Nancy Graham March 15, 2018 Personal Wealth Should I Buy Cryptocurrency? Are you hip to cryptocurrency? As I introduced in my last “No Dumb Questions,” unless you’re a cutting-edge computer kid, the technical details get pretty complicated, pretty fast. That said, you don’t need a financial economics degree to successfully invest in stocks and bonds. Can the same be said for cryptocurrency? Sorry if I’m ruining the suspense but, bottom line, if you do decide to hop on this fast-running freight train, my opinion is that you’re speculating, not investing. And what do I mean by that? Well, that’s what today’s NDQ is all about. Check it out, and then check in on future segments by connecting with me on LinkedIn, or subscribing to my YouTube channel. What’s a Bitcoin worth? A dollar? A hundred dollars? A hundred thousand dollars? More to the point, what might a Bitcoin be worth if you hang onto it? Having exploded from obscurity into one of the great “get rich quick” parties, should you be getting in while the getting is good? As I introduced in my last video, cryptocurrency can be exciting stuff, with tons of potential. Just as smart phones exploded from “what the heck is this?” to “how did I ever live without it?” so too might cryptocurrency technology flourish as an innovative worldwide exchange. Or not. As promising as “perfect world” possibilities may be for cryptocurrency, there are at least a couple of compelling reasons you might want to sit this one out right now. First, there are a lot of risks inherent to the cryptocurrency craze. For starters, there are significant regulatory risks. There’s a very real possibility that governments may decide to pile mountains of regulatory roadblocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require burdensome reporting. They also may decide to tax the heck out of it, if they can figure out how. These and other regulations could severely impact the liquidity and the value of your coinage. There’s also the ever-present threat of being pickpocketed by cyberthieves. It’s already happened several times, with millions of dollars of value vaporized in the blink of an iPhone. Granted, the same thing can happen elsewhere, but there is far more government protection and insurance coverage for your regulated accounts. Then there are the technological risks. Without going too deep into cryptocurrency operations, a system that was working pretty well in its development days is facing some serious scaling challenges lately. Imagine if your favorite cybercafé were suddenly discovered by the entire world. The human beings, computing power and terawatts of electricity required to keep everything humming could quickly overload the system. One recent post estimated that if the Bitcoin network alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today. That’s a lot of potential buzzkill for your happily-ever-after Bitcoin collection, and one reason you might want to think twice before you pile your life’s savings into them. Then again, every investment carries some risk. If there were no risk, there’d be no expected return. That’s why we need to address another important point. Cryptocurrency simply doesn’t fit into our principles of evidence-based investing … at least not yet. Let’s return to my opening question: How much is bitcoin worth? Stick with me because I’m going to get a little financial-econ on you here. In his column “Bitcoins & Its Risks,” BAM ALLIANCE Director of Research Larry Swedroe summarizes how market valuations occur. “With stocks,” he says, “we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending … we have historical evidence to make appropriate estimates.” You can’t do any of these things with cryptocurrency, Larry explains, “There simply is no tangible relationship between any economic or financial parameters and bitcoin prices.” So here are some big, fat ways buying cryptocurrency differs from investing: Evidence-based investing calls for estimating an asset’s expected return, based on all kinds of informed fundamentals Larry just described. Evidence-based investing also calls for us to factor in how different asset classes interact with one another. This helps us fit each piece into a unified portfolio whole that we can manage according to an individual’s goals and risk tolerances. Last but not least, evidence-based investing calls for a long-term, buy, hold and rebalance strategy. Cryptocurrency purchases simply don’t sync with these parameters. Sure, they have a price, but they can’t be effectively valued for planning purposes. And they’re so combustible at this time, they make an active volcano chain seem boring. Win or lose with them by a lot or a little, it’ll be a matter of random luck – speculation – not as a result of thoughtfully structured investment strategy. But do you still want to give cryptocurrency a go? Be my guest … but do yourself these favors: Consider it on par with an entertaining trip to the casino. Nothing ventured, nothing gained – but don’t venture any more than you can afford to lose. Educate yourself, try to pick a reputable “casino” in which to play. (CoinDesk offers a pretty good Bitcoin primer.) And think of all of it as fun money, outside the investments you are going to use to fund your ongoing lifestyle. If you do strike it rich, consider taking profits off the table frequently, and investing them more traditionally. That way, if the bubble bursts, you won’t lose everything you’ve won. Last but not least, bon chance! Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
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