Q: I almost hate asking you questions about this because I know you probably won’t like the idea, but I’m thinking about investing some money in Bitcoin. It is currently trading well below its all-time high. Do you think it’s a good investment at this price?
A: Before I answer your question, I want to tell you a story. In 1967, when I was about 5 years old, my uncle decided he wanted to teach me a lesson in hippie economics. He took me aside, took a dollar bill out of his wallet and asked me, “Do you know what this is?” Of course, I knew what it was. I said it was a dollar. He said, “No, you are wrong. It’s just a piece of paper with a fancy print on it. And with that, he tore it in half and threw it in the trash. I said, “Okay, can I dump your garbage? He just told me to go play.
I’m sharing this story because there are a lot of people who will tell you that Bitcoin (or one of the 4,000 other cryptocurrencies in existence) is just a virtual piece of paper with some fancy writing on it. And I admit, I have often spoken of cryptocurrencies in a dismissive manner. However, Bitcoin cannot be dismissed so lightly. As of this writing, the Bitcoin market indicates that each token is worth over $ 37,000.
That’s not to say that Bitcoin is a good investment. I’m always confused when people use the words “Bitcoin” and “Investment” in the same sentence. Bitcoin is a lot of things in my mind, but investing is not one of them.
An investment has intrinsic value. For example, if I invest in a stock, I own a slice (maybe a very small slice) of the company that issued the stock. I invest in these stocks because I expect the day-to-day operations of the business to create wealth, and as the owner, I will get my proportional share of that wealth. The company’s ability to create wealth gives rise to the intrinsic value of the stock.
Bitcoin, on the other hand, has no intrinsic value. There is nothing about Bitcoin that gives it value except its scarcity relative to demand. When Elon Musk says Tesla will start accepting Bitcoin as a payment method for their cars, the demand for Bitcoin rises relative to the supply and the price rises. When Elon Musk says he was kidding and Tesla will no longer accept Bitcoin as a form of payment, demand drops, and so does the price. The magnitude of the price swings can be mind-boggling, but it doesn’t give Bitcoin intrinsic value, and it doesn’t make it an investment.
Some people say they want to buy Bitcoin because they believe in the blockchain technology behind it. I agree that blockchain is a very interesting technology, but not only because it enables cryptocurrencies. The application of blockchain technology is much broader than this.
One way to invest in the future of blockchain technology is to research companies that use it to increase the efficiency of their operations. For example, DocuSign (NASDAQ: DOCU), the market leader in electronic signature technology, has been using blockchain technology to enable its business since 2015. Amazon (NASDAQ: AMZN) provides a platform called Amazon Managed Blockchain that enables customers to set up their own blockchain networks. As more businesses embrace blockchain technology, Amazon will be in a good position to capture this business.
You can also benefit by investing in businesses that are essential to sustaining the cryptocurrency world. For example, the Bitcoin ecosystem relies on computers with powerful graphics processing units (GPUs) to enable mining. Who is the world’s largest producer of GPUs? Nvidia (NASDAQ: NVDA). This approach is akin to the people of the California Gold Rush era who made their fortunes selling pickaxes, shovels and blue jeans to miners.
Of course, if you are really more interested in riding the wave with cryptocurrencies, you can do so directly with Bitcoin, Ethereum, or any of the other cryptocurrencies. My only advice is to keep your position small, put it in an IRA (Roth is best, if you can find a custodian who will hold it for you), and please don’t call it an investment.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He accepts any questions you may have regarding investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or e-mail them to [email protected]