Bitcoin and Other Cryptocurrency: Should It Be in Your Portfolio?
If you’re looking for a lot of excitement in your investment portfolio and enjoy the panic-inducing roller coaster of rapid gains and breathtaking drops in value, consider Bitcoin, Dogecoin, Ethereum, or one of the other cryptocurrencies that have arrived on the scene since 2009. Over the last year, Bitcoin—which is not actually a coin at all, but rather a set of complex mathematical calculations that “live” on computers connected to the internet—has been valued at $30,000 in February and July of 2021. It was valued at more than $60,000 about a year ago and for much of last October and November, before falling back down in value to, as this is written, a little over $42,000—slightly more than 37% below the all-time high set last year. Nobody knows what tomorrow will bring: a jump in value or a 50% decline, depending on the mood of the moment. What we do know is that there are not many components of a traditional portfolio that can lose 15% of their value in a single day, or go down 50% twice in the same 12-month period.
Are Bitcoins actually investments? One way to define an investment is money that is used to purchase something that could increase in value: such as shares of ownership in a company that provides a product or service valued by consumers or other businesses; or a tangible asset like a house, an apartment building, or a warehouse that can generate revenue for its owner based on rental or lease income. By this definition, gold is not an investment, because its value depends on whatever a purchaser is willing to pay for it. Interestingly, Bitcoin and other cryptocurrencies are most often compared with gold as an “investment.”
The original idea behind cryptocurrencies was to create a medium of exchange, like traditional currencies, but with a couple of twists: they are not issued by any government, but rather are created digitally; and the number of Bitcoins in circulation can never exceed 21 million. This “electronic currency” is therefore outside the control of central banks and their printing presses, which means that the currency cannot be debased by simply creating more of it.
In addition, Bitcoin transactions are anonymous, a feature which is welcomed by freedom lovers, but also by people who don’t want the government or anyone else to be able to see or document their wealth for tax or other purposes. Not surprisingly, Bitcoin and other cryptocurrencies have come into wide use by a colorful variety of international drug and weapons dealers whose banking arrangements might otherwise attract the suspicion of law enforcement officers. (Though, we should note, cryptocurrencies are also owned by law-abiding folks for whom the notion of a medium of exchange not controlled by any government is appealing, for one reason or another.))
There is no evidence that Bitcoin was created to be an investment, much less a get-rich-or-poor-quick asset class in a portfolio intended for traditional uses, such as funding a secure retirement. Buying Bitcoin and other cryptocurrencies can fairly be defined as speculation: in this case, believing (or hoping) that somebody else will come along and pay a higher price for the coins than you did. You could argue that any investment could be defined as speculation, but when people buy a stock, they’re holding legal ownership of a tangible asset that has some intrinsic value. No person alive can define the intrinsic value of a cryptocoin, which means it’s possible that Bitcoin prices will fall to zero at some point in the future. That would, of course, be very exciting—but not necessarily in a good way.
To learn more about Bitcoin and other cryptocurrencies, click here to read our article, “Cryptic Investing: Bitcoin and the Average Investor.” And to learn more about our fiduciary wealth and investment management services, please click here.