outcomes.
The views I have on bitcoin are a mix of Austrian economics and libertarianism. Bitcoin has also been described as a “Truth machine” in that you can interact trustlessly with the network without needing diligence on your counter party.
Bitcoin can provide a financial ‘peg’ similar to what gold provided before Nixon took us off the gold standard. It provides a peg as 1 bitcoin will always be worth the same amount in the network whether today or 10 years from now. By having a peg, we will have a disciplinary force upon politicians and central banks that promote fiscal responsibility. We have something fixed by which we can now accurately measure risk/benefit and the 100s of financial decisions we make now have a firm footing on what I am spending rather than current system which is a floating dollar. It reduces inequality by reducing the Cantillon effect we are seeing with the current system, where the people closest(wealthy) to the monetary spigot get the most of the benefit.
Now why is all that important? Without it, we have floating fiat currencies with infinite supply and central bank manipulations that can be imposed to bend the currency to the will of the politician or populist movement, whether moral or immoral. While good intentioned, they have side effects that is now leading to inequality/populism. Also, there is no telling who will control the monetary spigot in the future and whether that person has good intentions.
Also, stepping back and consider money from first principles. Why would you design money that is programmed to lose value over time? Think about the side effects of this design. How do humans make financial decisions if the base money is not a fixed known quantity? How do we invest $1 today when we know that tomorrow that $1 will be worth slightly less tomorrow?
Is bitcoin there yet? No, it is a tiny asset class with inefficient markets, whales, information asymmetry, and < 5% global adoption. I am speculating that it may provide a better, alternative financial system than what we have currently by improving upon what money is at a base layer.
Is it just me, or does Dahle always sound so… angry in his responses? I honestly don’t get it. A contrarian opinion to yours shouldn’t be taken so personally.
I value your opinion and you have no idea how many lives your changed for the better. That being said, the whole movement is becoming a bit Dave ramsey-ish ie my way or the highway. And like Dave Ransey, it works for a certain subset of folks but is no where all encompassing.
Please stop being so defensive when you’re questions. This isn’t IM rounds 😂
Not sure how you’re getting “it’s my way or the highway” when the post clearly says “Do what you want, just make sure you understand what you’re doing and why, and limit your investment into a clearly volatile, clearly speculative asset.”
It sounds to me like you prefer to only hear from people who confirm your views that having any significant amount of money in an asset that went up 1000% over the last year is a good idea. I would suggest you avoid listening to people like Warren Buffett, Mark Cuban, most financial advisors and perhaps even the CEO of Coinbase.
I think that impression comes from the part where you repeatedly cross out fanatics and replace it with proponents. The part where you went into detail about gambling addiction didn’t help you look neutral either. Your points are good, and I agree with you but this is a bit over the top. I dont buy bitcoin, but the way you write it makes it sound like you think anyone who owns any of it at all must be an idiot and a crypto cult member. When you write like that, you have to expect push back in the comments section. Personally I dont see speculating in bitcoin as any different than speculating in any individual stock. You assume you know better than everyone else that the price is going to go up. Good luck to you. I wouldn’t bet my retirement on it, but a little side bet placed after getting my 20% into an index fund … sure (though personally I’d rather spend that on something fun).
I love the comments so far. Let me summarize: you are not telling people to buy bitcoin while smart folks who understand it are buying, so you are clearly a biased idiot.
Interesting idea about the katana. I have an antique sword that I guess could substitute, but I generally recommend a tomahawk.
I enjoyed this article. I wanted to buy BTC to speculate but couldn’t get coinbase to work at the time…too bad, I would have had a paper gain of 23k (who knows if I would have sold today).
Great post.
I agree with TNT that you cannot claim to be neutral and then write a post that is 90% negative, some of which is blatantly wrong. Let me correct/address a few points for you:
#1. Speculation – yes…Literally every form of investment is speculation. You would not invest in stocks, bonds, real estate, gold, or anything else for that matter if you did not expect that investment to go up. So technically Bitcoin is speculation as well. Just like every other investment.
