Updated Commentary on Bitcoin and Cryptocurrencies.

It’s always a bad idea to make investment recommendations because all recommendations need to be viewed in the context of personal financial planning. But there are some things that need to be said and this is one of them: Bitcoin is a fake currency and it is a bad investment.

Brief History of Bitcoin

First invented in 2009, Bitcoin does not require and is not backed by a central authority, like real currencies. Instead, Bitcoin is a peer-to-peer system for online payments that runs on a decentralized network of computers around the globe that keep track of all Bitcoin transactions, similar to the decentralized network of servers that makes the internet work.

As of early July 2018, Bitcoin’s price was about $6,600, having rallied from $6,000 just a few weeks before. But at $6,600, Bitcoin is still worth 70 percent less than it was at the beginning of the year. But what does “worth” really mean?

What is Something Worth?

“Everything is worth what its purchaser will pay for it” is a quote from the Roman Writer Publilius Syrus and is a common answer when asked to define worth.

But think about that definition for a minute and whether it should apply to investing. Here is an analogy that borders on hyperbole: I go into my backyard and take a tablespoon of dirt out of the ground and sell it to my neighbor for $1,000. Does that mean that tablespoon of dirt is worth $1,000 because someone paid that?

Remember in the 1630s when tulips became a status symbol for Holland’s upper class? Tulip bulbs were actually traded on Dutch stock exchanges and peaked at several times the average Dutch annual salary.

Don't confuse worth for value.

What is Bitcoin Worth?

Bitcoin is backed by nothing and no one. Bitcoin doesn’t create anything. It’s only “worth” what someone else will pay for it. The only hope you have is in convincing other people that it’s worth something, hopefully more than what you paid for it.

Listen to the Oracle of Omaha, Warren Buffet:

"If you buy something like bitcoin or some cryptocurrency, you don't have anything that is producing anything," Buffett says. "You're just hoping the next guy pays more. And you only feel you'll find the next guy to pay more if he thinks he's going to find someone that's going to pay more.

"You aren't investing when you do that, you're speculating."

And know this:

Over 800 cryptocurrencies are now dead and worth less than one penny
New cyrptos are created almost daily and many of them are scams
Bitcoin is off 70 percent from its record high near $20,000 last year
The Labor Department reports that the average salary in the U.S. is about $52,000, which means Bitcoin is not quite in Tulip-bulb territory, but it’s close

Protect Against Asset Euphoria

How does a wise investor avoid falling prey to the lure of “asset euphoria,” as seen with the Bitcoin and Tulip bubbles? That’s easy, just remember the adage: “If it sounds too good to be true, then it probably is.”

To avoid losing large amounts of money to asset euphoria, the best move is to diversify your holdings. Diversifying your assets among various types of investments allows you to get a better risk-adjusted return. You spread the risks around. Over the long term, you will reap the benefits of many investment sectors, rather than suffer massive losses when a bubble bursts.

Questions? Contact us or schedule a time to meet here. We'll help you ensure you are properly diversified in the context of your personal financial plan.