If you haven’t heard of bitcoins by now, you will soon. They were recently profiled in this week’s BusinessWeek, they have skyrocketed since the Cyprus banking mess and in a nutshell, it’s an alternative currency play which resides in cyberspace only – there is no physical exchange, no regulatory oversight, not even an inkling as to who even invented the concept. It may well be the most prolific internet hoax of all time or someday, people may actually use bitcoins for routine exchanges for goods and services (until a government finally takes it seriously and outlaws it). Just this week alone, there was a runup and then a crash when hackers attacked a major exchange and investors sold in herd-like fashion. But since $1.4 Billion in valuation can’t be wrong (the same flawed logic of over a billion people believing in various religions each [surely, at least a few billion are wrong since they can't all be right!]), here are several reasons outlining why investing in bitcoins may well be the dumbest investment move you’ve ever made:
- Speculation to the 10th Degree – Often times, speculation gets a bad rap. Remember when oil prices were resulting in record gasoline prices at the pump due to those nasty “speculators”? Remember when speculators were driving up the yields on European sovereign debt? Whenever a set of free-market transactions move in a fashion that pandering politicians don’t understand or particularly like, they blame the speculators. But in those cases, first of all, they’re often right. Or they’re hedging. Or they’re speculating for some other legitimate reason, often times buying a share in a corporation or taking responsibility for custody of a commodity, etc. But speculating on bitcoins? It’s worse than gambling. At least at the casino, I know that most games give the house an edge of 1-5%, often with a very wide standard deviation, so over a short period of time, I at least have a modest chance of making a few bucks or over a long period, I can bank on losing X. However, with bitcoins? There is NOTHING to go on. You’ll never take physical possession of one, there’s very little history and what little history exists isn’t even a viable context in which to judge future returns. Tomorrow, we are just as likely to see a 50% increase as we are a 50% decrease. And just like we saw gold sputter out after the moronic gold ATM news, now we have a bitcoin ATM in the works and some guy got his name in the paper for selling his car for bitcoins. Next, we’ll see a girl selling her virginity for bitcoins. It’s a circus. As close to pure speculation as you can come. But speculation based on no thesis, other than hope.
- No Real-World Utility - People invest in some very obscure things. They invest in anything from art to wine to future cash flows from highway tolls. But all of these things have some sort of benefit – from paying cash flows to the likelihood to sell for more in the future due to scarcity and inability to replicate (you can’t recreate a vintage bottle of wine or a masterpiece).
- Even Worse Than Gold – I’ve cited the downsides and absurdity in throwing your net worth behind gold before (which, by the way, is down 7% on the year versus a 9% gain in the S&P500 or if you want to go back a full year, same thing – PLUS SPY pays a dividend), but people just love the idea of an alternative currency play. Something that is finite – that can’t be printed by a government with no spending controls. Well, while I’m no fan of gold, at least it’s something with the following properties – it’s physical, it’s very easy to quantify and relatively easy to exchange, it’s been in circulation as a currency for millenia, it will always be a currency of sorts, and for the preppers – if all hell breaks loose and dollars become worthless, at least you could trade gold for something. But bitcoins? You need an internet connection and willing partner on the other side of that trade to conduct a transaction. That scenario is laughable in the prepper playbook. The internet would be down, cell phones wouldn’t work, it’s back to 1900 at least. So, if gold stinks, bitcoins are even worse.
- Hackable – There’s virtually no risk at all of your ownership in a stock ever being taken from you. And cash and gold? Sure, they can be stolen, but there are measures in place you can reasonably undertake to protect your physical assets. But bitcoins? It’s flying blind. If hackers can take down government websites, steal the most prolific corporate secrets, hack military secrets and more, don’t you think they’ll figure out a way to snake some bitcoins? Either by creating more for themselves, ultimately rendering the currency as worthless – or by just stealing yours out of your account? After all, the whole system was set up years ago by who-knows and there’s no ongoing security measures, adjusting to an ever-evolving hacking environment, etc.
- Making a Statement – Thinking as an economist, there’s nothing that bothers me more than people “making a statement” with their investments. When it comes to investing, you should be seeking to make the most prudent investment for your given objectives, which usually include risk tolerance, time horizon and diversification goals. But to invest in something because it is the antithesis of something you find objectionable? That’s just silly. You don’t like the notion of a government being able to print unlimited amounts of currency so you invest in gold. We’ve seen how that’s worked out recently. But to invest in something as random and speculative as bitcoins? Come on. If you want to make a statement, go out and vote libertarian or write your local Congressman. Don’t piss away your hard earned money on an internet hoax.
Do You Own Bitcoins?
Would You Consider “Investing”?