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!
Jim, this article is not a perfect representation of bitcoin. Anyway, here is my article which I wrote a few years ago refuting all the points in this post.
https://financialfreedomcountdown.com/advantage-of-bitcoin-no-government-or-entity-can-freeze-your-funds/
I assume that your readers want to know more about it and hence you constantly post or tweet about it? I’ve not had the time to guest post but happy to write one if there are additional items not addressed in my post whichnuour readers want a deep dive
“Constantly”? In the words of Inigo Montoya, “You keep using that word. I do not think it means what you think it means.”
My last Bitcoin post was May 2019. My last few original tweets about it were January 27th, November 29th, and October 30th.
I did have an exchange on Twitter last week about it in the @s below an unrelated post, perhaps you caught that.
I have been in bitcoin for many years, but I tell most of my friends and family to not buy it (most would panic sell when the price dropped 20% one day, which it does often). I also acknowledge bitcoin is HIGHLY speculative. It could break and go to zero any day.
However, Bitcoin is the FIRST instance of digital scarcity.** It achieves this through a game-theoretic stable network where real peoples’ economic incentives are baked into the code and the protocol. This is the backbone of why Bitcoin is revolutionary. Everything else is just extra. This is super important.
Because bitcoin is a system of digital scarcity, currency was the first and most obvious application. The next most common applications are other financial instruments (an extension of currency IMO), ownership of art (digital on-blockchain art), other types of contracts, etc. The applications will continue to expand in breadth and depth as time goes on.
Other features that make Bitcoin unique and contribute to its usefulness:
– It is a push-based payment system. Credit card and many other payments systems are pull-based
– Borderless. Agnostic to the location of sender or receiver, which makes cross-border payments identical to within-country payments
– Transaction speeds are faster than ACH, Wire, etc. (averaging 10 minutes per confirmation)
– Flat fees whether sending $5 or $500,000,000
– Publicly Auditable
– Censorship resistant (not just illegal things. In December Visa and Mastercard stopped processing payments to online adult sites. Those sites are legal.)
** All previous instances of digital scarcity rely on a centralized institution being the oracle. We rely on JP Morgan’s database to not start adding 0’s to people’s account balances. There is no “hard” limit on what they can do. There are legal, regulatory, ethical, business-risk limits. And I suppose they have to sync with the Federal Reserves databses and balance sheets. But that just pushes the problem one step down — now we are relying on the Fed’s database to not add (or remove) 0’s from people’s balances.
Cool!
I don’t disagree there are lots of cool things about Bitcoin. I have no idea if it is a good idea to buy it now (I suspect it isn’t, but really don’t know). And that’s really the question when it comes down to what to do about all that cool information.
A lot of your post tries to look into whether bitcoin has some use and hence some value. I am trying to point out that your post misses the main revolutionary concept.
As to how to value it, no one knows. Nothing like it has ever existed before. Some guy invented a digital currency, based on nothing but social consensus. I don’t know if it should be $5 per bitcoin or 5 cents or $5 million (sidebar – coins can be divided into 8 decimals, so you don’t have to buy discrete bitcoins, you cna buy 0.03194739 bitcoin). The market doesn’t know either. That’s why it is so volatile. How do you value something whose future is so unknown, that can change and evolve over time (through code changes and protocol upgrades) and which has nothing to compare to? Trial and error and time is the only way.
I just told someone this yesterday: Back in 2013, I thought we would have substantially more people using bitcoin, and substantially more people informed on the subject AND I thought that the price in that scenario would only be like ~$5k. Reality is pretty much the inverse. We still have so few users and so few people educated on the matter, but the price is astronomical.
Bitcoin is super speculative, and if you aren’t interested in the subject enough to buy some and hold it in your own wallet (not some online exchange or other custody) then you probably shouldn’t buy. But its one of the most interesting things happening in the world. Y’all should really look into it at a deeper level
I agree no one knows how to value it and that’s why it is so volatile and that’s why I don’t invest in it.
I also agree it is interesting.
I wrote a blog post back in 2018 for WCI about Bitcoin, and trading it from a professional trader’s perspective who manages other people’s money. I tried to write it in a way that was educational, remain timeless, and age well. I think it has done just that, even though many, including Jim, thought 2017 was the bubble.
https://www.whitecoatinvestor.com/bitcoin-a-traders-perspective/
2017 was a bubble. Bitcoin dropped over 80% in value in early 2018. Did you miss that? Just because a bubble bursts doesn’t mean an asset can’t later go up in price.
As I wrote in my post, I think the word bubble gets thrown around quite frequently, often by bloggers and the media to help qualify why they’re not involved in a market. I remember when I read The Economist article “The Bitcoin Bubble” in 2013 when they wrote about it being a “bubble” because it went from $20-$100/coin. It’s been a “bubble” now 10-20 times over the course of the last decade according to financial bloggers and the media. Interestingly enough, very few asset managers (including myself) think it has been a bubble even once. It’s because there’s a lot more that goes into being an actual financial market bubble than just large price appreciations and large corrections, as I explained in my article for you. That said, we are currently in an environment where another pillar of Bitcoin actually becoming a bubble is being constructed, that of institutional adoption. I’ll leave you with a quote from Ray Dalio, just last week, as he readies his firm to begin investing in the space: “It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative idea that could well not be around in short order to probably being around and probably having some value in the future.” That’s quite the turning point for the largest asset manager in the world. Now the fun will start…enjoy the ride, or enjoy fighting it. Either way, everyone gets what they want out of markets, and some bloggers seem to like drama and ego-battles. Me, I just like riding trends, up or down, and right now the trend is up.
Ray Dalio’s Bridgewater isn’t even in the top 10 asset managers in the world.
https://www.statista.com/statistics/431790/leading-asset-management-companies-worldwide-by-assets/#:~:text=At%20the%20end%20of%202019,players%20on%20the%20financial%20market.
Does it bother you that even the “great Ray Dalio” has no idea what a BTC is worth? Apparently not.