#2. Really…comparing it to gambling and listing off reasons to be concerned if you have a gambling problem? Wow. Bad take. I don’t doubt that some people gamble and gamble in Bitcoin, Stocks, Bonds, the horse track, cards etc. That’s fine, but is this really even your argument at this point?
#3. 46% of transactions in Bitcoin are illegal? Really? You don’t honestly believe this do you? If you do you are so far in the dark it is not even funny.
#4. This actually is a good use case and one of the only positive’s you listed. It probably isn’t that relevant right now for people inside the US, but very relevant for most other countries throughout the world. Kudos for recognizing this.
#5. I don’t doubt there are some that try to impress others. Most, however realize that what is most impressive to others is having a big…..retirement portfolio. Irrelevant to your discussion other than it adds negativity.
#6. I agree…we are not there yet, but having a small percentage of ones asset allocation for if/when this does occur seems intelligent, not a negative thing like your perspective comes off here.
#7. There are far more global issues that can and likely will come up that are more realistic than “the zombie apocalypse”. Bad metaphor. I agree that guns, ammo, land, and the ability to sustain it would be good hedges.
#7.5 Yes, this is a very real use case for BTC. People outside of the US understand this far better than anyone inside of the US.
And now you get to the negatives? Do you see how your post is definitely not a “neutral” post?
1. You are correct that at this time BTC is not a useful currency. It may or may not get there. And we agree that 36% of businesses do NOT accept BTC. That number is laughable. It seems you cherry picked that one though, as I have never heard anyone who is educated on BTC quote that number. If they are quoting it, then they need to better educate themselves.
2. Just because something is volatile, does not mean it is not a good store of value. Many people seem to make this argument. But one does not preclude the other. Store of value is simply defined as an asset that maintains its value, rather than depreciating. In the approx 11 years of its existence BTC has maintained its value better than any asset on the planet. One does not have to be “missing a few brain cells” to understand this.
3. You use CPI as the measure of inflation. This is the same measure that most academics are using. Understandable given its history. But most people now realize that CPI is not a good measure of inflation at this point. You mention education and healthcare….those are only a couple. Anything that is truly desirable for most is inflating at a rapid rate. Dollar value has decreased significantly since 1970 and I’m pretty sure you know it despite your argument here.
4. We agree. Simply “showing your love” is a dumb reason to invest in anything. Not sure I have heard this argument much…but maybe you have.
Now, I think you probably wrote this post to get more traffic on the site. I understand that. If you want, I can share this post with the BTC community and you will likely see more comments than you could possibly imagine. Not sure you really want that though. Just let me know. It will likely flood you with negative comments as there are too many hardcore BTC fanatics out there.
I agree there are many hardcore BTC fanatics out there. That’s actually a reason to buy it. There is a certain percentage of people that won’t stop believing it is the solution to all financial problems no matter what happens with it due to their religious fervor about it.
I agree with you that lots of people are gambling with Bitcoin.
I disagree that BTC maintained its value well in 2018.
I disagree that anything that is truly desirable for most is inflating at a rapid rate. Gasoline, food, and technology has all been falling in real price for years. Those who argue against CPI always like to ignore stuff that isn’t going up in price in their calculations. Here’s a list of “truly desirable” stuff that is cheaper than it used to be: https://bestlifeonline.com/products-cheaper-today-than-20-years-ago/ Consider the decrease in the cost of financial advice and investment management with expense ratios now approaching zero for instance. Remember long distance phone cards? There may very well be a better measure of inflation than CPI, but the only measure that should matter is your own personal inflation.
I disagree that every investment is just as speculative as Bitcoin. A company with real assets, real earnings, real products, and real people pouring their heart and soul into it every day is far less speculative than Bitcoin. You can actually value it in a reasonable way. Yes, there is always some small speculative component about its future, but Bitcoin is nearly 100% speculative since it has almost zero current uses.
Good luck!
