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Should I Be Purchasing Bitcoin?

Insights Investments

After my Uber driver bragged that he had just bought $1,000 of Bitcoin, I decided I should share some of my thoughts about Bitcoin and the other crypto-currencies available.  In a nutshell, I see value in digital currencies, and think they have a chance to massively change how we exchange “money” for products and services.  However, this does not mean the Bitcoin makes for a great investment. 

Here are some of the main reasons why I will not be buying Bitcoin at this time:

  • “Fear of Missing Out” and “The Greater Fool Theory” are terrible investment styles.  The hype surrounding Bitcoin feels very similar to Japanese stocks in the late 80s, dot-coms in the late 90s, and real estate in the mid-2000s – none ended well.  Investing with the crowd is easy, but is rarely lucrative.
  • World-changing products do not always make investors rich.  Air travel changed everything, but hundreds of airline companies have failed miserably.  Personal computing changed everything, but hundreds of personal computer companies ended up worthless.  These currencies may change everything, but choosing the winners (if any) seems like a long-shot.
  • There are no huge barriers to entry.  There are currently 325 crypto-currencies each with a market value of over $10 million.  Twenty of these are huge each having a market value topping $1 billion.  Because there are no limits on the creation of new ones, new competitors are appearing every day.  There may be a limit on the number of Bitcoins that will be “mined”, but there is no limit on digital currencies.
  • There is no reasonable way to value the opportunity.  Bitcoin produces no income, so it’s virtually impossible to determine its fair value.  If it’s a currency, there is no reason for the price to appreciate or fluctuate at all; in fact, this likely hurts its adoption as a currency.  Bitcoin is currently being traded like a collectible, looking more like a rare Beanie Baby or misprinted baseball card.
  • The greatest investors are not buying the story. Bridgewater Associates’ Ray Dalio says “Bitcoin is a bubble.”  Howard Marks of Oaktree Capital Management calls the Bitcoin phenomenon “lottery-ticket thinking.”  Warren Buffett says Bitcoin is “going to implode.”  Buffet’s partner, Charlie Munger, is less kind, calling Bitcoin “rat poison.”  Of course, nobody can predict the future, and these folks might be entirely wrong.  Given their track records, I’m glad to be on their side.

There is no telling if/when the Bitcoin mania will end.  Things will get interesting as “crypto” funds start to roll out before the end of the year.  I’ll continue to keep an eye on the space, but for now, I’m staying clear.


UPDATE: If you've read this far, you will enjoy this Wall Street Journal video showing how practical Bitcoin is today.  Click here to watch.