John Oliver once said, “Everything you don’t understand about money combined with everything you don’t understand about computers—that’s Bitcoin.” Bitcoin is the most famous of over 4,000 different cryptocurrencies. All of these currencies are the subject of both endless debate and fascination. Many people are speculating about what role it should play in your portfolio. So in this episode of Best in Wealth, I talk about the volatile path of Bitcoin—and three reasons why financial stewards should not hedge their bets on cryptocurrency.
Outline of This Episode
- [1:08] I got my first COVID shot!
- [4:13] What to Make of Bitcoin now?
- [7:50] Why the steep rise?
- [9:08] Bitcoin and gold as an investment
- [12:13] THREE issues to consider
The volatile journey of Bitcoin
Bitcoin has not been around that long. It was steady for a long time around a couple hundred to a couple of thousand dollars. But had a dramatic rise to $20,000 in 2017. What happened next? It plunged at the beginning of 2018 and a lot of people lost money. In October 2020, it shot straight up. It was worth over $53,000 per coin. It has proven extraordinarily volatile—gaining or losing 40% in a month or two. It has been a wild ride.
So what’s led to this volatile track record? Why is the cost of Bitcoin continuing to rise? Bitcoin is easier to purchase now. There are also a lot more people talking about it. More millennials and institutions are buying. Others feel it is a great hedge against inflation. But Bitcoin is of limited value as a reliable medium of exchange and as a risk-reducing asset. It is not a hedge against a well-diversified portfolio.
Bitcoin and gold as investments
Assessing the merits of Bitcoin as an investment can be difficult. It means you have to lower your allocation of stocks, real estate, or bonds. You have to give up something to get Bitcoin, right? We expect to receive future income from stocks, real estate, etc. As a stock-holder, we participate in the profit.
Bitcoin is similar to holding gold as an investment. Even if they are held for decades, the owner may never receive more Bitcoin or gold. It is not clear that Bitcoin offers investors positive expected returns. You own a coin or a lump of gold, hoping that supply and demand drive the worth in an upward trajectory.
Some say Bitcoin is worth more than gold. Why? Because you can discover more gold, which means what you are holding would inevitably be worth less. On the flip side, there is a finite number of Bitcoins—as far as we know. But could they make more coins? Can code be written differently in the blockchain scheme? Could cryptocurrencies merge? There is no guarantee.
THREE reasons why Bitcoin is speculative
Bitcoin—and other cryptocurrencies—are speculative at best. Here are three reasons why, as family stewards, investing in Bitcoin is not responsible.
- First, it is not backed by an issuing authority and exists only as computer code, kept in a digital wallet accessible by password. What if you forget your password? There is NO resource for any forgetful owner of Bitcoin. After a limited number of password attempts, you can permanently lose access, therefore rendering it useless. A holder of more than $200 million worth of Bitcoin cannot access them. Can you imagine being that person? This is not unusual. 20% of all outstanding Bitcoin are stranded and unavailable to rightful owners.
- Second, Mt. Gox—the Bitcoin exchange launched in 2010—handled over 1 million accounts in 239 countries and 90% of transactions. It suspended trading and filed for bankruptcy in 2014. They announced that hundreds of thousands of Bitcoins were lost or stolen. Your investment was gone. Sounds like the wild west to me.
- Lastly, The UK Financial Conduct Authority prohibited the sale of crypto products to investors. Why? Because of the nature of the underlying assets, the presence of market abuse and financial crimes, extreme price volatility, inadequate understanding of assets, and the lack of clear investment needs.
I would not personally gamble my future on Bitcoin. Listen to this episode for the whole story!
- The One-Word Challenge Episode
- 6 Behavioral Biases that Can Negatively Impact Your Long-Term Investments
- Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes
- FCA Bans the Sale of Crypto-Derivatives to Retail Consumers
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.