And I find it fascinating to hear you threatening to send the online crypto mob after me. Reminds me of one of Bernstein’s four signs of a bubble (# 3):
https://awealthofcommonsense.com/2017/07/4-signs-of-a-bubble/
This was not a threat…It was not meant to be at all. Sorry if it came off that way.
It was an offer. I understand how you make money…clicks on your website. If you want clicks, the crypto mob (yes we agree that they have a mob mentality) would provide you with a ton of clicks/traffic. Unfortunately given this article it would be almost entirely ugly and illogical posting. I doubt you want that kind of traffic/negativity. But it was an offer….if you want clicks, let me know and I can try and circulate this post through the community. Otherwise I would not do that.
I agree that a lot of what the “crypto mob” posts is illogical and much of it is ugly and negative.
Clicks are fun, but the point of WCI isn’t clicks. It’s to help those who wear the white coat get a fair shake on Wall Street. I think I’d rather not have “BTC4LIFE!” spray-painted on the garage door though.
Don’t condescend. The point of WCI is clicks, or more broadly, to make money. You don’t do this whole WCI enterprise for free, nor should you. And if the website stopped getting traffic, I imagine a businessman such as yourself would either make changes or stop doing WCI and begin spending more of your time doing other things.
It’s ok to be a BTC detractor, but it’s hypocritical to call out the virtue-signaling of Bitcoin investors as a farce, and then engage in virtue-signaling yourself about your own profitable business.
Clicks from people who aren’t white coat investors who just came here to argue about cryptocurrency are absolutely not going to be profitable to the enterprise. Some eyeballs are more valuable than others to a business.
Looks like you got the clicks on this post either way. LOL 😉
Not really. Yesterday was the worst Monday in the last month for pageviews. It’s only the 54th most visited page in the last month. Don’t equate your interest nor the number of comments on it to actual interest among readers.
Apparently Bitcoin isn’t anywhere near as interesting as taxes.
Just to chime in here… your “offer” does sound pretty passive-aggressive… like when my mother-in-law come to visit.
Again, I challenge you to an open debate on Bitcoin. You can chose the venue, YouTube, Facebook, etc. 1 hour of moderated debate for the benefit of everyone.
Respectfully,
Q Lobb, MD
I’ll debate after you after Buffett agrees to debate you. Oh, he won’t either? Weird. I wonder why.
You’re no Warren Buffet. And why the prerequisite of a debate with Buffett? What are you afraid of? It’s obvious a lot of WCI followers are interested in something that you personally do not see value in. Your persistent, aloof responses to a request for a debate are interesting but lack any reason/logic for your reluctance. Why is that?
Just here to point out you’re no Satoshi Nakamoto. What makes you the authoritative figure on Bitcoin?
Fascinating that a subgroup of high income professionals, who have followed this blog over the past few years because they couldn’t even explain an expense ratio, are now extolling the virtues of crypto. The irony is rich.
I agree with all of this and think that 5 or 10 years from now, this post will have actually saved many people from losing a ton of money by putting 5% of their portfolio in bitcoin.
Nobody seemed interested when in late 2018 I told them now was the time to buy if you want Bitcoin in your portfolio. Weird I know.
But starting to speculate AFTER a 1000% run up? Surely even speculators recognize that to be folly, no matter what you think about the long term prospects.
4th largest cryptocurrency down 50% in the last 2 hours. That seems stable. /sarcasm
https://cointelegraph.com/news/reddit-rage-as-xrp-price-crashes-50-hours-after-hitting-two-week-highs
I’m not sure what percentage of investors can handle that sort of volatility and go on with their lives as normal, but it isn’t high.
Dr. D,
Please don’t do the whole lumping of “crypto”, it’s disingenuous. No one is making a case for “All Crypto”
I’m more on the maximalist side and DO NOT believe BTC is a “speculation” as you do (although all things in investing are as others have pointed out). What do I mean by that? It will definitely hold its value over time, I have supreme confidence in this point. As for the other coins, they may have utility, but to compare something like XRP to BTC is just trolling and not relevant to the conversation.