WCI thanks for responding to all the comments in the article. It seems like you are the lone warrior, standing by the truth while all the hordes are attacking you.
My own portfolio is largely made up of index funds, though I do have some individual stocks, but I bought them to keep over decades and not be a short term trader. My individual stocks have done well to make up 18% of the portfolio, but it is mainly over few decades of some technology stocks doing well. I certainly havenot put 18% of my saved money in them.
Last week I broke down and bought GME ($340) for 10K, I have already lost 100 dollars per share on it. I feel foolish for supporting what I felt was a right cause. I could have used that 10K for better stuff like home renovations.
Should listen to your advice more often. Thanks for fighting and keeping us sane!
This is fine, the more bitcoin for me the better.
People didn’t understand why email or the internet was going to be important 30 years ago either.
But a whole bunch of them still lost money speculating about it.
To be fair, the internet now composes the majority of the top 10 of VTI and if purchased with any size when OP was referencing would have been enough to retire on. Bubbles can be bad if bought at the top but bubbles can be naturally occurring events due to the extreme excitement over a new technology such as what the internet was.
People didn’t get excited about the internet 30 years ago? You mean this?: https://en.wikipedia.org/wiki/Dot-com_bubble
It’s a growing religion with faith, conviction and trust.
It’s not my religion but I’ve been willing to profit from it.
I love it. I think that’s a great attitude. There really is a fervor there that probably puts a floor under its price. I hope.
Hi guys,
I read all the posts and replies, all I can say is give this idea time, don’t denounce each other or disparage, it takes time to sink in, it takes years, it’s a long game, you have to dedicate a lot of time to learn about this topic, it’ takes not days or weeks but rather months… to get a good handle on it.. and you have to start from the beginning, from the question of what is money and whom and what you trust.
Before delving into this I also only did index funds and wow has my world changed, I’m able to breathe and sleep better, since I’ve gotten into it, I am able to say thank you to Satoshi, in my opinion you have to understand the past and come from a country that has been ravaged by currency depreciation, and you have to have a return of 15-20% a year just to stay on top on inflation. CPI doesn’t measure real estate in New York, or La, your kids education, your luxury car, basically anything you want in every day life, it doesn’t measure. If you gonna live in your parent’s basement and eat pizza, use a computer and play video games that are now free online, yes CPI is accurate! Good luck to all and come back to this post in a few years, it’ll be worth it, you’ll see how math will change you, just run the numbers for your own situation before you dive in… thanks to all 🙏🙏🙏
There are a lot of things I want that are in the CPI. Here’s some of what’s in it:
Food; Shelter; Household operations, furnishings and equipment; Clothing and footwear; Transportation; Health and personal care; Recreation, education and reading, and Alcoholic beverages, tobacco products and recreational cannabis.
Here’s some of what is not in it:
The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance.
At any rate, I addressed the inflation issue above in the post.
This biggest risk you are taking is not having any exposure to this new asset class knowing as much as you do. As a young guy, this may (and every year looks more so) be the one opportunity to front run big business, Wall Street and the banisters/gangsters, they will come in, gradually then suddenly… during each 4 year epoch…
Stay humble especially to the blog author, I have your book on my shelf, I’ve read your blog for years, yes youre smart, but don’t follow your emotions, stay sober, look at the numbers like in mathematics 4th grade, it’s just plain mathematics. Get educated on this new technology and listen to other people’s opinions, listen to Plan B, the stock to Flow Model, Michael Saylor, listen to engineers discuss it, it’s just a store of value for most of us, like a monetary battery that continues to charge up as more people get involved, listen to the senator from Wyoming, Listen to Peter shiff, all the haters, Warren buffet, Charlie munger — read widely, listen and evaluate all criticism, we are very lucky to be from the US, not so many people as luck as you and me, good luck!!! 🍀
https://youtu.be/cryWpkW25ug
I don’t think buying after 12 years and a run up to $40,000 that I’m somehow getting in ahead of the crowd, gangsters, Big Business, and Wall Street. Maybe if I’d bought in 2009-2011 I could claim that.
But you’re basically saying “If you knew more you’d buy as much as you could because it must go up in value.”
I disagree that it “must” go up in value. In fact, things that just went up 1000% in the last year very rarely continue to go up in value. Maybe this is the exception, time will tell. But I’m grateful that I’m in the position that I can afford to stand on the sidelines and just watch.
Yes you are correct, only time will tell, I’ve been in the space since 2019, have been DCAing, and now am lucky enough to achieve the status of FIRE. If I had been only passive index stock DCAing which I did the three years in prior, this process would have been a lot slower. True, we live in a unprecedented time with unlimited QE, so time will tell and the price will be the barometer. I tell all my friends given what literature, media and podcast (1000s of hours of material) that exist and are being created daily, it would in fact be irresponsible to not have even a minimal allocation say 1% in this new asset class. It has served me well and some of my friends also getting on the life raft.
Thanks for your hard work, we do appreciate you even if we don’t always share 100% of each other views, we are all one big family, good luck with your endeavors and wish everyone here the best 🔥
A podcast of another ER doc I heard was excellent a while back, I’ve listened to dozens of podcasts but this is the first where the interviewee was a MD
https://podcasts.apple.com/us/podcast/citizen-bitcoin/id1350483937?i=1000501366642
Congrats on your success!
Wow, WCI! You really opened up a can of worms with this post! Maybe you can bring the rest of the haters to the yard by writing a post about driving a Tesla to buy whole life insurance and paying with Bitcoin.
I agree that Bitcoin is far to volatile. Anyone with any knowledge of rebalancing should be selling bitcoin now, not buying. But you are probably correct in assuming that most of them don’t have a written investing plan.
Anytime I hear a list of names of famous people investing in a product or the phrase “once in a lifetime,” I’m reminded of the one time I invested in a startup company. Long story short, it went bankrupt and I lost everything.
