Bitcoin bonanza... Should it be considered for investment?
Bottom Line: I've had a number of people inquire of late about the virtues of Bitcoin & whether it's something that should be considered for investment. The incredible increase in price above $10,000, on back of the CBO (Chicago Board of Trade) allowing options trading on it, has a tendency to catch the attention of just about everyone. This is a great opportunity to articulate the difference between producing and non-producing assets.
I don’t believe in investing in non-producing assets (this is also a Warren Buffet principal). For example, if I really believed that gold and/or silver was a great investment I’d be more inclined to invest in a great mining company that produces the metal than the metal itself. Why?
If you buy a non-producing asset like gold, silver or even bitcoin as an investment you actually are gambling and guessing. You’re making the guesstimate that someone will pay you more for that medium of exchange than what you paid for it. It doesn’t provide any inherent benefit along the way.
A producing asset like a business is a different story. A frequent misconception of those who aren’t familiar with stock market investing is that it’s similar to a casino and/or gambling in general. That actually couldn’t be further from the truth. Does the average person who walks into a casino win? Of course, not right? Only about 5% of casino gamblers turn a profit. Conversely, the average stock market investor will turn a profit. In fact, the 10% average rate of return in the stock market per year is the highest of any investment or related class in the history of the United States. The reason is the historical trend of the economy and businesses. They will grow over time provided that our economy does as well.
When you invest in a stock you’re investing in the business behind that stock. If it grows you’ll not only be in a position to have a higher share price over time but if you invest well you’ll likely have dividends that will be paid to you along the way as well. When I’m investing in a stock I’m actually not concerned with the day to day price of the shares. I’m interested in the business I’ve invested in growing and paying a dividend to me based on profits over time. Two-thirds of all historic stock market gains have come in the form of dividends that are paid out by companies.
That takes us back to Bitcoin. It's nothing but sheer speculation. It's worth whatever someone's willing to pay for it today but there's nothing inherent to provide value to it. For that reason, I couldn't even consider it as an investment. Additionally, there are five new challengers to Bitcoin entering the cryptocurrency world, potentially adding more uncertainty to Bitcoin's stability going forward. It's also worth noting that cryptocurrencies are nothing new. Dozens have failed since the 90's. Bitcoin has simply been the one that gained traction.
As a rule, I advocate three concrete reasons as to why to initiate an investment prior to doing so...