Should You Invest In Bitcoin?
No! End of story. Don’t invest in bitcoin. Stop worrying about it, and use that time and energy to do something meaningful and fun instead.
But I Really Want To Invest In Bitcoin
“Isn’t it really hot right now? I hear it keeps going up! Wouldn’t I be rich if I had already invested?”
Okay, fine. To those of you who really want to invest in bitcoin, I’ll give you some additional information – but only to further back up my answer of no. (Exception: If you feel you understand bitcoin, you have money to lose, and if investing will help you achieve your goals, you may proceed.)
I Am Not An Expert
I am not a computer scientist or an expert in cryptocurrencies and the underlying technologies that make them work. Rather, I am here to share what I have learned (be it at a very high-level), as I have understood it.
There are very smart people working on some very sophisticated coding to make this all work. If you really want to dig deeper in understanding what this is all about, you might start with several of the links shared in the show notes of this podcast episode (or listen to the episode itself). I’ve also provided links to further reading toward the end of this post.
What Is Bitcoin?
Here’s a high-level definition, according to Wikipedia:
“Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency, as the system works without a central bank or single administrator. The network is peer-to-peer and transactions take place between users directly, without an intermediary.”
Translation: It is a digital form of currency that is not backed by a central bank or government. Addition: It is powered by blockchain technology, which acts as a “perfect” digital ledger for keeping track of all transactions.
Is Bitcoin Even An Investment?
Bitcoin is a currency – a digital currency – but it’s still a currency, just like the US Dollar, Euro, Yen, Pound, and Fijian Dollar are currencies. (However, there is no government backing bitcoin. It has value because people are giving it value.)
Are you asking yourself if you should be investing in those currencies? Probably not. Not one reader has asked me about “investing” in other currencies. That is because exchanging one currency for another (US dollars to Euros or US dollars to bitcoin, for example) is not really an investment. It’s similar to buying gold bricks or baseball cards. You can hold them and hope they are worth significantly more in the future so you are able to sell them for profit, but there is a key limitation that makes these kinds of assets different from true investments:
- They don’t have any value unless you sell
- Unlike stocks, which pay dividends (you share in the profits of the company when you own a share of its stock)
- Unlike bonds, which pay interest (bonds provide an income stream to pay back principal plus interest)
- Unlike a rental property, which provides you with cash flow (via collected rent or lease payments)
- Just as $1 in your wallet doesn’t provide you with any future income, a bitcoin held in a digital account does not provide you with any future income either
Additionally, it is impossible to predict how one currency will fluctuate relative to another currency.
Because a currency (again, think cash) does not provide you with value just for holding it (in fact, it loses value to inflation), most would recommend only holding cash for near-term expenses (day-to-day spending, an emergency fund, upcoming expenses in the next 0-3 years, etc.). And, the cash you hold should be in a form you can actually use, which, in the case of most readers, is US dollars.
For now (at least), bitcoin does not have (broad) purchasing power. Maybe that will change one day, but you can’t exactly pay your rent/mortgage or buy shampoo with bitcoin (in the same way you can’t with gold bricks or baseball cards).
Bitcoin in speculative, so you should ask yourself if you have money you can afford to lose. It is also new – there is no precedent for what it will do going forward and no track record for providing positive expected returns.
The real innovation here is the underlying blockchain technology, which is sophisticated coding by fancy computer scientists that creates a “perfect” transaction ledger. Buying bitcoin is not an investment in blockchain technology, however, and the technology is open-source and available for anyone to use anyway. Owning bitcoin and thinking you will profit from the underlying technology is similar to owning an iPhone and telling yourself you own Apple stock.
Key Questions To Ask Yourself
- If you received an all-employee email from your employer tomorrow stating that all future paychecks would be paid in bitcoin, would you prefer that to getting paid in US dollars? (Keep in mind that your salary would stay the same. According to Google, $75,000 is currently equivalent to about 5 bitcoin.)
- Would you be able to pay your bills, save for retirement, and plan your next trip using this bitcoin?