I’ll pass on Bitcoin and stick with passive investing.
WCI, post your BTC address and I will send you a (small) amount of BTC. Zero risk, something for nothing (infinite ROI). It will be fun, I promise. I’ll probably only check this post the next day or two though.
If you don’t have a cryptocurrency wallet yet, I recommend the Exodus wallet.
***offer only stands if you truly don’t own any BTC
Thanks for the offer. I’d prefer you donate it to a charity on my behalf. If you need a list of charities, try one of these:
https://www.whitecoatinvestor.com/our-favorite-charities/
It’s supposed to be a Green Eggs and Ham type thing. I’ll send you the BTC, and you can donate it to the charity of your choice. Or hold it for a few years, then donate to charity. Might make for a fun blog post down the line. Lots of clicks. Has to be tough coming up with new material.
I’m bullish on the long term prospects of crypto, but to be fair you missed many of the harshest criticisms of BTC in your article:
#8 Paying more taxes
If you try to spend crypto on anything, odds are you have a tax liability (unless you took a loss on the coin). And unlike physical gold/silver or cash purchases, BTC transactions ARE traceable in the public blockchain. If you acquire the cryptocurrency mid bull run (like right now), short term capital gains rate won’t be a pleasant experience for most high-income professionals if they plan to take some profits this year.
#9 High transaction fees (gas fees) during congested periods and bull runs
This is one reason why BTC functions better as digital gold and not cash; other lesser known coins have already solved the transaction fee problem. Still less costly than a wire.
#10 Opportunity cost associated with the requisite learning curve
Especially expensive for high-income professionals.
#11 Inheritance issues
If someone is holding substantial crypto assets, they had better provide instructions to their family on how to access them in the event of unexpected death.
These are only a few additional criticisms, but I imagine you could find plenty more. Owe it to your audience to be a fully informed crypto bear if you plan to continue posting on this topic. Again, the problems solved by BTC far outweigh these downsides imo (currency manipulation, confiscation, censorship, diversification/portfolio theory considerations, macro trends, etc). BTC is tip of iceberg, ETH/decentralized finance are the major growth opportunities. Stack some cash and buy during the downturn, likely around spring/summer 2022 if BTC halving cycles continue to be strong predictors.
The reason I don’t own Bitcoin is not because I can’t afford to own Bitcoin. So your offer to give me some is not particularly enticing.
I disagree that writing about Bitcoin brings “tons of clicks”. See the response above to Napoleon Dynamite. Just because you’re really interested in this subject does not mean most people are. It does bring tons of comments from the fanatics for years to come, kind of like whole life insurance posts, but that is far from the same thing. The comments are actually probably a drag on the business because they require moderation/response etc. Maybe that’s why some folks like Mike Piper just turned theirs off years ago or like Mr. Money Mustache don’t really read and respond to them.
Your “negatives” are just related to using it as a currency and I think we all agree that even after 12 years, it still isn’t a useful currency. Maybe it will be some day, but the taxes don’t matter if I can’t use it as a currency. That means the stuff I want to buy is priced in Bitcoin so I don’t have to pay taxes on selling Bitcoin for dollars to buy it.
I do find it fascinating that you somehow know we are “mid bull run.” Quite a clear crystal ball you have there.
The transaction fees don’t matter as much to those who don’t trade.
Not sure why there must be a huge learning curve to buy Bitcoin with massive opportunity cost. Just because it becomes a hobby to some to “study” it, doesn’t mean one has to do that to buy it.
I think the inheritance issue is easily addressed.
As I said earlier, I’m not a crypto bear, although I do take a strong stance against speculation. Maybe you’re mistaking that for a belief that the value of Bitcoin must go down. I don’t believe that at all.
Better phrasing on my part would have been “midst of a bull run.” No crystal ball here.
My offer to send bitcoin was about having a bit of fun engaging with this technology to try it out, not because I figured you need the cash.
Anyway best of luck with your investing. I commend you for staying so actively involved in these comments and engaging with your readers.
Interesting that I’m giving off the impression that I need cash. Hopefully that’s the message my kids are getting too.
Haha no I meant I am sure you do NOT need cash. My comment was not meant as a dig.
It is hard to ignore an asset that keeps achieving a new all time high every two to three years at a pace that outperforms every other asset for the past decade. More importantly, Bitcoin is not generated out of thin air. The network that is built to secure this digital monetary asset is the largest and most established network among all crypto currencies. That has value. It is tangible. It is growing and it is measurable. There are more active bitcoin wallets than ever before.
Just apply the same principles to it that you apply to any portfolio. Everyone has some “tilt” in their portfolio because they believe in something longterm, but they don’t want to bet the farm on it. Have a written plan, and keep investing a small portion (<5%) of your portfolio every month whether you think it is in a bubble or in a bear market and reap the benefits of dollar cost averaging.
If someone started dollar cost averaging from the peak of the 2017 market until this day, they would have easily outperformed any index fund. Some chose to tilt their portfolio into tech, others into emerging markets, others into energy. I will tilt it into Bitcoin. In 10 years, it will be an interesting topic to revisit. Although I have a hunch you will say the same thing again even if bitcoin was trading in the 6 digits.
You’re right that my opinion isn’t based on its performance. No one can deny its performance over the last year has been spectacular, just like it was in the Fall of 2017 and several other times.
But it is not just the last year. IF someone dollar cost averaged through the entire 2017 crash, bear market, until now, they would have been rewarded handsomely. You can stretch that further back through all the crashes. More importantly, there seems to be a fundamental shift in how institutions are valuing bitcoin. Visa wants to include it in their payment system to avoid missing the boat. Paypal has already started.
While I agree with you that Bitcoin has not necessarily been a good hedge against inflation, it does however seem to work beautifully as a hedge against the DXY. Bitcoin price has done very well when the DXY index drops, and does poorly when the DXY strengthens. I fully expect another spectacular crash in BTC price at some point, but if that happens, then the value of my USD probably is holding well against other currencies.
