Hard to believe that this blog has been around for almost two years and I never wrote anything about Bitcoin and Cryptocurrencies. I will have some more of my own thoughts and comments in tomorrow’s weekly Wednesday post but to set the stage, our online buddy Matt Paulson has agreed to write a guest post on the topic. Matt runs a site called MarketBeat which is pretty neat. It has a lot of free information, including all the interesting stats on earnings history/forecasts, dividend history, SEC filings, etc. for individual stocks. I don’t think I have seen all that information aggregated so nicely anywhere else, see below:
In any case, here’s the guest post on Bitcoin, take it away Matt…
Bio: Matthew Paulson is the founder of MarketBeat, an Inc. 5000 financial media company that empowers retail investors to make better trading decisions by providing real-time financial data and objective market research.
The stock market continues to soar, reaching new highs on a regular basis. Many people attribute this to the brighter macroeconomic outlook, lower taxes and less regulation, so markets find it easier to price future expectations. This has led to record highs for both bitcoin and the stock market. However, individuals need to be careful when making an investment. Although bitcoin may appear to be the wave of the future, we need to understand the benefits and drawbacks of both stocks and cryptocurrencies to ensure they make the decision that is right for their unique needs.
Bitcoin
One reason many people look to Bitcoin is that it has consistently yielded a higher return than all currencies across the world and has done so for five of the six previous years. This consistency is outstanding regardless of what investment a person is looking at. Furthermore, this cryptocurrency is now maturing, giving investors more confidence in its existence and viability over the long term.
Another reason people are taking a second look at Bitcoin is the computational network used with the cryptocurrency is very strong and secure. This has been a concern in the past, but those using the network continue to find ways to improve on it. In addition, the wallets services are user-friendly and reliable, and new applications are appearing every day to make the use of Bitcoin easier than ever. [ERN: Of course, exchanges have been hacked before, so while the blockchain is secure, your Bitcoin holdings are only as secure as the IT department at your crypto site or the password you pick! But definitely, experts have told me that the technology is getting safer!]
The scarcity of Bitcoin works in its favor. There is a limited supply of the cryptocurrency, as there will never be more than 21 million bitcoins in existence. Furthermore, demand continues to increase abroad while mining for the cryptocurrency has become more difficult. When combined, these factors help to drive the price up. [ERN: Despite my skepticism of some of the crypto-hype, I’d have to concede that in a lot of countries that are – shall we say – less financially enlightened there are millions (billions?) of people looking to keep their money safe from confiscation, hyperinflation, capital controls, etc.!]
Traditional assets rise and fall in value based on external factors, yet this isn’t the case with Bitcoin. There is no need for reporting at the end of each quarter, no company performance information to share and no public stakeholders to mollify. As a result, there is no distortion of the market. Investors have a better understanding of where their money is going. [ERN: which is also weakness and cause for fluctuations: an asset free of fundamentals can display wild swings!]
One concern of many when it comes to Bitcoin is the volatility of the cryptocurrency. Thankfully, the market has settled down recently, again due to the maturation process. This is due in part to individuals gaining a better understanding of the cryptocurrency and how it works. However, not all agree that Bitcoin is the best investment for the future.
Stocks
Some experts believe Bitcoin and other cryptocurrencies are prone to fraud and this could lead to a bubble that is even bigger than the one that was seen in the housing market. Jamie Dimon, well known for his position as the CEO of JPMorgan Chase, agrees with this assessment, declaring Bitcoin to be a fraud. He isn’t the only one warning investors to be cautious. Mark Cuban, a billionaire, states that Bitcoin isn’t a bad thing to invest in, but people need to limit it to 10 percent of their portfolio. The rest should be made up of more traditional offerings, such as stocks. Buying stock allows the person to balance their risk level while receiving income from their shares and the possibility of capital growth.
One major benefit many experts cite when they recommend the purchasing of stocks as opposed to Bitcoin and other cryptocurrencies is the regulation of the stock market and other financial investments. Individuals who opt to buy Bitcoin don’t have the same level of protection. In the event cryptocurrencies begin to be regulated, the price may drop significantly in a short time period.