But you’d have to be more engaged in the whole dialogue to understand that, and it seems you’ve already decided. So, I get it.
NapoleanD does a good job to dispel some of the more outlandish comments/analyses here, which are telling and are informative primarily because they show us what’s really going on. The same reason Dahle won’t tell people that passive investing can’t last is the reason why he is so anti-bitcoin. For God’s sake, even Bogle foresaw a time when index stuff would (of course, that’s the point of markets – recognition and adaptation) meet its end. But the innovators and the visionaries see things early and get paid, while the legacy (think Boomers) stick to “what they know.”
Any nascent technology or innovation is going to be “volatile” or doubted — that’s baked into the cake. What those of us who support BTC constantly see, however, is criticism that shows how minimally it is considered or understood at all. Most of us aren’t saying it’ll be the future “currency” for obvious reasons, so that’s a false premise. The main position is that it is a phenomenal asset in a world that has gone mad and will be increasingly confiscatory; and a necessary alternative for “investors” for a number of reasons. If you think this global debt system can last and isn’t going to come after (what they call) “rich” guys like you … good luck with that.
We beg to differ and offer at least hope for a way out of a system that is based on entrenched actors who have shown us what they specialize in = not caring about anyone but themselves, and certainly not standards or virtues that are identifiable in their respective countries “Constitutions”, the USA being the best example.
I’m curious to see Bogle’s quote that “index stuff would meet its end.” Got a citation?
And yes, there were plenty of people who used to say Bitcoin would soon function as a currency. That seemed to go away about 2017.
Yes, here you are:
https://www.wsj.com/articles/bogle-sounds-a-warning-on-index-funds-1543504551
And please don’t be a literalist, as my language suggested exactly the same idea: passive/index leads to what Bogle knew would be a problem scenario. Point proven.
Got a citation on yours? There are a lot of fanboys on everything, that doesn’t mean it’s not going up (or down). It CAN serve as a currency, but the definition of currency is an “efficient means of exchange” and as it stands, BTC is not (compared to what exists in the credit card world or straight USD). It has many properties that are amazing though, and they destroy all the existing competition, as we have already noted.
https://www.mrmoneymustache.com/2019/09/12/michael-burry-index-funds/
Bitcoin is the soundest, hardest money ever created. It is a once-in-a-lifetime investment opportunity. Soon owning one whole bitcoin will be unaffordable to most. The key is to dollar-cost average, only buy bitcoin (not alt coins), and HODL (don’t sell). The 200-week moving average has always gone up and will continue to go up. We are witnessing the monetization of a new form of money, just like gold was monetized 5000 years ago.
I have followed WCI since 2012, and I have also held bitcoin since 2012. Doing so and not following WCI’s advice on bitcoin has served me well. While I support 99% of WCI’s teachings, I am saddened by his stance on Bitcoin and the banning of Bitcoin discussion on the WCI Facebook forum.
I encourage everyone to read Bitcoin Standard. It will open your eyes and you will understand the origin and nature of money and why Bitcoin is the hardest money ever created.
Mark Cuban is a convert. Even Elon Musk is convinced. The bitcoin revolution is inevitable. Please do your own research and don’t heed to WCI’s opposition to bitcoin. Not buying bitcoin could be the worse financial mistake of your life. One day, WCI may change his mind and support bitcoin. I look forward to that day.
You’re sad? I’m surprised you get emotional about investing. That usually doesn’t serve people well.
Again, you seem to think I’m somehow opposed to or “not supportive of” Bitcoin. I’m not opposed. I’m not shorting it. I’m not trying to destroy it. I’m simply standing on the sidelines and calling it as I see it. If people want to speculate with part of their portfolio, I tell them to limit it to a single digit percentage. Next you’re going to tell me I’m opposed to Argentine bonds just because I don’t encourage everybody I know to buy them.
When Bitcoin becomes a useful currency or store of value to me or I find some other use for it besides pure speculation, I’ll buy some. Until then, I’m content to let this pitch go right by since I don’t personally need to speculate on it to meet my goals.