I’m not seeing the inverse correlation with the dollar you’re seeing.
I get that you think it’s an inflation hedge because it isn’t in dollars, but I don’t think you can argue it is inversely correlated. Uncorrelated at best.
The Paypal thing is not quite accurate. You can buy Bitcoin at Paypal. Then when you go to buy something with paypal, the Bitcoin is sold for dollars (and you’ll pay capital gains taxes on it) and then the dollars are used to make the purchase. Being able to buy Bitcoin at Paypal is very different from being able to use Paypal to pay with Bitcoin. Nice try though.
https://www.paypal.com/us/smarthelp/article/cryptocurrency-on-paypal-faq-faq4398?app=searchAutoComplete
What did PayPal announce around Crypto?
We announced that PayPal users in the U.S. can buy, sell and hold select Cryptocurrencies directly through PayPal using their Cash or Cash Plus account. Users will be able to learn about Crypto, track crypto prices, all without leaving the PayPal app. We plan to introduce this service to Venmo in 2021.
PayPal also announced that it will enable Cryptocurrency as a funding source for purchases in 2021, allowing users to use their Cryptocurrency holdings to make purchases at its network of more than 26 million merchants. Once launched in 2021, when a consumer selects Cryptocurrency as the funding source, the Cryptocurrency will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency.
Jim,
At first I thought you had just re-started one of your prior posts where you discuss why you think Bitcoin is a bad idea. But, I just pulled up the one from May 2019 and I see you have added more to this one, so I applaud you for putting more effort into it.
I think, however, that you and others that have posted above miss the message from the ‘bitcoin fanatics’ as you call us. (I guess I am lumping myself in here to your label, even though I would not describe myself as such.) Your day job, just like mine, is to help people. And a lot of the people posting on here have that same mentality. We are trying to help you understand this, too.
Your message, it seems, is this is too risky for you, and you’ll jump in later once everything is sussed out. That’s certainly a safe route. However, there is tremendous wealth creation going on in the crypto world. MOST of your readers do not have the same net worth as you have created with your publishing empire. They do have high earning potential, and they have an opportunity to grow wealth. Many of them are smart and determined enough to do their due diligence on individual investments.
I believe that those of us that have done this research are trying to share that opportunity with you. I get that you don’t want to take it. It seems to me that you view bitcoin much like an individual stock, rather than a new asset class. I just think you’re also doing your readers a disservice by continually steering them away.
Someone posted above that he would come back in 5 years to see what BTC is worth. Great, but no one actually has to wait. It is easy to just look back 5 years ago and see what it was worth and then again 5 years before that.
The price per bitcoin is increasing because more people are figuring it out, and buying in. There are PLENTY of reasons in the comments above about why bitcoin is going to succeed.
Smart and very wealthy people have started buying bitcoin. Large companies are buying bitcoin. Institutions are beginning to buy bitcoin. There is going to be increased institutional buy-in over the next few months. I predict that this will begin to accelerate over the 3rd and 4th quarters of 2021.
Because supply is limited, and production is decreasing, while demand is increasing, price is going to rise. Today’s price is around USD$34,000. I place this here only for people to have this as a reference if they read this post in the coming months and years. (FYI, Ethereum is around USD$1,400 and I do not recommend XRP. I am impressed you mentioned ADA. It has promise, but I personally have not bought any.)
I think one other thing to keep in mind when discussing all of this is risk tolerance. I am comfortable buying and selling stock as well. I suspect most of the posters above who are buying cryptocurrency are also comfortable buying and selling stock instead of trading index funds. And, for the record, I bought some bitcoin before although I bought most after the 2018 crash you like to mention as a reason why people should not buy bitcoin.
As was posted above, I believe the price will soon be out of range for most individuals to own an entire bitcoin.
Rich Lassiter, MD
A few comments for discussion:
“I believe that those of us that have done this research are trying to share that opportunity with you.” Of course you do. The more people buy it, the higher the price goes, and the people who got in early can dump their Bitcoins for a profit. This is the entire idea on which the greater fool theory is sustained.
“Because supply is limited, and production is decreasing, while demand is increasing, price is going to rise.” The same could be said for sports cards (which have overall increased in value way more than Bitcoin over the last year after decades of doing nothing). Or Beanie Babies back in the late 90s. This reason in and of itself is not a reliably good reason to buy something.
Rich-
One of the worst ways of determining future performance is by projecting recent past performance into the future. I would caution you against doing so. I don’t pretend to know what the 5 year performance of BTC will be, I’m simply pointing out that neither you nor anyone else knows either.
Your arguments (smart people, rich people, companies are all buying Bitcoin) is the exact same one trotted out by the whole life salesmen.
Trees do not grow to the sky. You cannot say “demand is increasing”. You can only say “demand increased and I think it is going to continue to increase.”
I only say demand is increasing because more bitcoin is being purchased and taken off exchanges, and more companies are buying bitcoin. More wallets have been created. Grayscale is buying more bitcoin than is being mined, and more companies and institutions are implementing their plans to buy some. I believe that these things actually do indicate that demand is increasing. I also believe that demand is going to continue to increase, although that is grammatically a different statement.
And I’m saying you’re projecting the past into the future. You can say demand increased. But you cannot definitively say demand is increasing because you have no idea what demand will be a month, a quarter, or a year from now.
I don’t have any problem with your belief that demand will increase in the future.
I have no idea what is going to happen to Bitcoin. I think behind every post on a topic like this it may be useful to write in what percent of your portfolio you have invested in Bitcoin or crypto. It would add clarity to everyone’s positions. I’m with WCI in that I don’t care to invest in BTC myself because of the volatility and I don’t really understand it. Thank you for writing the article.
There is an article in the WSJ by Andy Kessler from January 31st called “Behind the Bitcoin Bubble”. It seems like this could be an interesting month for crypto. I’m sure the Fanboys will brush this off like no big deal.
