Update – Is Bitcoin a Bust or Bounty?

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It’s been almost a year since I published my initial post on cryptocurrencies and I thought it would be a good time to provide an update on how our foray into this Wild West of personal finance has advanced – and what I’ve come to believe about their benefits and the confusion around them.

PORTFOLIO STATUS

If you read the headlines, you may believe that the cryptocurrency fad is over – that the bubble has ‘popped’.  It’s true that in late 2017, the cryptocurrency frenzy was in full swing and values have dropped dramatically since that point.

That said, you might be surprised to hear that our cryptocurrency portfolio has still DOUBLED – in fact, nearly TRIPLED – in the last 11 months.  Two-thirds of our buy was in Bitcoin, the early leader in the crypto space, and the other third is in Etherium.  Bitcoin is up 2.3x over since last June and Etherium is up 3.8x.  That balances out to a 2.8x or 280% return over the last year.

It would be simple enough for me to jump out of cryptos at this point, but I’ve enjoyed tracking and learning about their development.  The amount we invested is a fraction of a percent of our total nest egg (but growing), so I’m happy to continue to let it ride.

My initial belief about CC is that they would be effective as a anonymous store of value with limited capabilities for transaction.  I haven’t wavered in my belief in that simple concept since then.  In fact, I’ve come to learn that the backbone ‘distributed ledger’ technology behind cryptos offers potential across many industries.

CRYPTO CONFUSION

I believe that the challenge many people have with accepting cryptocurrencies is errantly rooted in their own concept of what it is.

Many think of them as investments and look for significant appreciation, but they are not backed by a reoccurring profit/tax stream like a corporate stock or municipal bond.  Other think they are like a traditional currency, but they don’t have a currencies’ transactional capabilities.  You can’t buy a Coke with a Bitcoin at the corner store, and probably won’t ever be easily able to.

Others warn that cryptocurrencies lack ‘intrinsic value’ – but value is in the eye of the beholder.  Many things lack intrinsic value.  What makes a Van Gogh painting worth more than any other artist’s? He didn’t use better paint or a better canvas.  In fact, his paintings were considered worthless in his own day.  Value, like beauty- which is also very valuable – is in the eye of the beholder.

Value is the merely the worth we apply to something based on how well we’ve accepted a story about it.  The story we share is a ‘social fiction’ that becomes the basis of value for a painting of sunflowers, a Beatles song, a misprinted postage stamp, or a Honus Wagner baseball card.  Wipe out our collective interest in baseball and the $2.1M Honus Wagner card is worthless.

CRYPTO BENEFITS

Things that are valuable are not necessarily useful, but cryptocurrencies may be both valuable and useful.  The key role of a cryptocurrency is to anonymously store financial value against government-sponsored inflation.

People forget that there is nothing natural about inflation broadly –  it’s caused by government’s management of the money supply.  Finite, accepted, but free from authority, cryptocurrencies offer a promise of holding their worth against the declining purchasing power of government-manipulated currency.

If cryptocurrencies only appreciated against the US dollar by the rate of inflation last year – about 2% – it would have served a valuable need.  After all, even 2% inflation a year will erode 50% of your purchasing power over 25 years.  It’s hard to save 50% of your income, but inflation torches 50% of your purchasing power every quarter century.  At 4% inflation, it drops to every 12.5 years!  That’s real retirement risk.

Additionally, I still think there is limited transactional potential in cryptocurrencies.  First, we are starting to see ways to connect cryptocurrencies to transactional debut/credit card networks that already exist.  These networks are already capable in translating currencies of different values.

Second, there is some inherent benefit in anonymous transactions.  Beyond nefarious activities – although those are sizeable by themselves – people do not believe that government need be privy to every purchase.  The arc of history leans toward individuals taking power from institutions.  Why would currency be any different?

ALL IN?

Given my optimism on cryptocurrencies, you might be asking how aggressive I am personally being with cryptocurrencies?   In two words, I would say “very little”.   We have a small stake in it today and I haven’t been pushing more of our portfolio into it.

The fact is, while I am bullish on the idea of cryptocurrencies, I have no idea if Bitcoin, Etherium, or any other individual crypto are the right vehicles.  In 1900, there were thousands of automobile companies and only a few of them survived.  Henry Ford himself failed twice before founding today’s Ford Motor Company.  While the overall automobile industry had clear potential, finding the company with the optimal route to success would have been difficult to predict.

For this reason, I wish there were a way to buy an ‘index’ of all cryptocurrencies – but that’s probably not practical at this point.  It is too dynamic an environment to capture all of the existing & new cryptocurrencies that emerge each day.

Additionally, we are at the stage of our FIRE journey where time is not on our side and we need to be more focused on protecting our nest egg than growing it.  Young people with a long career ahead of them have more degrees of freedom to take on the level of risk that likely comes with the development of the cryptocurrency concept.

Most readers were skeptical about cryptocurrencies when I wrote about them last year.  Has anyone started to change their mind?  Anyone bought in?

Image Credit: Pixabay

3 thoughts on “Update – Is Bitcoin a Bust or Bounty?

  1. But seriously, folks … in my opinion, the largest risk to FIRE is longevity. Diligence and discipline are required to approach FIRE in the first place. (You are an outstanding example of these traits, Chief!) Also required is a highly diversified portfolio of capital and assets, designed to withstand the depredations of decades and change, while providing inflation-resistant purchase-power and growth potential, a small fund of speculation may be useful. In my mind, this is “money to burn” – that you have no expectation of seeing again. Win or lose, it is not a structural financial necessity. Personally, I prefer limited-partnerships for speculative thrills.

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    • Good thoughts, Bowmanifesto – cryptocurrencies are highly speculative and financial gurus suggest you allocate no more than 10% of your nest egg to these sorts of high risk bets. As you say, one can achieve FIRE without these as a financial necessity. Berkshire Hathaway grew nicely without Microsoft or Google, too. They sure are fun to talk about though!

      (Thanks too for being the first person to use the word “depredations” on this site!!)

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