Bitcoin: Currency, Investment or Speculation?

Over the last few months I have had several people ask my opinion on Bitcoin and the cryptocurrency markets.  For a while I didn’t think much about it, but as the value has continued to increase substantially I thought it was probably time for me to share my thoughts.  How you view Bitcoin, really depends on what you think it is.  Is it currency?  Is it an investment? Or is it speculation?  I’m going to spend a few minutes breaking down each and give you some things to think about.

When I first heard of Bitcoin, it was described to me as a type of digital currency that can be used without the tracking of the Federal Government.  That sounds good on the surface, but realize this means that many people who would see value in this as a currency would do so for reasons that may be less than legal.  There is a reason they would prefer not to be tracked. 

My biggest challenge with defining Bitcoin as currency comes in the definition of currency itself.  Merriam-Webster defines currency as “something that is in circulation as a medium of exchange” or “a common article for bartering.”[1] In simplest terms, the reason the US dollar and other government currencies works as currency is that, for the most part, something that cost $5 can be paid with a five-dollar US bill today, tomorrow and most likely next week.  We do experience inflation in many of our goods, but most of that inflation happens slowly during the year.  It is a very rare occurrence when something you want to buy today for $5 of US currency will cost $10 of US currency tomorrow.  I’m not going to spend time on hyper-inflation scenarios that have occurred in rare occasions in other countries, because as of today, that is not a scenario we seem to be facing in the US. 

The volatility of Bitcoin is a major concern for its consideration as a currency.  It has risen over 2000% Year to Date as of December 2017.  Anything that can go up that quickly can go down that quickly as well.  If I need to buy bread or eggs tomorrow I don’t want to guess what the value of my currency is going to be.  Anything with this type of volatility would not be considered as a “medium of exchange” or “an article for bartering.” In my mind, it is difficult to take the position that Bitcoin is currency.

If Bitcoin is not currency, then perhaps it is an investment? When I consider investing I have a set definition that I have found serves me and my clients very well.  I’m looking for entities that can provide return of capital and increased cash flow over time.  Here is where I struggle with Bitcoin as an investment.  Bitcoin is not a company that has profits.  The only reason Bitcoin has value is because other people feel it has value as a currency.  Based on the definition of currency above, that leaves us with a problem.  It doesn’t act like a currency.   It isn’t backed by the full faith and credit of any government or institution.  If the faith in its ability to be a currency goes away, so does the value.  

I am not so naïve to say that Bitcoin could never be an investment.  However, as of today it doesn’t fit my definition.  If I’m going to be honest, it looks a lot like 1999 or 2000 when companies that didn’t have any profits or earnings were getting an Initial Public Offering (IPO) on the stock market just because they had “.com” in their name. 

If Bitcoin is not a currency or an investment, then it seems that Bitcoin is speculation.  Merriam-Webster defines speculation as an “assumption of unusual business risk in hopes of obtaining commensurate gain.”[2]  Think of speculation as gambling.  You can win big, you can also lose big.  One thing I always ask when I look at any type of speculation is “who is really making any money?”  In Vegas, “the house always wins.”  It might be worth figuring out who the “house” is for the crypto currency markets.  The trading exchanges will certainly make money off those who want to speculate.  I read yesterday that people are taking out second mortgages to buy Bitcoin, so the banks are making money.  The question is will any investors actually keep any profit that they can take home and put in their bank account when the dust settles.  I’m afraid I’ve seen this story before, and I don’t like the ending.  I’ve always said, “When the guy bagging your groceries is giving you investment tips, it’s time to exit the investment.”  Although most of our groceries are now delivered to our home, I’m seeing a lot of people who have never had deep money conversations acting like Bitcoin experts.  If you feel you must venture into these waters, please be careful.    

I’ll conclude my thoughts by quoting from one of the wisest and richest men who ever lived, King Solomon.  He wrote a book of lessons he had learned throughout his life to his sons.  He said, “Steady plodding brings prosperity; hasty speculation brings poverty.”[3] At the end of the day, I may end up being wrong about the ability of Bitcoin (and other cryptocurrency) to become a currency or an investment.  As of today, however, it is speculation and my job is to help protect the families we serve from poverty and I take that job very seriously. 

[1] https://www.merriam-webster.com/dictionary/currency

[2] https://www.merriam-webster.com/dictionary/speculation

[3] Proverbs 21:5, The Living Bible copyright © 1971 by Tyndale House Foundation. Used by     permission of Tyndale House Publishers Inc., Carol Stream, Illinois 60188. All rights reserved.

 

Eric Dunavant, CFP®
President
E Six-Thirteen