For what it’s worth, my mother called me last week to tell me how she is selling an old mutual fund she received years ago and is buying more Ethereum. So take that tip to the bank.
I agree with that. I keep meeting these true believers who post 30 tweets about it in response to something I write and then I find out they only put 1% of their portfolio into it. Well, 1% just about equals the 0% I have. If you actually believe in this as an asset class appropriate for a portfolio, buck up and put 5% into it. If you don’t believe in it enough to put 5% in, then why bother with it? You’re only using play money.
Does your mother shine shoes?
If someone wants to speculate in Bitcoin, at least in the past the boom-bust cycles have been so short you don’t have to wait long to buy during a bust rather than the current boom.
People are going to have different investment thesis, but I think you have a valid point. I have approx 10% of my 401K in GBTC, as a proxy for investing in BTC since I cannot actually invest in BTC with that account. It was closer to 7% when I bought it, but the price is rising. BTC is closer to 30% of my non-qualified investments.
To be honest, I did just ‘dip my toe in’ with 1% back in 2017 before the run-up, and after spending considerable time on this, I realized I needed to allocate more capital, and did so in 2020.
I realized that most of the financial advice out there is ‘do what is safe.’ Diversify assets. Invest in Index funds. Those are all fine ideas for people with a low risk tolerance. I also considered that if I wanted to have a home run, I needed to really swing at this. I was going to beat myself up for not following through on my research and convictions if I didn’t allocate some serious money behind this. As such, I allocated a considerable portion to bitcoin this past summer, and it is currently up approx 3X.
I’ll certainly admit all my picks haven’t been winners. I sold all my GME at a loss back in July around the same time I bought BTC 😉
I’m positive that cryptocurrency is the future. Bitcoin is not going away. I think there is a good chance that it is not the one we use for everyday transactions. Instead, it will remain a store of value. Ethereum is already in use (and I have also bought it), but ADA or DOT may be the one we all interact with/on daily in a few years. I haven’t done enough investigation to put money behind those, yet.
Good on your mom for diversifying her assets.
I think the fact that you bought GME at all tells us all we need to know about your investing recommendations.
Risk tolerance is one thing, foolhardiness is another. 30% of your portfolio in Bitcoin is foolhardy (although I recognize yours is only 30% of your taxable account).
Return of principal matters at least as much as return on principal. Why in the world would you need to take on enough risk to have 3X returns in a year? Do you only make $30K a year and only save 5% of it or something? At 300% a year you’ll own the entire world in a decade.
This has been fun to read! Thanks Jim and also thanks to the others willing to spend time writing about this in the comments. Disclaimer: I do not and never have owned any bitcoin. I do run a server/node and “stake” a small amount of ether and consider it more of a hobby/side gig than an investment. I agree with many above who state that this is a fascinating technology and in 20 years I suspect we will look back on this time as a turning point in monetary policy/system. Technically bitcoin is not at new as it seems. Though it was the first major cryptocurrency and still is by far the largest in terms of market capitalization, its algorithm and code are fairly basic. The trouble I see with bitcoin is that much of it’s “value” is dependent on growth. It is also much more centralized now than ever (majority of the hash rate is now and will continue to be concentrated in large commercial mining farms). It’s also dependent on a very energy expensive and hardware specific “proof of work” mechanism that is “secure” for the moment (until quantum computing can break the SHA256 algorithm) but is very wasteful/inefficient. Yes, for “normies” (the term in crypto world for “normal” people who don’t know yet or care much about cryptocurrency) bitcoin is in the headlines and its growth in the past year has been astronomical (bubble?). I think the “use case” for bitcoin is not that compelling and if there ever was a time to speculate on bitcoin, I would guess that right now is not it. There are some really cool ideas out in the broader cryptocurrency world that have huge potential e.g. decentralized finance. I think it’s similar to the explosion of really cool ideas at the dawn of the internet/information age. In retrospect, we know that Google and Facebook and Amazon and Netflix and others took/invented/built those ideas and capitalized on them to great financial reward. We don’t even remember the names of the companies that failed (at least I don’t). Prospectively, no one knows for certain what will happen. I suspect that at least some of the cryptocurrency protocols out there today will persist in a usable/valuable form for the next few decades. There is pent up demand from young people especially millennials for alternatives to the traditional monetary/financial system which they see as repressive. Many governments controlling fiat currencies including the US have repeatedly and recently shown willingness to control markets and “print money” in response to perceived or real crises. Central banks have a huge amount of power, not much transparency and little accountability. I personally have benefited quite well from the traditional financial system (and will continue to do so) but I can see how there is a lot of room for growth in these alternative spaces. I think there is a case to be made that cryptocurrency is a legitimate asset class. It is new and exciting. Just like any asset class, it has plenty of pros and plenty of cons. Do I think most people should invest in cryptocurrency? Nope. Most people haven’t even figured out the difference between stocks and bonds. In this group (white coat investors), I think it is something worth consideration after you have your “financial house in order”. Someday soon there will be an “index fund” equivalent for cryptocurrency protocols but not yet. Right now it’s like the Wild Wild West. Scams abound. People are losing their minds and betting/gambling like crazy. “High risk high reward” is an understatement. Caveat emptor
Necrotic,
It sounds like you know the space well. Regarding index funds, Circle had created a way to buy a collection of coins years ago, although I did not buy/use that. Circle was bought by Voyager, but from what I can see on their app, I don’t think they continued that basket purchase option. Grayscale does have one, though, the ticker is GDLC.
I presume you have identified ways to earn interest in your coins. I had mentioned this to WCI on a prior post a week or two ago in a different bitcoin thread, but he deleted it.
I doubt it deleted I because you mentioned that. The only comments I generally delete are either somebody trying to advertise on here and ad hominem attacks. In your case, it was likely the latter I suspect.
