The Bitcoin Investing Paradox

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So, yes, I’m a Bitcoin skeptic so far. You may have seen this piece, (Not) Investing in Crypto, in which I lay out why.

I’m okay with that. Skepticism protects your portfolio from fad investments and bad advice.

And when a new investment materializes from thin air and is hyped as something that’ll replace money as we know it and return 40,000% all while saving the world from poverty, my spidey senses are triggered.

Add massive volatility and an investment that even its advocates say could go to zero, and I have a hard time wanting to invest in it myself or our clients.

But that doesn’t mean I can ignore it as a wealth manager, or stop doing the work on it with an open mind. I don’t have all the answers, and I don’t want to make a mistake with people’s money.

Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.

Charlie Munger

The post I shared above came out of a presentation on crypto late last year that I attended.

The first episode of the podcast I host was about crypto — A Crypto Currency Primer.

Curious about crypto? In our debut podcast Heritage Financial President, Sammy Azzouz, chats with David Lebovitz, JP Morgan Global Market Strategist to provide listeners a primer on cryptocurrency. What they are, how the technology behind them works, why the buzz, talking about the different coins, and how to think about them as an investor.

And lately I’ve been reading white papers from investors who recommend investing in Bitcoin and have taken large positions.

It’s not helping because the more I dig into it, the more I see a Bitcoin investing paradox that’s hard to get past.

10,000 Bitcoins for 2 Pizzas

You may have heard the story of the guy who in 2010 convinced someone to take 10,000 Bitcoins for two pizzas. The coins didn’t have value then. Now, at around 30,000 per coin, those two pizzas cost him $300,000,000.

This might be a strange way to make the investing case against Bitcoin. After all, it went from zero to $30,000 in 12 years.

But the investment case being made for Bitcoin, or at least the most consistent one I see is that it’ll increase in value as more people adopt it as a currency. And with a finite number of coins predetermined, the sky’s the limit for that price increase.

If adoption grows, so should its aggregate value as a payment system. A growing system value, measured by the market capitalization of Bitcoin, should mean a growing value of Bitcoin given the limited supply of the denominator.

The Value Investor’s Case for… Bitcoin?! by Bill Miller IV, CFA, CMT and Bill Miller, CFA

If you imagine it being used for some fraction of world commerce, then there’s only going to be 21 million coins for the whole world, so it would be worth much more per unit.

The Bullish Case for Bitcoin by Vijay Boyapati

Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it

Why Bitcoin Matters by Marc Andreessen

So, you invest in Bitcoin because you think it’ll be used as a currency and the price will go up. But as an investor you should never want to use it as a currency because you risk buying two pizzas for $300 million.

A Bitcoin investing paradox. Still sounds too goofy for me.

Suggested Further Reading

Understanding Investment Rule #1 — You don’t want to lose money as an investor. Here’s what that really means and how to avoid doing it.

Sammy Azzouz is the President of Heritage Financial, the author of the personal finance book Beyond the Basics, and he blogs about personal finance at The Boston Advisor.