If you’ve ever seriously considered buying Bitcoin, please read this article. The principles I’ll discuss below also apply to gold, other forms of currency substitutes and any other speculative (non-productive) investments (e.g. precious metals, stamps, baseball cards, etc.).
Around the time Bitcoin reached its then price peak of $19,650.01 on December 17, 2017, we received as a firm a record number of calls from clients who wanted to jump on the bandwagon. For reasons I’ll discuss below, we recommended to not buy Bitcoin. The Bitcoin party quickly died as the Cryptocurrency fell into an almost 3-year slumber (in comparison) with prices dipping almost to $3,000 at some points. Our clients dodged a bullet and we got to look smart, for a season. Now that Bitcoin is back, and with more fanfare than ever (peaking today at a staggering $58,194.50), the number and frequency of client inquiries are heating up again.
For this reason, I’ll offer this as my official opinion statement as to why I will not personally invest in Bitcoin, and why I don’t recommend it to you either.
Unfortunately for you and me, however, I still don’t have a crystal ball. I have tried to identify and base my reasoning on timeless principles that, if followed, will benefit us in the long run. That is the secret in life: find and live by true principles; the timeless, immutable laws that govern the universe—including economics. The hard part is that these universal laws don’t sell headlines, and they don’t often sell the products marketers want us to buy. Like Bitcoin.
Investment vs. Speculation
For starters, we need to define the terms investment from speculation. An investment, as we define it, is ownership of a venture with some productive capabilities or other intrinsic value because of a benefit the asset provides. A business, with people working in it, is productive. A home does not produce, but it has the intrinsic value of providing shelter, a place where someone can live.
Therefore, with an “investment,” you can expect a return on your investment from the productive power (e.g., Apple will produce and sell the next iPhone); or you can expect it to hold its intrinsic value.
A speculation, on the other hand, is when you buy something with no intrinsic value, nor productive capabilities, with the hope to sell it in the future at a higher price.
Take a bar of gold, for example. If I buy one today, put it on my shelf and wait 20 years, I’ll have the same bar of gold plus a pile of dust. In order to sell it for a profit, I’ll have to find someone who values the shiny, dust-collecting paperweight more than I do.
Investments (e.g., stocks, bonds, farmland, real estate, dental practices) will produce for you. Speculative purchases (e.g., gold, silver, baseball cards, and Bitcoin), will not produce or do anything. If you buy them, you better cross your fingers that you catch the market wind going in the right direction.
On principle, we never have, nor will we, recommend you put your future livelihood in the hands of speculative “assets.” If you want to buy speculative assets (like Bitcoin or gold), my recommendation is to take the money you have budgeted for Vegas, forego the trip, and use that money to buy Bitcoin.
Speculative assets can actually go to zero.
I am asked all the time, “what if my stock portfolio goes to zero?” Remember what your stock portfolio is – your share of ownership of the best-run companies on the planet. If you’re unsure of this, take the afternoon, drive to Costco and just observe. Even though your ownership may be small, you own a share of that business—the building, the inventory, the supply chain, the reputation, etc. Then ask yourself, “what if Costco goes to zero?” It is possible, but how likely is that really?
Bitcoin, on the other hand, as well as other speculative assets, can actually go to zero. If Bitcoin becomes out of favor for whatever reason, it’s value could literally go to zero in that instant (OK, it might take a day or two).
Bitcoin is an incredible technological idea…but a technology nonetheless.
I think the idea of Bitcoin is brilliant and I tip my hat to Satoshi Nakamoto, who or whatever that is, for its creation and implementation. But at its base, it is a technology, and an infant tech at that. As such, although it’s gaining notable traction, a new technology could emerge over night that could instantly replace it as the newer, better version.
Take MySpace, for example. When MySpace came out it was an absolute marvel and people flocked to it by the millions. Once the idea was born, however, others stole the concept and quickly made a better platform. MySpace is now irrelevant.
So if you’re thinking of buying Bitcoin, are you sure that you shouldn’t buy Ether instead? Or how about Litecoin, or Bitcoin Cash?
Doesn’t cash have similar qualities to Bitcoin? And if so, doesn’t that disprove these arguments?
Great question. Yes, as a currency, cash has many of the same qualities as Bitcoin.
Cash is a currency with no intrinsic value. Each bill has the words “In God We Trust,” printed on them. Now I do believe in God, so I appreciate that reference. But when it comes to cash, we simply “trust” that the vender will accept it as payment for the goods or services I want to buy. Cash only has value because you and the vender think it does.
Cash is also quickly becoming a digital currency. One client of ours, who has accumulated over $100,000 in actual bills, recently tried to pay for his home remodel with cash; most of the contractors, however, would not accept the paper bills.
Cash is also completely unproductive, like Bitcoin and other speculative assets.
And to one-up you on this point, with each stroke of the presidential pen, cash is quickly losing its value (meaning the US government can’t stop printing it by the trillions, which is devaluing it by the day).
For these reasons we have never, as a firm, recommended that our clients hold cash as an investment. On the contrary, our position on cash has always been consistent and to the contrary: don’t hold any cash (but rather invest it or pay off debt), unless you need it for working capital, an emergency fund, or you’re going to buy something in the near future (or have some other expense, like taxes).
It is possible that Bitcoin will replace cash as the currency of choice (although I doubt the US governments and Central Banks will allow that to happen without a war); however, at the time of this writing cash is still the dominant currency in the US.
But if you were going to buy Bitcoin, is now the time to do it?
Let me offer one final reason as to why I am not buying Bitcoin; but even if I were, why I would not start now. On April 9, 2020, Bitcoin’s value closed at $6,871.91; today, its value is $58,194.50; this equates to a 746.8% increase in the last 365 days. Again, I’m no Dr. Emmett Brown so I can’t say for certain as to Bitcoin’s future, but I can’t remember a time when buying anything was a good idea after a 746.8% price increase. Can you?
If I am still going to Invest in Cryptocurrency, is Bitcoin the right one to buy?
I have no idea. And as you can tell, I’m not planning to buy crypto or any other currencies (unless I travel abroad 😉). But if you were a crypto investor, Bitcoin was definitely the wrong one to buy! You should have invested in Ether (ETH), which posted a staggering 1,210.97% return in the past year!
Conclusion
Although I think Bitcoin is a brilliant concept, and one that I like (a currency where politicians can’t trash its value in order to buy votes), it has a long way to go to become mainstream, and it will face steep opposition along the way. And because it is a currency—a commodity used to facilitate trade—I would only ever treat it as such, and not an investment.
Epilogue
In case you’re wondering, there are many smart, rich people who disagree with me. How many of these will profit from you jumping on the bandwagon with them? All, perhaps?
- Tim Draper, billionaire and Bitcoin Cash owner
- Howard Marks changes his tune…too late!
- Suze Orman – Buy Bitcoin? ‘Of course!’
In my observation, most people are following trends, not principles.