DPI is another fledgling DeFi index but I’m not convinced yet it is mature and it really only works for ethereum protocols. Grayscale charges a ridiculous premium in my opinion. Again, as Bogle and Dahle have always said, the fees/costs matter a lot in the long run. Gas prices have been good for miners but not for traders. I think there is inherent value in providing liquidity. You earn “fees” for being on either side of trades. There are massive companies on Wall Street that do this and leverage very small arbitrage rates (and milliseconds faster on trading) to make millions and millions providing liquidity in traditional markets. DeFi allows the option for the same type of thing but in a decentralized way. It’s risky and new but I see it as a way to be on the “earning fees” side instead of the “paying fees” side.
Agreed that there is a high premium on Grayscale, but it is the closest proxy available in my retirement account. I suppose I could by MSTR, but that’s really not quite the same beast. (Perhaps you could argue it’s a better vehicle, but that’s not for this conversation.).
Along the lines of buying the exchange to make money on the fees, I think there is great promise in Voyager and Celsius. Voyager is publicly traded and I have purchased. Celsius is private and I may try to get on in their next equity round. Meanwhile, both have utility tokens which may be worthwhile, although I haven’t purchased, yet.
It is unfortunate there is no way to buy bitcoin in a brokerage such as Fidelity/Schwab/Vanguard without paying a hefty premium. The GBTC premium can range from 2%-30% depending on if people are fearful or greedy with the bitcoin volatility. In my opinion, the premium reflects the demand for a traditional investment vehicle. If a bitcoin ETF gets approved, this premium will disappear.
Bitbo.io is a good website to see the real-time GBTC / QBTC(canadian version) premiums relative to spot bitcoin if you are curious. Also has other interesting metrics on the network.
MSTR is a strange beast. It has outperformed bitcoin since their corp bought $1billion of bitcoin.. I don’t understand why. Before purchasing bitcoin, I believe its market cap was 1-1.5 billion and they had a huge stockpile of cash. Now, market value of its bitcoin is $2.68 billion but its stock market cap is $6.86 billion and they do not have that cash stockpile anymore. So either the MSTR price is a bubble, the underlying company has dramatically increased in value since Sept 2020, or potentially there are institutions that can only get BTC exposure through a stock like MSTR and therefore are forced buyers of a premium.
Yea, it’s crazy the premium is so high. Wouldn’t surprise me if you could buy it at Fidelity/Schwab etc soon directly a la RobinHood.
Great write-up Jim. And I appreciate the great commentary by Necrotic. These coins are all highly volatile but I agree are interesting from a hobby standpoint. I think coins that have a DeFi purpose will do better in the long run (think Ethereum, Polkadot, Cardano among others). But who knows. Interestingly you can “stake” some of these coins on major exchanges and earn interest on them. Agree with Jim that this is purely speculative. Like the dotcom boom, amongst the different crypto coins, I expect there to be a few winners, and many losers. Wouldn’t bet the retirement fund on it, and would expect to lose anything put into it, but I added income from a couple moonlighting shifts into it early/mid 2020, and has been entertaining to watch. Harvard, Yale, Brown endowments have been making small (speculations I would say) on bitcoin since at least 2019. If we continue to see such increased institutional demand (even if only 0.2-2% asset allocation) to crypto then I would expect prices to continue to climb, on a macro perspective, over the next 5 years. Even if they don’t, has been fun to watch.
Oh man,
When i saw the post pop in my email, my immediate reaction was to follow thru and “I cant wait to read the endless comments, this is going to be fun!”
Got done reading “devil takes the hindmost” and an avid follower of your post. Thanks for the hardwork.
Open criticism: I do see your point in educating the crowd but dont think the crowd understands this is counterproductive to you and the blog. They wont understand that you risk loosing followers, risk “upsetting” lot of people, risk you reputation as a guy out there to give you “free sound advise” which we dont even get by paying thousands of dollars to advisers.
I see your point and urge in educating the crowd as you have done for years. The experts wont get it though. Time is the best teacher.
Happy speculating to the masses!
If somewants to speculate more, try earth2.io
I’m not sure speculating in Bitcoin is as bad as speculating in earth2.io, but maybe you can buy land there with Bitcoin.
“i rEalLLY doNt haVE a DoG in tHe fiGHt”
then states “46% of Bitcoin transactions involve illegal activity”
Well, which is it James? Are you neutral regarding illegal activity, or are you against it? I think even you acknowledge your own absurdity in the very next statement, by stating it is more like 1%, and decided to hedge your bet by that tiny modicum of honesty provided.
Just be real with us, 1) Bitcoin doesn’t fit your conservative investing party-line, and flies in the face of this little cottage industry you’ve created, and 2) I’m sensing more than a small hint of bitterness that you’ve missed out on it.
You keep using the word “speculative”. I’m not sure you know that that word means. It’s been around since 2008-09.
Oh, and to add to your companies that take bitcoin, you may have left out Microsoft, Paypal, Starbucks, ATT, KFC … list goes on:
https://paxful.com/blog/who-accepts-bitcoin-retail-ecommerce-car-mortgage/
https://www.buybitcoinworldwide.com/who-accepts-bitcoin/
Crypto is here to stay, whether you like it or not. Bitter articles like this are not going to make it go away. Keep trying tho 🙂
Dr. D I really do not think you are doing yourself any favors here. You are getting into arguments with random people on the internet. We all know this is usually not beneficial. What a huge time suck to respond to all these comments. And you may not see it, but your aloof and condescending responses could be very off-putting to a large percentage of WCI followers. You have provided us with an immense amount guidance and knowledge. WCI was my entry into understanding personal finance and investing. Please don’t let your distain for bitcoin take you down.
I dont get how people have the gall to tell WCI that he got them into personal finance and then tell him how to run his own website. B***sh**….beyond belief.
Everything he has said is in line with the INVESTING mentality he has always educated with. To tell him that he is wrong to speak against something that is NOT IN LINE with that mentality, when he clearly wants to continue to because it is his right (his website) and responsibility (as an educator on this forum) is totally out of line.