Every occasion in my life that I’ve heard the phrase “once in a lifetime investment opportunity”, it’s turned out to be a scam. Maybe this one time it’ll be different. I’ll be back here to revisit the comments in 5 years to see how everyone’s doing.
I will too. Don’t forget that there have been many investments even in the last 30 years that have had gains that made things life changing for those with insight.
With the boomer generation, you could generally capitalize consistently and lean on the US economy. Those days are now over. But even during those times, other people tried (of course most failed) to not just be conservative and win slowly (that might be the right strategy for most) … they took shots and indeed hit the moon. That’s the idea – high risk, high gain. The thing about BTC is that at this point, it is NOT high risk. It is risky compared to other investments that will relatively do nothing, yes. But it’s asymmetry is once in a lifetime because it’s a technology that is so unrelated to other things we have seen and has even sociopolitical ramifications, network effects that have proven in recent past (goog, fb, etc).
Hey, forget me, I’m just random internet idiot. Ask Raoul Pal, Michael Saylor, and many others what their take is. I have nothing to hide or complain about – once the network got big enough and matured, I saw this for what it was (in 2018) … a HUGE opportunity.
See you at 100k, folks.
It’s funny, before I was criticizing WCI for calling people fanatics, and now you come out sounding like a fanatic. Most “once in a lifetime opportunities” fail. This may be the lucky one that doesn’t. You may be right here that it’s the currency of the future but the reality is nobody knows that. Anyone who is 100% certain with zero doubt qualifies as the fanatic he was warning us about. Go for it if you believe in it, but I would highly recommend you leave some room for error. For all you know the coin base will get hacked again doing significant dammage to bitcoin, or the crypto being developed by the government in China will become the dominant currency if their growth continues.
If you don’t think there are BTC fanatics out there, try writing something on the internet about BTC that isn’t 100% positive. They’ll find you.
But the fanatics aren’t a bad thing for the more rational speculators. I think they probably put a floor under your investment. It won’t go to zero as long as the true believers exist.
One year update (plus a few months). S&P 500 up double digits in the last 1 year period despite the recent correction; Bitcoin sideways more or less during the same period. Still awaiting 100k.
I’m back again and eager to hear an update. This is great buying opportunity for Bitcoin since it’s down 70% from its recent high. I assume you’re buying more right?
Certainly a better deal now than 6 months ago, but that doesn’t mean you still can’t lose it all!
I agree with much of this…I too have followed WCI since 2010 or 11 (right when he started the blog). 99% is outstanding. Clearly I disagree with his take on BTC.
I do disagree with your comment that he has banned BTC talk. Go to the general investing forum and see the post/posts I started in May and again in September. Although the initial thread was closed by a moderator, and another was taken down by a moderator, the recent thread from September is still going strong. So I wouldn’t say it is banned. (although I understand why he might have banned it from the FB forum)
BTC speculation discussions haven’t overrun the WCI forum preventing anyone else from using it in any reasonable way. So we let them go, trying to keep them contained in a single thread at a time.
Similar discussions of GME are permitted in a single thread on the subreddit, the WCI Forum, and the Facebook Group.
But we definitely had to rein in what was going on in the Facebook Group for reasons discussed here: https://www.whitecoatinvestor.com/why-your-facebook-group-post-was-closed/
That move has been widely applauded by users with over 1000 likes on the announcement and dozens of emails thanking me for doing it.
Darn it, were is the popcorn emoji. Maybe we only get that in the forum. :O)
Jim was quite straightforward in his article. And he certainly laid out his arguments and facts and figures to back them up. He didn’t tell anyone to not invest in them. He said know what you are investing in if you are. Jim has always been clear that most Dr’s don’t need the extra risk in order to come out ahead.
Yes, stocks are always a risk, but most reflect that fact that there are tangible assets behind them. Tangible profits (or losses), too. And when you buy a basket of them, you aren’t dependent on one to give you the returns you need.
