Whether to invest in Bitcoin (₿) has been one of the questions I am most often asked, though not quite as often since the price started to fall last November. While the question of whether to invest in Bitcoin and "suffer the slings and arrows of outrageous fortune" is not as dramatic as the life-or-death question Hamlet was asking, I would still like to explore the answer in hopefully a more straightforward way than his soliloquy.
Let's start with a breakdown of the pros and cons of Bitcoin and cryptocurrency in general.
Pros: Bitcoin is accessible, can be used for purchases in another country, and is easily traded with minimal fees. It is also decentralized (not regulated by the government) which means it cannot be taxed or frozen (though the government is working to address the taxation issue). Another upside to Bitcoin is the potential for high returns.
Cons: The decentralized nature of Bitcoin can also be a disadvantage, as there are no legal protections, and transactions cannot be reversed. If a password is lost or a virus corrupts your wallet, you could lose access to your funds. While there is a potential for high returns, there is a history of volatile swings in the price of Bitcoin. Like Hamlet, it is a legitimate question to ask ourselves, should we "rather bear those ills we have than fly to others that we know not of?"
In an interesting Wall Street Journal article, Greg Ip suggested that cryptocurrency might be included on the short list of innovations whose net contribution to society is negative, akin to asbestos or cigarettes. He said that cryptocurrency has driven the growth of ransomware, as 100% of ransoms are demanded in cryptocurrency. In fact, while cryptocurrency is used by some legal business, 75% more is exchanged by illegal entities.2 There is also a concern that mining and maintaining Bitcoin uses substantial amounts of electricity (about 91 terawatt-hours annually), more than the entire country of Finland.1
To return to the question of whether to buy Bitcoin, I would recommend investors start by reviewing their investing philosophy (see January's article Forest Service Campgrounds and Investing). I recommend choosing investments that will result in a diversified portfolio, including assets that don't always move in the same direction under changing market conditions. Beyond that, I recommend comparing any new type of investment to other investment options (such as stocks) and asking the following questions:
I always tell clients that their money is their own to decide how to invest. My job is to provide information, discipline, and experience to help inform those decisions. My hope is now you are more prepared to answer the question, to ₿ or not to ₿, for yourself.
For those of you interested in reading more, the investment firm GMO wrote a short piece on Bitcoin which is one of the best I have read. You can find the Bitcoin discussion in the appendix of their recent inflation white paper using this link: GMO White Paper.
If you would like to discuss cryptocurrency or any other investment with me, you can email me at
email@example.com or call (520) 204-1058.
You can also schedule a meeting directly with me using this link: Schedule with Matt
Matt Haertzen, CFA, CFP