Please re-read my post and tell me specifically what I said that was “out of line.” Nowhere did I tell anyone how to run a website or business. I would never try to tell a successful entrepreneur how to run their business because I am in fact, not an entrepreneur. But you seem very triggered by this. I simply explained that the tone of responses could be off-putting to some readers.
I don’t have any distain for Bitcoin. I do have distain for speculation as an investment strategy though.
Well I for one am very impressed that Dr. Dahle has responded to damn near every single comment here. Gives me confidence about his conviction/vetting in other product recommendations. But I couldn’t agree more that I think the points have been made, and this is having diminishing returns. I’d like to formally request that Dr. Dahle close this discussion and get back to making the podcasts and blog posts and books that have been so essential to clawing my way out of a horrid financial situation!
For better or worse, like with the whole life posts, the comments are an important part of the content.
You’ll notice that most of the comments don’t refute the fact that it’s a speculative investment (remember, speculative doesn’t mean “bad”, it just means the investment relies on someone else later paying you more for it than you have paid. Like gold, oil, or empty land) and that the main reason people are buying it is to speculate.
Nobody is in fact arguing that it is a useful currency.
Nobody is arguing that it is a stable store of value.
They are simply arguing that it is a speculative investment that will go up in value over time and were mistakenly under the impression that I was arguing the opposite, when in fact, I was simply pointing out that it is speculative.
Or they argue that speculation is a good way to invest, a position with which I do not agree.
Geez WCI way to go to bat and respond to most comments. Whether you disagree with the guy or dont, that is a massive time commitment and honestly I would be opening a beer or two after having to respond to that many people on the internet.
I treat crypto the same way I treat gambling money in a casino. Fun money that is extra, wouldn’t notice it or change my life if it was gone. That is the kind of money I throw at crypto. And honestly only when it seems to be a good time to buy (I was one of those guys who thought it was a good idea to buy BTC at 4000$ and held a nice chunk of it since then). I play with the other coins too, and have done well with them (mostly LTC and some ETH). We are in the middle of a little bull for ETH that has been fun, and I am betting that LTC is about to go on a run. But not betting with the money I need to retire.
But most importantly, its after all the bills are paid, after the usual investments go where they are supposed to, fun speculation money. Too risky and volatile of a market to trust my retirement with (IMHO).
I agree if you’re going to speculate, limit the amount and buy during a bust, not a boom.
There is a very simple way to understand this article, and that is written at the top, all the incentives.
I’ll summarize it:
Money managers do not make money with Bitcoin (BTC). This is an asset that you can self-custody. That is the only reason tradicional managers write misinformation like this – it is not in their interest to lose capital and customers to BTC. Nothing less, nothing more.
The prudent investor should stay alert, avoid this misinformation and learn. BTC is the biggest technological advance since the Internet. Do not let yourself be fooled by people who need your money and will do anything to slow down the inevitable.
Read “The Bitcoin Standard” by Saifedean Ammous. Nearly everything in this article is wrong (source: I’ve studied BTC daily for many years and could refute it entirely, but Brandolini’s Law prevents me from doing that)
Funny that you think the article was written by a money manager.
I think the most important use for bitcoin today is portfolio diversification. In this way I guess it’s a form of speculation, but it goes somewhat beyond “I hope this goes up in value in a few months and then I’ll sell it.” It’s more of a tactical allocation to hedge against possible (and not really apocalyptic) scenarios.
There are some macroeconomic scenarios that have happened many times in history, including in the 20th century, that haven’t occurred during our investment lifetimes. In particular, an stagflationary decade like we saw in the 70s, or an environment with negative real rates like the 40s, would be quite negative for the real return of long duration assets like the bonds and growth stocks (in the form of FAANG-dominated index funds) that form the majority of most portfolios today.
Gold performed well in both the aforementioned decades as a portfolio diversifier. There’s a good chance bitcoin could do the same, but one need only allocate 1-2% of a portfolio as opposed to 5-10% for gold to get the same hedging effect. Already there are insurance companies,hedge funds and other portfolio managers making this allocation to bitcoin for this reason. Bitcoin also serves as a call option on an emerging financial system. I think it’s at least interesting to consider for most.
I agree, it’s a speculative asset that some people use to diversify/hedge their portfolio.
Just wanted to comment to say that I agree 110 % with this post.
I’m actually surprised how many pro-bitcoin comments came out of the woodwork.
My question for bitcoin fanatics is how do you come up with a target valuation ? How do you know if it should trade for $100 or $100,000 ?
The simplest exercise that I use is to compare the monetary value of bitcoin with the monetary value of gold.
So say gold all the above ground gold is worth 10 trillion. Although there are industrial and jewelry uses, most of the gold in the world is stored in vaults as a store of value. So let’s say that 10-15% of the value of gold is derived from its industrial and jewelry use, and 85-90% is derived from its monetary value = $8.5 trillion.
The market cap of bitcoin is $0.7 trillion. Bitcoin is superior in gold in many ways (in terms of scarcity, verifiability, portability, divisibility, security) but inferior in other ways (only 12 years old, not held by central banks). So it comes down to what proportion of the value of gold you think bitcoin should have. I would always argue it’s at least 10%, so the fair value of bitcoin is at least $0.8 trillion = $40k/BTC, more or less where we are. As a result of increasing adoption perhaps the value of bitcoin should be half of that of gold, or the same as gold, or twice as gold? Corporate treasuries are adding it in this current cycle, perhaps other entities including central banks add it over the next decade as well.
So one could estimate using this mental model that it’s worth at least the current price, perhaps a lot more in the future. You don’t have to buy an entire coin, since each one is basically infinitely divisible. Just having a small amount, in case it catches on, or in case of ongoing currency devaluation, is something to consider.
Some could reasonably argue that the number should be much less than 10%.
Exactly the question. The answer for the real fans is “more than what it is now.” But the honest answer is nobody knows. It’s in “price discovery” mode.
Any thoughts on the stock to flow model for valuing bitcoin?