- Would you know how to set up accounts to receive and spend bitcoin in order to accept your regular paychecks and use the proceeds?
- Why do you want bitcoin?
- Are you drawn in to ideas that promise getting rich quickly more than tried-and-true investment principles? Why is that?
- Do you consider yourself an expert in bitcoin?
- Does it make sense to buy something when the price is already high?
- Do you like making your life more complicated? (Alright, alright. I’ll stop.)
So How Should I Invest?
I would stick to the tried-and-true methods of low-cost, diversified stock and bond portfolios. Investing is one of the few things in life where doing less (fewer trades, fewer big bets, fewer speculative buys, less research to find the next hot stock, etc.) produces better results. I’d take advantage of this and stop worrying about fancy investments that aren’t really investments at all.
Let me refer you to a series of previously published articles on this site for more guidance:
Principles of Investing
- Part I: Diversification
- Part II: Expense Ratios and Low Costs
- Part III: Asset Allocation (your stock/bond mix)
- Part IV: Discipline and Automation
- Okay, But How EXACTLY Do I Invest?
Mr. Money Mustache on Why Bitcoin is Stupid
- “No, you should not invest in Bitcoin. The reason is that it’s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.These are all things that people have bought in the past, and driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.”
- Mr. Money Mustache also gives a helpful summary about why bitcoin is unlikely to become a global currency – and why governments themselves would not want this.
Bitcoin Investment Advice from Kiplinger:
- “When you invest in bitcoin (or gold, or oil, or other commodities, or any other currency, or fine art), you are betting the farm on price appreciation alone. Or rather, you’re betting that the price of bitcoin will go up compared with the U.S. dollar. What this means is, bitcoin is different from more conventional investments like stocks, bonds and real estate. That’s because conventional investments offer the chance to generate cash. As an example, stocks are a slice of business ownership. Businesses exist to earn a profit. As an owner of that business, you are entitled to a slice of that profit. That profit can either be re-invested into the business (to increase the value of the business) or paid to investors as dividends. Either way, a stock generates cash — ultimately enriching those who own shares. The same is true for bonds. Bonds spit out cash (usually twice a year). With a bond, you (usually) get back your original investment, plus interest.The same applies to real estate. Rental property can appreciate (or depreciate) in price. But, either way, rental property exists with the goal of generating cash for the investors — cash above and beyond the costs to maintain the property.”
The Difference Between Investing and Speculating, from Investopedia:
- “In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.”
- “Investing involves the purchase of assets with the intent of holding them for the long-term, while speculation involves attempting to capitalize on market inefficiencies for short-term profit.”
- “A speculator is a person who trades derivatives, commodities, bonds, equities or currencies with a higher than average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.”
And be sure to ask yourself if Bitcoin is even relevant to your goals in the first place. For that, I refer you to this post in The New York Time from Carl Richards:
- “Investing is different from speculating or gambling. Investing is a means to an end, and that end is our collective financial goals. Beating the stock market, buying what’s hot, outperforming a brother-in-law — those are not financial goals. Financial goals are things like having money to send kids to college, buying a house, taking a trip or retiring someday. This is why we invest.If we start by declaring that certain important goals are the reasons we are investing, then we can move on to figuring out the investment process that can help us meet those goals while taking the least amount of risk…Investors do not put all their eggs in one basket. That’s something speculators do. Our financial goals are important, and the consequence of failure are high. So we spread our risk out by diversifying across lots of different types of investments, like stocks and bonds and real estate, both in the countries where we live and far away…This is what the process of investing looks like. And yeah, it can be a little boring.”
I am making zero predictions about how valuable bitcoin will become, whether I think the price will continue to go up, if it’s a bubble destined to pop, or how widespread it will become in the future. Rather, I think it’s important to focus on your financial goals and the best means available to you for accomplishing them, in addition to spending time on those things that provide value and enhance your life. Before you get up caught in the next new think (in this case bitcoin, but there will always be a hot new thing), it’s important to remind yourself of your goals, values, and what you’re really working toward.