Investors should always diversify but must determine how comfortable they are with losses and allocate their investment dollars accordingly. One should never put all their eggs in one basket, whether the eggs come in the form of stocks, bonds, real estate, cryptocurrencies or another option.
A Third Option: Stocks with Cryptocurrency Exposure
Individuals who are interested in investing in Bitcoin have a third option they should consider; stocks with cryptocurrency exposure. A person can choose to buy one of these stocks and benefit from the growth of the crypto market. Think of companies that make processors designed to mine Bitcoin or other cryptocurrencies. You’ll also find some surprising names like Overstock.com. This company has been around for approximately 20 years and it’s not just in the business of selling comforter sets. It now owns tZero, a subsidiary that serves as a general ledger system for capital markets. So, one can buy stocks and profit from Bitcoin without purchasing the currency directly. [ERN: I like this idea! Very intriguing! Marketwatch had a list of 11 Crypto-related stocks, but I’d like to see a more comprehensive list. That would be something for Matt and his site to work on!]
One benefit of buying stocks in companies associated with Bitcoin is these stocks can often be included in a retirement account. While Bitcoin may be included in some retirement accounts, industry advisors don’t believe this will be the case for long. They are concerned the Internal Revenue Service (IRS) might declare them ineligible for inclusion in a retirement account.
Regardless of which option a person chooses, research is key. A person should never buy a stock without learning more about the company, the stock price history and more. The same is true when investing in bitcoin. Although this is the most well-known of the cryptocurrencies, others are now being offered. It may seem wise to save money by purchasing one of the lesser known options, but this isn’t always the case. This is your money and your future. Remember this always, research all available options and you’ll find you have a diversified portfolio that helps you build wealth and prepare for the future.
[ERN: Thanks for your contribution! Looking forward to everybody’s comments. Stay tuned for more discussion tomorrow!]
We ended getting a tiny bit exposure to this (very speculative?) market via a token that represents the value of the top 30 traded cryptocurrencies. Sort of like an crypto ETF. It’s bit of fun money that is currently providing a better return on investment than any other investment we have. If that is still the case once we are able to sell the token is to be seen (which not possible until Feb. 8). But it’s looking good! It sure was a fun ride over the last few months.
Nice! As long as it’s fun money! Best of luck and thanks for sharing!!!
Thanks for the intro! What do you all think about Bitcoin futures? Apparently they are now traded on the Chicago exchange.
Mentioned that in today’s post! Good point!
https://earlyretirementnow.com/2018/01/31/thoughts-on-bitcoin-and-cryptocurrencies/
Stocks.
Good to see some balanced and honest view on the subject! I have done my research and as I write on my blog hold some positions in crypto (less than 1% of my net worth). I am just appalled by all the false information, the FUD spread through mainstream articles, news and even bank directors, so-called experts who clearly have not done their research,… and I am tired of hearing all the criminal stuff as well :). There are honest crypto holders, I am very positive to both crypto and the Blockchain technology, let s see what the future holds.
Haha, “the criminal stuff”. I think the best comment I heard on this was something like “Yes, Bitcoin is anonymous and completely untraceable, which makes it perfect for criminals. You know, like cash.”
Marius: Don’t waste a single brain cell investigating anyone making ridiculous promises like 100% monthly returns. Train your brain to go into Ignore Mode and move on!
Jason@WPF: I hear you. I’d ask anyone interested in Bitcoin if they’d still want to buy it, all else being equal with no change in fundamentals, if it went down by half in one day. And then half again the next day. And half again the next day. Because, all else being equal, I’d be selling my personal belongings to buy a blue chip stock that was doing that! But I’d guess most Bitcoin fans would be selling instead.