I have my doubts about something that extrapolates price based solely on demand, but its hard to argue with its accuracy so far. It is also amazing that it predicted this runup in price years in advance. The model was created by a quant who works for a institutional investor. Stock to flow is essentially the inverse of inflation and bitcoins stock to flow is on par with gold and will surpass gold soon. There is also a stock to flow cross asset model which compares bitcoin to other assets with ‘scarce’ supply.
Link to live model:
https://digitalik.net/btc/
Link to original work: https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25
Pretty unique way to value something. Maybe it is the best way, don’t know.
While Bitcoin is scarce, cryptocurrencies are not. There are 4000+ of them now and there is nothing keeping someone else from starting one. So the scarcity argument for Bitcoin really depends on Bitcoin “winning” the cryptocurrency race. Or at least “continuing to win.” I don’t think that’s anywhere near guaranteed. It wouldn’t surprise me at all if the eventual winner were ethereum or cardano or chainlink or one that hasn’t even been invented yet.
Agreed, no guarantees that bitcoin is the winner or even one of the winners. But at this point the network effects will be very difficult to overcome. Although networks like MySpace got supplanted by networks like Facebook, interestingly there hasn’t been a network that has been supplanted after reaching the size of bitcoin (ie market cap of 700 billion).
Thanks for providing a forum in which to discuss this.
I’m a fan of the S2F and S2FX models. At some point they’ll break, but so far it’s been very profitable to bet on the price following their trajectory. I also believe that it’s possible that they break to the upside, as opposed to the downside, if enough money starts front-running future halving events.
Thanks for providing the link to the S2F model. I ran across it a year or so ago and couldn’t remember what it was called. I’d been wanting to read more about it.
Above link is a scam dont go.
Treasury reserve asset might be the best use for bitcoin? Tesla just bought $1,500,000,000 worth of bitcoin. We’ll see how long they hold. Microstrategy makes it sound like they are holding forever. Companies are buying in this cycle. When will governments (are they already)?
Are we witnessing early stage of new global (or interplanetary-Mars?) reserve currency? Has potential to have more trust than current system. More fair? Yes very speculative and not as safe as VTSAX.
Maybe we are. The problem is I really have no idea and don’t actually need to either know or guess to reach my financial goals. Most of my readers should be in the same boat.
I think it’s something most should consider to *help* them reach their financial goals especially in this environment. If we’re in the throes of a dollar devaluation as happened in the 40s or 70s, any fixed income or cash allocation we have is going to lose purchasing power. Equity indices, at these extended valuations, may also fail to maintain purchasing power especially if we see a rise in interest rates. A portfolio to hedge those two asset classes is necessary.
It doesn’t have to be bitcoin… commodities, precious metals and EM equities all probably do the job. If one has to put in the work to research and allocate to any of the aforementioned assets, bitcoin may be the one that carries the best risk/reward profile.
If….may….hedge….probably….may
Hard to disagree with any of that. You makes your bets and you takes your chances. I prefer to protect against those concerns with TIPS, stocks, international stocks, real estate, and small businesses. But if you want to throw 5% into Bitcoin because you think it’ll have awesome returns, I’m not going to tell you you’re crazy. If you throw 30% into Bitcoin or you think you should buy some because it did so well last year, then I think your approach should be criticized.
The Tesla purchase is a big deal. Seems like a pretty wise decision in my opinion. I thought TSLA was overvalued and sold all my shares last week. It doesn’t seem like the market cared about TSLA as much as BTC’s response Elon continues to surprise. It seems unlikely they would sell their bitcoin an incur short-term gains on them, so that’s somewhere around 40,000 coins removed from trading for at least year (if the average purchase of $1.5B was at $38K. I haven’t how many coins were purchased reported yet). MSTR has 71,000 and GBTC has 650,000. Grayscale requires you to commit to at least 6 mos holding. There’s a nice list of large holders at https://bitcointreasuries.org/
That’s a weird justification to buy something. Can you imagine buying Apple stock because you found out Tesla bought some?
Bitcoin just breached 1 trillion dollar market cap.
$1,000,000,000,000!
Definitely a speculation (#2). When is it foolish to not own any? Just wait until more companies adopt it as treasury reserve asset and own it via them? Or should we all be front running these institutions now with 1-5% of portfolio or be content for average?
Many bitcoiners mindsets on twitter have similarities to Boglehead philosophy. HODL! Do not day trade, you will get burned. Buy and hold long term, never sell. This is in stark contrast to r/wallstreetbets.
A bitcoin world is one in which savers are rewarded again.
Remember not to confuse outcome with process. If you go through a good portfolio design process and then all of a sudden 2008 hits and you lose 25% of your portfolio, it doesn’t mean your process was wrong. Likewise, if you go through a bad portfolio design process and put 75% of your money into Bitcoin but make a killing on it in 2020, it is still a bad process. Better to be lucky than good, of course, but you get my point.
Buy and hold (HODL?) and rebalance works fine as long as none of the asset classes in the portfolio go to zero. With Bitcoin, that’s a legitimate concern. Although perhaps less legitimate than it was 5 years ago and maybe that’s part of why the price has soared so much recently.
I have zero problem with you throwing 1-5% of your portfolio into Bitcoin. I’m not going to, but this isn’t some sort of religion with a prophet you must follow. I want you to make educated, reasonable decisions, come up with a reasonable written plan, and follow it. If that plan includes a little money in Gold or ARK funds or Bitcoin or Individual Stocks or Whole Life Insurance or Covered Calls or something else I don’t invest in, that doesn’t necessarily make it unreasonable. You don’t need my permission to do whatever you want with your money.
But I would caution you not to bet the farm on something that didn’t exist 15 years ago, is almost useless for the purposes it was designed for, has massive volatility, and recently had a huge run up in price. Historically, investments like that have generally not ended well. That doesn’t mean this one will suffer the same fate, but you probably ought to be careful in how much of your money you use to bet it won’t.