There are a lot of people putting sums that they can’t afford hoping for that quick buck. And we have seen that play out with the whole scenario with GME and AMC, also. They aren’t investing, they are gambling. Most on here can afford to take a speculative bet on Bitcoin. But how many in the real world can? I’m in the category of those that can’t. I’ve seen this story before. I didn’t like how it ended.
cd :O)
You could likely afford to put <5% in if you really wanted to. That's what I'm talking about when I'm saying limit how much you put into speculative investments.
You can afford it. But you don’t think you can. Why? You don’t have the conviction or the knowledge about it to have such a conviction. Mostly it’s not because people know, it’s that they are paralyzed because they think “it’s too late'” it already made its move, etc. Nope.
Good luck with affording a bad culture getting worse, tax situations getting worse, Fed out of control, balance sheets and US Debt out of control … haha, you can’t afford it.
Most people don’t take a shot (I’m not saying YOU MUST do it here) … and that’s why most are losers.
It’s gotta be that way, but I don’t live like that. I don’t make excuses.
Thanks for the demonstration of how the true BTC fans think about it. Very illuminating.
As near as I can tell your argument is “The value of Bitcoin must go up because of the following macroeconomic events….”
If it must go up, the price would already be higher. That’s how markets work. You are saying you know more than the collective insight of everyone else in the world. That’s a dangerous place to be and has cost many people a lot of money in the past.
Hello WCI, long time reader here. What are your thoughts on the economy from a money printing, debt, macro perspective? Are we at risk for 2008 again? My take is that we are in for a world of hurt at some point, much worse than 2008, and having some diversification outside the US financial system in the form of cryptocurrencies makes sense for a small part of the portfolio.
Bitcoin is intelligently designed digital gold. It is only code, but the network effects give it staying power against competitors. There is now institutional buy in and increased adoption, which will help stabilize the price long term. For the next decade or so I would view it as an incredibly volatile uncorrelated growth asset that will eventually settle into its role as digital gold. Innovation within decentralized finance has also been booming, irrespective of what the price action does during boom/bust cycles. Buy during busts, not booms, which occur like clockwork every 4 years based on the bitcoin halving.
#1 Speculation
#2 Gambling
Agree that bitcoin can be used for many things, including speculation and gambling.
# 3 Conceal Illegal Business Activity
Bitcoin is readily trackable in the public ledger using a blockchain explorer. Illegal activity is far more likely to occur in the privacy coins (Monero, etc.). No “intelligent” criminal would use bitcoin.
# 4 Squirrel Money Out of a Country
One of the appeals of Bitcoin is that it cannot be confiscated.
# 5 Impress others
# 6 Get a Head Start on Possible Future Currency
Yes, and yes.
# 7 Hedge Against Bizarre Global Catastrophic Circumstances
Yes, this is one use of bitcoin. USD at risk for losing world reserve currency status, money printing, historic debt levels, wealth inequality, trade wars, and more contribute to instability and unsustainability of the current system.
I have no idea which way the economy or the markets are heading. If I did, speculation would be much easier. Luckily my investment plan does not require that information to be successful.
I certainly hope the price stabilizes long term, but see little evidence of that yet.
I have no idea whether people will view BTC as digital gold in ten years or whether Bitcoin will be a prime example of financial bubbles in the textbooks.
I agree if you’re going to speculate, you should do so during busts, not booms.
Before completely ruling out cryptocurrency as a small portion of a diversified portfolio, I’d recommend the following book; see review by founder of portfolio theory below.
Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond by Chris Burniske and Jack Tatar
https://www.amazon.com/Cryptoassets-Innovative-Investors-Bitcoin-Beyond/dp/1260026671/ref=sr_1_13?dchild=1&keywords=bitcoin+investment&qid=1612219200&sr=8-13
“Whether or not one contemplates investing in cryptoassets, anyone with a practical or theoretical interest in financial markets should know about them. Burniske and Tatar do an excellent job explaining this brave new world to us.”
