Cryptocurrencies are trending! I can’t go a day without seeing some news story about them. I’d been successfully ignoring all of the noise, but last week one of my friends asked me about my cryptocurrency investment strategy. This is a guy I really respect (at least until he asked me this question), and it was the call to action I needed to reconsider my approach.
Five minutes later, I was done, and I thought I’d share my “cryptocurrency investment strategy” for your amusement.
What Are Cryptocurrencies, and Why Are They Awesome?
Cryptocurrencies are a form of money. More specifically, courtesy of Wikipedia:
“A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency.”
Cryptocurrencies claim certain advantages over traditional currency. They’re hard (“impossible”?) to counterfeit. Transactions can settle immediately. Cross-border transactions can be easier. They’re decentralized – there’s no central authority, but rather a bunch of different people collectively managing the “blockchain” database that records the money supply and transactions (this is indeed seen as an advantage).
U.S. Dollar versus Bitcoin: Who Will Win
Bitcoin seems to be the most popular cryptocurrency right now, so perhaps it’d be helpful to compare it to the almighty U.S. dollar.
On the one hand, you have a made-up currency with no intrinsic value – it’s just worth something because people believe it’s worth something. That worth can oscillate wildly and is ultimately controlled by shadowy figures who aren’t really accountable to anyone.
On the other hand, you have Bitcoin.
Neither of them is terribly confidence-inspiring. They are not “commodity” money – they have no value in themselves (acknowledging Bitcoin’s equal footing here with the U.S. dollar is both important and frightening). I don’t always agree with the Federal Reserve’s strategy for the U.S. dollar, and the whole concept of random anonymous “miners” defending the legitimacy and value of my Bitcoin hoard sounds rather sketchy.
However, for now, the U.S. dollar seems to win handily in reliability and stability. Bitcoin’s value (at least in U.S. dollars…) has been all over the map since inception and continues its wild swings today. It may have some advantages over the U.S. dollar, but it has a long road to win me over as a stable medium of exchange.
All this talk about “medium of exchange” is boring, though. Let’s look at cryptocurrencies as investments!
Cryptocurrencies Are Currencies
Some folks have made massive fortunes “investing” in Bitcoin. Bitcoin’s initial value was less than a U.S. penny, and it currently sits over US$ 5,000. That’s a handsome return. Of course, some folks have also lost fortunes “investing” in Bitcoin, and I’m sure there’ll be more to come.
I’d like to tap the brakes for a second, though, and ask, “What is Bitcoin?” Is it truly an investment? I’ve always thought that an investment was something you purchase with money in the hopes that it earns a return.
But Bitcoin itself IS money – it’s just another currency that you can use to buy stuff.
If I were to tell you that I was taking US$ 1 million and converting it to Euros with the idea that I’ll convert back when the Euro has strengthened (giving me more than US$ 1 million), would you consider that an investment? Or is that just currency speculation?
A Bitcoin today will be a Bitcoin tomorrow and a Bitcoin next year. The return on that (as measured in Bitcoins) is 0.0%.It’s only when you compare Bitcoin to other currencies that you start to think of it as an “investment”.
But projecting future currency exchange rates is a dangerous game to play. I don’t know of anyone who has consistently predicted future exchange rates, and I don’t know why anyone should expect to earn positive returns on currency speculation. You could make a fortune, but you could also lose one.
It’s a safe bet that the US$ value of Bitcoin won’t be the same in a year that it is today. You could make a mint if you correctly predict which way the exchange rate will go. But guess what? The same could be said for the Euro, or Yen, or Swiss Franc, or gold.
If you’re investing in the companies or technologies involved in developing cryptocurrencies, that’s one thing. But “investing” in the cryptocurrency itself sounds more like speculation to me.
If there is an investment case for Bitcoin and Friends, I’m not able to see it and I’m not capable of capitalizing on it. Which brings me to my cryptocurrency investment strategy.
My Cryptocurrency Strategy: Own Assets
Fortunes have been made and lost on cryptocurrencies, with more of both to come.
How can I determine which cryptocurrency will win? What technology will become the gold standard (haha) for currencies of the future?
I don’t know and I don’t care. If you’ve already made millions (of U.S. dollars, that is) speculating on Bitcoin, bully for you. If you’re just beginning your punts, good luck.
My simple view of cryptocurrencies is as potential future mediums of exchange. They certainly don’t cut it for me today, but if they become ubiquitous, then I’ll be more than happy to start using them.
When I look at my net worth, I don’t have much actual exposure to U.S. dollars – while I own assets that are valued in US$ and produce income in US$, that doesn’t define them. If I own a house, do I really care if it’s denominated in US$ or Bitcoins? It’s still a house. 100 shares of a company are 100 shares, no matter what currency you use to value them.
If the U.S. suddenly switched to using Euros, or Bitcoins, or wampum, or seashells, I wouldn’t be too worried as long as long as the currency was stable and accepted by everyone. Owning assets with an intrinsic value is a natural hedge against currencies with no intrinsic value.
And that captures my cryptocurrency strategy. I’m going to own as many assets as possible.
I think a lot of folks are getting nervous about a world where they have massive exposure to a traditional currency and a cryptocurrency at the same time. That doesn’t feel likely to me (except of course for the brave souls who are actively speculating).
If Bitcoin becomes the currency of the land, salaries will be paid in Bitcoins. Groceries will be bought with Bitcoins. Assets will be valued in Bitcoins. That shouldn’t happen overnight, and it would only be possible if a lot of folks agreed to it. A currency is a medium of exchange, and to work properly, it must be accepted by all parties.
I truly wish I could predict the future direction of cryptocurrencies and make a bundle from that knowledge. I also wish I knew the winning numbers for the next lottery drawing.
Since I can’t, I’ll use the same strategy for cryptocurrencies as the one I use for U.S. dollars: own as few of them as possible.
Cryptocurrencies are exciting new technologies, but they are just currencies. I’ll steer clear of currency speculation and just focus on owning assets.