"I don't trust investing," a friend said once. I asked her why. "Isn't it kind of like playing the lottery?" she asked. Investing is intimidating enough for people as it is. Toss in something as unpredictable as cryptocurrency, and people give up on it altogether. It reinforces the notion that investing is like buying a bunch of scratchcards.
"I certainly would never ever recommend Bitcoin," said Norm Mindel, a Certified Financial Planner, co-managing partner of Forum Financial Management, and author of Wealth Management in the New Economy. "When something bizarre like this comes out, if a client came in and said, 'I want to buy this,' I would say OK, if you want to do it, take a small amount of your portfolio and go buy it. But leave me out of it."
The Difference Between Bitcoin and Long-Term Investing
There's a big difference between the kind of passive, long-term investing that's required to build a nest egg so you can retire someday and investing in something like cryptocurrency, which is well, cryptic. The thing about cryptocurrency, Mindel says, is that we don't understand it. While there's risk involved with any kind of investment, that risk is much greater when there isn't much data to draw from.
The other issue is that unlike investing in a company that turns a profit, or a rental property that turns a profit, or anything else that turns a profit, commodities such as cryptocurrency have no inherent value.
"The way I describe investment is when you invest in the stock market, what are you really buying? You're buying the present value of the dividends of the earning of capital gains," Mindel explained. "So when people say, 'I don't understand the stock market, the stock market is a gamble.' Well, it's got risk associated with it but there's something to quantify."
Cryptocurrency, on the other hand, is more of a gamble because there is no value to draw from except what someone else is willing to pay for it.
"When you deal with commodities, with cryptocurrencies maybe, you're relying on someone else to pay you a higher price. There's no inherent value in the commodity itself. There's no inherent value unless someone's willing to pay you more," Mindel said. Yes, maybe someone will be willing to pay you much, much more, but the trouble is, we just don't know. And that's dangerous.
How Bubbles Are Made
Of course, someone will inevitably pop in and say, "But hey, it worked for me," which keeps the bubble inflating. Guessing games and get rich quick schemes work sometimes, but more often than not, they're just a good way to lose all of your money. As boring as it may be, you generally can't go wrong with diversifying your investments in the broad stock market with the right mix of stocks and bonds. That's worked a hell of a lot better for most people in the long term than making a bet and getting lucky.
"You need something with data points and recommendations," Mindel explains. "That's what happens when you own a company. If you own all of Bitcoin there is no cash flow, there's only money based on whatever you do to create the new currency, which is beyond my understanding."
Passive investing might not be mysterious and sexy (like, not at all), but it's good enough for Warren Buffett, the world's greatest investor. Beyond the mystery of cryptocurrency, though, it's especially dangerous to bet on something that becomes a trend. That trend begins to inflate like a bubble, and bubbles are prone to burst (look at what happened with the Dotcom bubble for reference). And for what it's worth, Buffett has warned that Bitcoin is a bubble, too.
But what is a bubble, exactly?
"A bubble is when values get what you would call irrational," Mindel says. "The problem is, you don't know it's irrational, so the prices fall. What's in most people's recent memory is the housing bubble, prices just kept climbing and everyone was telling you a house is a great investment, you never lose money owning our home, you can't get this deal anymore, if everyone's buying into the feverish moment and it's only in retrospect, then we would say: there's no way those houses were worth that kind of money," Mindel explained.
Slow and Steady Wins the Race
While some people are already calling cryptocurrency a bubble, people eschew the warnings for the lure of getting rich quickly. I asked Mindel if it made sense to get it on the bubble right before it burst.
"I'm a horrible market timer. If you're making a decision because of timing, you're either very smart or very lucky," he said. "There's very few of those out there."
It's sort of the tortoise and the hare argument. Like any get rich quick scheme, you might get lucky, but it was that easy, we'd all be rich. When it comes to building wealth, slow and steady almost always wins the race. So if you hired a professional in charge of managing your wealth and they put your portfolio in Bitcoin, you should probably find a new professional.
Trends such as Bitcoin often enough scare people away from investing altogether. Many people already believe investing is like playing the lottery and so they never save beyond a traditional one per cent savings account. By the time retirement rolls around, there's just not enough. Bubbles like cryptocurrency confirm their fears.
"Look, if I had a client say, 'I'm either going to take my money to Vegas or invest in Bitcoin', I'd say go with cryptocurrency because you'll probably have better odds than Vegas," Mindel said. "But you have to approach it with that mentality."