Harry Max Markowitz, winner of the Nobel Prize in Economics and founder of Modern Portfolio Theory
What do you mean rule it out? I didn’t rule it out of anybody’s portfolio but my own. I told everyone else to limit their investment in it to the single digits.
There seems to be a lot of confusion here about the definition of speculation. Fortunately, due to the magic of the interwebtubes, we can look it up in a few seconds. While cryptocurrency as a category might (might!) be the future of money, “investing” in any particular cryptocurrency and having certainty about its inevitable rise is…speculation. While I don’t own any crypto, I’ve been following it for years and having absolutely nothing against it. It seems as though most proponents, including several people I know well, have a religious fervor for this stuff. I think Dr. Dahle presents a pretty fair picture of Bitcoin.
I thought so too, but people sure get upset when you are anything but a 100% totally loyal cheerleader for the cause. Reminds me of some recent political events now that you mention it. And that line by Anakin in Revenge of the Sith:
https://www.youtube.com/watch?v=pez_79eWSWw
Look if people want to speculate in it, I say knock yourself out. Don’t bet the farm. And you’ll probably end up better if you buy during a bust than a boom. But don’t pretend it’s anything other than that.
Not upset about it…but I do believe you (IMD801) do not understand the definition of speculation. Here it is from the Google interwebs: investment in stocks, property, or other ventures in the hope of gain but with the risk of loss. “the company’s move into property speculation”
So as I mentioned, yes Bitcoin is speculation. So is literally every other investment including stock market index funds. The entire goal of any investment is speculating that the investment will rise.
So I disagree that “speculation” is an argument that can be made for, or against any investment. By definition, they are literally all speculation.
If you believe that investing in Bitcoin is no more speculative than investing in the overall US stock market you’re sorely mistaken. While there is at least a tiny speculative element in just about anything, in the long run the speculative element contributes very little to the return of stocks but is nearly the entire return for a cryptocurrency.
Literally everything we do in life is speculation, then, right? Since everything we do is ostensibly done with the hope of some kind of gain. There’s no difference between having an emergency fund in Ally and buying GME on margin, I guess. But you know that’s not a useful definition and it might be better to argue with the Bitcoin fanatics in here who have openly stated it’s speculation.
Dr. Dahle’s analysis is absolutely fair given what we know today. All I see is a bunch of conjecture, conspiracy theory, and yes speculation about all kinds of things under the Sun to justify their pet speculative interest of the day.
But a Fair analysis based on current data wont cut it for the Pro- BTC bunch. They need it to increase in value. And with no earnings/dividend/cashflow to justify its price, how will it increase in value if other people don’t buy into it ? Thus the obsessive attempts to convince WCI he is wrong – similar to the nonsensical Whole life arguments previously played out on this forum by “seller” agents.
To an ignoramus like me, it seems to me there are some here trying to convince Dr. D, and others, to be their “greater fool(s)”.
Good try guys.
The interesting thing about these obsessive attempts is that when Bitcoin takes its next big hit, they’ll go away for a while. A few months. A few years. But if Bitcoin goes vertical again afterward, they’ll all be back.
Ha ha reading these comments was hilarious! Actually reading the article was hilarious too because my first thought was that I own mine to speculate, scrolled down and voila there it was #1 on the list. I very much get a flat earther gold bug vibe from most of these comments. That the bitcoin supporters cannot recognize the validity of each of your points concerns me, it’s trending towards delusional. Seeing the flaws in something is every bit as important as seeing its potential. I keep a small bit for fun for now as a bet on the future to see if it will develop into something useful but I have no delusions about its main uses today (criminality and currency control avoidance – which I suppose is just a subset of criminality?). I also find it amusing that people think it’s safer because of the freedom from regulation while forgetting about the risks that lead to the development of regulations in the first place.
I agree. Anyone who thinks they don’t own it primarily for speculation concerns me because that is currently its primary use. Maybe someday it will have a different primary use, dunno. They mostly just seem upset that I haven’t put 1% of my portfolio into it as a believer and a “supporter”.