I get asked a lot of questions by peers and followers, but perhaps the most common question is, “so you own Bitcoin, right?” No, I don’t, and here’s why.
What Is Bitcoin
Bitcoin is a cryptocurrency – basically, an encryption key that you trade for goods, services, or other types of cryptocurrency, with names like Ethereum, IOTA and Litecoin. One of the biggest advantages of bitcoin is that the currency can cross borders easily, meaning foreign trade is easier, and circumventing exchanges.
Before I tell you my reasoning behind sitting this one out, I feel that I need to write the obligatory ‘damn, I wish I had bought in years ago’ statement. If I had invested pocket change in the coin years ago, I would now be worth millions by now. Even a year ago, the coin was trading for $300-400, and today is trading at about $17-20k. That’s a nice 5,000% return on initial investment.
Despite Everything, I Would Never Buy In At These Prices
Or maybe at all. Bitcoin doesn’t fit my investing style. I buy stocks and bonds (and hopefully real estate, eventually) because I can research them and see if they are a sound investment. These investments also connect to real companies/things; in the case of stocks, you get ownership in a company. For real estate, you own an appreciating, rentable investment. I like knowing that I’m not just buying a certificate. I’m actually buying (for stocks) ownership in a physical company, an entity designed to make money, with voting rights.
What do you get when you buy a Bitcoin? A mathematical algorithm. You can’t hold in your hand, vote or receive a share of the profit. Its value is based entirely on your trust in the math, the exchange and the willingness of the market to accept it. You get nothing. And, as of late November – December, its value is based 100% on market hype.
Originally, Bitcoin was used because it was anonymous. People used it on Silk Road, an illegal goods market, so they could be untraceable. But, this is no longer the case. Law enforcement and authorities insist that bitcoin and its owners can be traced.
I usually like to follow Warren Buffets advice, because he is always right. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Well, what happens to Bitcoin if the market shut down? You’d be left with a bunch of worthless hex codes and math equations. In a way, gold is a better investment than Bitcoin.
It’s A Bubble!
Look at this chart (source). Then compare it with a chart of Bitcoin. Then try to guess what phase of the bubble we are in. Is it Greed? Delusion? I’ll make a new section. Let’s call it insanity. Yesterday (Dec, 6th) the coin was trading at 14k. Today, it was up to 17k. That’s known as exponential growth and is a tall tale sign of a bubble.
Now, look at this chart (source) of the price of gold since the 1970’s to 2010’s. See the spike in the early 80’s? That’s called the 1980’s Asset Price Bubble. Gold and Bitcoin are regarded similarly. Both are decentralized forms of wealth and can be traded for goods. Compare the asset price bubble for gold in the late 1980’s to the Crypto Price Bubble of the late 2010’s. If this doesn’t scream bubble, then what does?! If you want further proof, look up the Dutch tulip mania, or the dot-com bubble and read up on it.
Here’s Something That Might Cause The Collapse
The IRS wants a piece of the pie. As of right now, Bitcoin is deregulated, and this is partially the cause of the bubble. Soon, BTC futures will start trading, and who knows what those thoes will show. But the point is that BTC is going from a fringe thing to a mainstream powerhouse (currently worth $300 billion), that is used like real money. Currently, the coin could be used for money laundering or tax evasion, and the SEC/IRS will not let it slide. While there are limited regulations on trades now, (click here) I feel that with this pivot into mainstream investing, with futures and derivatives, governmental agencies are bound to crack down on this trade. I won’t be surprised if they come out with complete regulations for crypto in the next two years (as soon as a few months), and when they do this will have a major impact on crypto and BTC values.
Big finance guys tend to agree with my opinion. Jamie Diamon, CEO of JPMorgan Chase: “It’s just not a real thing, eventually it will be closed.” Mark Cuban: It’s high risk. “[just] pretend you’ve already lost your money.” Jim Cramer: “It’s just pure gambling at this point.” Howard Marks: “In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme).” Jack Bogle, a wiz investor sums it up perfectly. “Bitcoin has no underlying rate of return. You know bonds have an interest coupon, stocks have earnings and dividends, gold has nothing. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it.” (Quotes from CNBC)
Because of its crazy rise over the past month, it just has that much further to fall. But, I don’t hate Bitcoin. I just despise the crazy price that it’s trading for right now. If it fell, say, to $1,500 per coin, then I would love to buy in. But now, with prices like these, that’s just crazy. And, even if I’m wrong, I’ll still be happy. I’m content with investing in stocks that I know will go up, and netting fairly high yields, then Bitcoin (a math equation), and netting crazy returns for another month, then losing it all in 2 days. It just doesn’t suit my style.
*This is a personal letter and is my opinion. I won’t hate you if you invest in Bitcoin.