Some thoughts on Bitcoin
Q: I almost hate to ask you about this because I know you probably won’t like the idea, but I’m thinking about putting some money into Bitcoin. It currently trades significantly below its all-time high. Do you think it is a good investment at this price?
A: Before I answer your question, I want to tell you a story. In 1967, when I was about five years old, my uncle decided he wanted to teach me a lesson in hippie economics. He took me aside, pulled out a dollar bill from his wallet and asked, “Do you know what this is?” Of course, I knew what it was. I said it was a dollar. He said, “No, you are wrong. It is just a scrap of paper with fancy printing on it.” And with that he tore it in half and threw it in the garbage. I said, “Okay, can I empty your garbage?” He just told me to go play.
I share that story because there are a lot of people who will tell you that Bitcoin (or any of the other 4,000 cryptocurrencies in existence) is just a scrap of virtual paper with fancy writing on it. And I admit, I have often talked about cryptocurrencies in a dismissive way. However, Bitcoin can’t be dismissed so lightly. As of this writing, the market for Bitcoin says each token is worth more than $37,000.
That’s not to say Bitcoin is a good investment. I am always puzzled when people use the words “Bitcoin” and “investment” in the same sentence. Bitcoin is many things in my mind, but investment is not one of them.
An investment possesses intrinsic value. For example, if I invest in a stock, I own a slice (maybe a very small slice) of the company that issued the stock. I invest in that stock because I expect the company’s day-to-day activities will create wealth and, as an owner, I will get my proportionate share of that wealth. The ability of the company to create wealth gives rise to the stock’s intrinsic value.
Bitcoin, on the other hand, has no intrinsic value. There is nothing about Bitcoin that gives it value except the scarcity of it relative to the demand for it. When Elon Musk says Tesla will start accepting Bitcoin as payment for its cars, the demand for Bitcoin increases relative to supply and the price rises. When Elon Musk says he was just kidding and Tesla will no longer accept Bitcoin as payment, the demand goes down and so does the price. The magnitude of the price swings can be breathtaking, but that doesn’t give Bitcoin intrinsic value and it doesn’t make it an investment.
Some people say they want to buy Bitcoin because they believe in the blockchain technology behind it. I agree that blockchain is a very interesting technology, but not just because it enables cryptocurrencies. The application of blockchain technology is much broader than that.
One way to invest in the future of blockchain technology is to look for companies that use it to achieve increased efficiency in their operations. For example, DocuSign (NASDAQ: DOCU), the market leader in e-signature technology, has been using blockchain technology to enable its business since 2015. Amazon (NASDAQ: AMZN) provides a platform called Amazon Managed Blockchain that allows customers to set up their own blockchain networks. As more companies adopt blockchain technology, Amazon will be well-positioned to capture that business.
You can also benefit by investing in companies that are essential to maintaining the cryptocurrency world. For example, the Bitcoin ecosystem relies on computers with powerful graphics processing units (GPUs) to enable mining. Who is the world’s premier GPU producer? Nvidia (NASDAQ: NVDA). This approach is akin to the people during California’s goldrush days who made their fortune selling picks, shovels and blue jeans to the miners.
Of course, if you are really more interested in riding the wave with cryptocurrencies, you can do that directly with Bitcoin, Ethereum, or any of the other cryptocurrencies. My only advice is to keep your position small, put it in an IRA (Roth is best, if you can find a custodian who will hold it for you), and please, don’t call it an investment.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite z202, Monterey, CA 93940 or email them to: firstname.lastname@example.org