THE LATEST NEWS ON CRYPTO

With these latest SEC regulation changes, you can now buy ETFs for cryptocurrencies.  This means that it will be as easy to buy bitcoin as it is to buy a mutual fund or an individual stock.  These ETFs will trade on the major exchanges.

If you know me, you won’t be surprised to hear me say that I don’t believe this is a good thing for most investors.  This is great news for the speculators and there is a role for speculators in our economy, but speculating is a dangerous game to play for ordinary investors.

Bitcoin and the other cryptocurrencies are highly speculative and highly volatile investments.  You get a sense of the volatility in this price chart of bitcoin. 

Bitcoin and the other crypto options are new forms of currency that trade on the new blockchain technology.  For simplicity, I will focus mainly on bitcoin in this post as it is the biggest cryptocurrency. The blockchain technology is very powerful and includes many new trading innovations that can improve the efficiency of trading anything.

As an investment, It is best to think of bitcoin and the other cryptocurrencies as commodities and not currencies.  They behave like commodities whose prices are mainly driven by supply and demand factors. Commodity prices are much more volatile than traditional currencies like the dollar or the euro. 

The crypto enthusiasts believe that this is a seismic shift in how we are going to handle money in the future and a bit like the emergence of the internet.  I understand their enthusiasm, but I have no idea what the future for cryptocurrencies look like.  The introduction of these new ETFs has and will increase the demand for cryptocurrencies which has resulted in a pretty big increase in their prices in the last couple of months.

Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular with those who use it to transfer large sums of money for illicit and illegal activities.

The supply side of the cryptocurrency equation gets a little murkier. Bitcoin will have a fixed number of coins minted and the supply will stop increasing in 2140.  The number of new bitcoins introduced gets cut in half every four years.  Limited supply is one of the main attractions of bitcoin to speculators.   

There is a lot of competition in the crypto space now.  Bitcoin used to make up over 80% of the market and now it only represents about 50% of the crypto market. There are now hundreds of other tokens vying for investment dollars today.

Let’s compare bitcoin as an investment to my favorite investment, stocks. 

When you own one stock or hundreds of stocks in an ETF, you own a share of the profits that those companies produce.  On a simplistic level, when the profits of the companies increase, the price of the stock increases and the opposite occurs when the profits decrease.  We know that other things influence the price of stocks in the short-term but in the long-term the biggest factor is profits.

If you are like me and you believe the long-term profit growth of the companies in index funds representing the S&P 500 or the Nasdaq, for example, you can be very confident that those stock prices will be higher in the future. 

Cryptocurrencies don’t produce any sales or profits on their own.  As a currency, they facilitate sales but there are no income statements to evaluate for bitcoin. 

Buying bitcoin is gambling and not investing.  There is no consistency or predictability of bitcoin as an investment.  And nobody understands why bitcoin goes up or down in value.  Clearly the price of bitcoin is a function of supply and demand, but what drives the demand side of the equation other than people betting on a future dominated by crypto?  Nobody really knows. What if more countries introduce regulations to limit the use of cryptocurrencies?  It is believed that China moving away from bitcoin in 2021 led to the big decline in crypto prices. 

When you truly understand your investments, you understand the risks associated with those investments.  Very few investments come without any risk.  Understanding the strengths and weaknesses of any investment is the key.  S&P 500 Index funds are great investments but owning one of these funds does subject you to the irrational and dramatic ups and downs of the stock market.  Knowing that allows you to be more patient during periods of stock market volatility because the stock market always goes up in the long run.

If you have some “fun” money that you can afford to lose and the idea of speculating on bitcoin appeals to you, go right ahead.  But you should not include bitcoin in your retirement investments.    

Happy Investing,

Phil

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