Posted by John Posey
It has been interesting to watch the rise of Bitcoin over the past several years. The ability to complete transactions using a digital currency across the globe is certainly a compelling story. In fact, it can be so intriguing you might have the feeling that you’re missing out if you haven’t got in the game. I’d encourage you to check out, Making Sense of Bitcoin by Ashby Daniels to get an education on the topic.
For the average investor considering getting into the Bitcoin game, I would treat it like a lottery ticket because it’s pure speculation. I wouldn’t invest more than I could handle losing entirely. I think many of us get interested in these kinds of opportunities because of the fear of missing out emotions we experience (AKA – FOMO) driven by the surrounding buzz. Now, I’m not going to take a stance on whether it’s a good buy or not, but rather point out what it looks like from where I sit.
The reason I would call it pure speculation is because Bitcoin in and of itself produces nothing. Investment opportunities in companies and real estate produce goods and services and can generate cash flow to the contrary. Bitcoin seems similar to investing in precious metals – it has little to no utility value and you’re essentially just betting on the direction of price. These are about the same reasons why Warren Buffett has never been much of a proponent of owning gold. It has been said that Warren once referred to gold as an unproductive asset that will never produce anything but is purchased in the buyer’s hope that someone else will pay more for it in the future. From this lens, it seems to rhyme with Bitcoin.
With that said, none of that means an investment in precious metals or Bitcoin is inherently bad. Obviously, if you purchased Bitcoin years ago and still own it, you’re not regretting it as of April 5th, 2021 (It is surpassing $59,000 USD as I write). Precious metals are often purchased as an inflation hedge which I think can make sense but Bitcoin is an entirely different animal in its infancy. I think you just need to understand the game you’re playing here and it’s a game of betting on price – the future movement of supply and demand for a singular item. Speculation is a game of choice for many investors - being able to recognize when you’re doing it and using it with purposeful intention is valuable. Following the herd or hustling to make easy money is often foolish. Seek clarity and understanding over a get-rich-quick prescription – it’s generally better for your financial health. As a typical investor, I think if you’re aware that you’re speculating - primarily making a bet on price, you’re likely to be better prepared to accept the outcome.
The most intriguing part of Bitcoin to me is the underlying blockchain technology used to make it work rather than the cryptocurrency itself. I can imagine more application of the underlying technology impacting many industries and transactions worldwide. Interestingly though, the tech process is becoming a significant energy suck in keeping the Bitcoin infrastructure chugging along based on the research highlighted by Ashby Daniels in Making Sense of Bitcoin – The Primary Headwind section. I had never considered the energy impact of the technology being adopted at a record pace and it seems it could become a hot button down the road. Ashby referred to the energy drain as the cost of decentralization – as it should be noted that Bitcoin is not regulated by a central bank, unlike traditional currencies. Yet another key characteristic and potential risk in the future.
Proceed with the awareness and the acknowledgment you’re a true speculator if you choose to play the game. Just like the lottery, you have to play to win but I think you better be okay with the possibility of losing.
Do you have a topic you’d like to learn more about or other burning personal finance questions? I’m always looking to cover relevant and useful topics, so let me know!
Happy investing and/or speculating. :)
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