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Originally posted on August 6th, 2021. Updated on September 16th, 2021 to include an alternative take by one of my favorite analysts.
My gamble into the crypto debate
Cryptocurrency is not an investment.
Yes, you read that right, and as I write this, I am certain the bitcoin army is preparing to invade the Mile High City with torches. But before they set my blog afire, let me interject.
Cryptocurrency is not an investment, but it may become a portfolio diversifier that stores wealth. As of the present, most cryptocurrency is too volatile to be a reliable storer of value. However, that may change as crypto markets learn how to appraise themselves in the future.
Before berating me as a cryptocurrency hater, know that I am not. Instead, I assert that you are wrong if you think cryptocurrency is an investment; that is all.
I do believe decentralized commerce provides unique benefits and that blockchain as a technology is very promising. However, cryptocurrency fails the muster test to be an investment as of writing this post.
So what is an investment then, Olaf? You are acting frozen and cold-hearted; we might as well call you Frostie! Surprisingly, I haven’t watched the movie Frozen yet, for those that get the reference.
Defining an investment
An investment is an asset that creates a future profitable income source. Typical investments include – drum roll – stocks!
Stocks have proven to be an investment, as the equity markets have consistently appreciated over prolonged periods. [Legally, I should disclose the past is no guarantee of the future, but it is an indicator.]
What about bonds? Yes, they are an investment too, providing a reliable interest payment and return your original deposit!
These are examples of investments, as they provide a good chance of regaining your original money back, plus a profit. There is inherently some risk, but the reward has proven itself to be greater for those who can weather the storm. Many other investments exist too, but I am not interested in delving down the rabbit hole of alternative investments; maybe another day!
So if cryptocurrency is not an investment, what is it? As it stands, crypto is gambling, as is naked options trading and short-selling. Fine art? Nope, not an investment either.
Cryptocurrencies offer no interest, no dividends, and are susceptible to the wrath of Elon Musk’s tweets. And for those who argue, what about gold? Gold is not an investment, and it has barely been a storer of value, providing a measly 1% return above inflation; that is before accounting for storage expenses. So out goes that rebuttal!
Heresy, I know.
But gambling is betting, and with the price swings cryptocurrencies experience, kindled with the lack of interest payments or profit distributions, crypto is solely speculative.
But that does not mean you should avoid cryptocurrency. Instead, call it what it is, not by a fanciful label that holds no resemblance to the actuality of it.
Humans inherently gamble for a variety of reasons and throughout the various aspects of their lives. Do you root for your sports team to win? That is gambling. Have you ever bought a Pokémon trading pack? Gambling. Drove a different route home without checking Maps because the highway was backed up? Definitely gambling. And don’t get me started with casinos…
Gambling is in our human nature. It provides us an adrenaline rush and an escape from the trivialities of life. But make no mistake, gambling has no guaranteed outcome, and the risks are generally underplayed.
So be honest with yourself; as it stands, cryptocurrency is betting. That could change in the future, or it may stay the same. I certainly don’t know, but the takeaway is don’t put money into cryptocurrency that you cannot afford to lose, and if you choose to buy some, have fun with it!
There is no guarantee what any cryptocurrency will be worth in the future, let alone tomorrow. As non-productive assets, cryptocurrencies sit there and do nothing. They don’t facilitate the production of new goods/services, and they aren’t loaned out to fund new ventures. However, the moonshot bet that if you get in now, ___coin will be worth more someday is the escape you are buying into, and the adrenaline rush is exhilarating.
What do you think about cryptocurrencies? Do you buy and sell them? Do you agree or disagree with my take? I would love to hear your thoughts in the comments below.
An Alternative Take
While I don’t currently view bitcoin as an investment or value storer, Fidelity Investments Global Macro Director is not convinced. However, he thinks it only makes sense to hold bitcoin during specific periods rather than all the time and as a diversifier based on historical research and future analysis. Importantly, he debunks the investment myth and repaints bitcoin as an alternative asset for storing value. If you have 45 minutes to spare, this interview is undoubtedly worth the listen.
Do I buy his argument? No, bitcoin is still a speculative gamble. However, bitcoin can become a storer of value as he advocates, but currently, it is a poor one due to the wild fluctuations. Will he be right? As I previously said, only time will tell.
Mile High Finance Guy
finance demystified, one mountain at a time