Thanks! Even more balanced review today:
https://earlyretirementnow.com/2018/01/31/thoughts-on-bitcoin-and-cryptocurrencies/
Not all bashing Bitcoin. I think there is a legit opportunity. But some wrinkles as well. 🙂
In my opinion, this article is missing the answer to a key question. It’s missing the “Why.” Please explain why I can expect an “investment” in Bitcoin to return more than investing in an index fund over the next 10 years.
A bond provides coupon payments and returns your investment at the end of the term. A stock yields expected profits which generate returns for investors. What is the intrinsic value of a Bitcoin? What drives the value of a Bitcoin (up or down) other than speculators?
I’d be very curious to read a post saying that “the value of a Bitcoin is $X and that you should buy it if it’s less than that price. The reason it’s worth $X is because ABC.” I’ve yet to read that post. If it exists please share it.
Let’s say I accept Bitcoin as a currency. That does not make it a good investment. I’m not “investing” in the Euro or GBP today. Why should somebody invest in Bitcoin?
Excellent point. I will write something in more detail tomorrow. I’m troubled by that, too. 🙂
“The value of the cryptocurrency relies entirely on what the market thinks it is worth. There is nothing really defining the intrinsic value of a Bitcoin as explained here. I have asked the question at the meeting of the Norwegian Bitcoin association and the answer was similar, the value of Bitcoin is what people are willing it to be, how they value it. In other words if the market believes Bitcoin should be worth 10 000 EUR or 16000 EUR, then it will go up to that price.” – This is what I have written 🙂
Good point. There is no intrinsic value. Just like paper money has no intrinsic value.
If anyone could help me it will mean the world to me. I found this website saying they will pay you 100% of your investment in 30 days, http://www.[REDACTED] Is this for real? anyone used it?
No! It’s a scam!
I feel if someone is asking that question (“Should I invest in stocks or bitcoin?”) then the answer is stocks all the way. I like the last point – stocks with cryptocurrency exposure. In fact, that’s probably better than “stocks with bitcoin exposure.”
Sounds like a plan. But even there I would keep the exposure to only a few % of the stock portfolio. 🙂
BTC has no intrinsic value as an investment.
True. Just like paper money. See my thoughts on “intrinsic value” of Bitcoin:
https://earlyretirementnow.com/2018/01/31/thoughts-on-bitcoin-and-cryptocurrencies/
I don’t think it is a matter of either/or, you could invest in each. However, bitcoin is a much more speculative investment. For highly speculative investments I would only allocate a small amount of money(~1% of portfolio), which I wouldn’t mind losing.
Yup, that would be my maximum: 1%. But right now it’s 0%. 🙂
With all the potential that blockchain offers, there are still unforeseen (unforeseeable?) risks. With the potential for great profits with speculation in cryptocurrencies, there is also the potential (surety?) to attract unsavory characters to the party. Given the nature of a “public ledger” created by blockchain, I find it disquieting that it is not too hard to cook up non-transparent means to “create value”. See https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange and https://seekingalpha.com/article/4131159-regulators-must-investigate-bitcoin-tether for some strange things afoot in crypto-land. What does this mean–something sinister or something so brilliant my feeble mind cannot appreciate its sagacity? In either case, it certainly is fun to be a spectator to history being made.
As long as FDIC doesn’t guarantee my deposits I will stay away from cryptocurrencies.
What do you think of this from Coinbase (one of the major exchanges in the US) for example? https://support.coinbase.com/customer/portal/articles/1662379-how-is-coinbase-insured-
I can’t speak to that. I would stay away from endorsing or non-endorsing specific exchanges. 🙂
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Many thanks for useful article, you helped me a lot.
Grayscale’s new funds will allow people to invest in price movements for the various popular cryptocurrencies. It includes Bitcoin Cash, Ether, Litecoin and Ripple’s XRP, in addition to Bitcoin. The company also runs the Digital Large Cap Fund that allows investment for a combined basket of cryptocurrencies.
Read more here: https://goo.gl/yk7eN1
how can someone know the future of bitcoins?
really not possible
this is madness, stop buying!