A dated commodity will never have a positive expected return – Bitcoin does not have a positive expected return over the long run.
An investment into cryptocurrency and Bitcoin can prove to be profitable but it’s akin to buying a lottery ticket rather than buying a proven asset which builds wealth long term. Yes, if you’re a cryptocurrency investor that first sentence is probably going to make you hate me. But it’s largely true. There are still pros to cryptocurrency and Bitcoin at large but they remain niche and relatively small. And as an investment, they should hold as much weight in your portfolio as you’d normally allocate towards gold or other commodity investments or towards stock picks – which for me personally is about 1% of my overall investment portfolio.
You can always make two choices when it comes to financial decisions, good financial decisions and bad financial decisions. The issue is trying to separate out the decisions from the outcome. If a good financial decision has a bad outcome, that is still a good financial decision – this would be something like, investing in a S&P500 or global index fund and then the stock market crashes nearly 50% like it did in 2008. You made a good financial decision but it had a bad, unpredictable outcome. That was a sound, evidenced based financial decision on your part to gain wealth over the long run, and if you held onto those index funds and continued to put money into it, you would have eventually gotten back to even – assuming the US/World economy continued to grow.
The issue cryptocurrency has, like with all commodities, is that due to the nature of being a non-productive asset, it cannot create wealth over the long term. You’re probably saying “But Kendon! It’s created so much wealth so far for the early adopters!” And yes! You’re right, it has! However, the issue becomes what happens if simply, Bitcoin and cryptocurrency stop growing, in fact, let’s say the world stop growing tomorrow. Under this hypothetical world where markets transact but there’s no extra people to sell items to or room for growth, only stocks and bonds would continue to produce money as companies could then pay off the debt they issued (bonds) and companies would stop attempting to grow into new markets and they’d issue dividends with their extra cash or do share buy backs with their extra cash since they have a reasonability to shareholders to distribute profits. And there would still be profits under this hypothetical world as markets are transacting but companies remain stagnate without growth opportunities.
However, with cryptocurrency it’s a different beast. Let’s say in our hypothetical world, cryptocurrency has reached all the people it’s going to reach, every country has adopted it as legal tender, everyone already has an opinion about it and has either decided to use it or not. The answer for Bitcoin is… now what? How does it grow? If no one else is buying in? If there’s a constant level of demand and a constant level of supply, then the price will remain the same (lets also assume that it’s after all Bitcoin’s have been created so there’s no extra supply being created). It simply would either fall out of favor because of all the cons associated with using it or it would simply remain a stagnate commodity much like gold. Unless there’s a dramatic shift in monetary policy and investment theses within the next couple of decades. Bitcoin would remain stagnate as a non-productive asset.
However, lets add in one extra factor into our Bitcoin world that we were not considering before – miners. Without new buyers Bitcoin has a negative expected value because miners have a constant selling pressure, as their fixed and variable costs (like rent and energy costs) are priced in dollars (or the Chinese Renminbi). Miners would consistently be selling into a demand that has already reached its peak. This means that month after month there is constant selling pressure. And if we assume there’s no extra demand coming from anywhere, with selling pressure every month, Bitcoin would slowly lose value until it reaches a point of equilibrium where mining fees cover miner’s expenses – where that is, we could model it out but last year in 2020 it was roughly about $14,000, something far less than the value we currently see from Bitcoin. In our hypothetical world, Bitcoin has either a negative expected value, or a net zero expected value.
Except our hypothetical world really isn’t all that hypothetical, assuming Bitcoin ever exists for a long enough period of time, it’s completely reasonable to assume, it will reach our “hypothetical example.” The only difference we have today is that people continue to put their money into Bitcoin and thus, it produces a positive return for a while. And this will continue until it reaches our hypothetical world – meaning, it’s largely an MLM, the early adopters get rich, but the older adopters make less and less over time, to where eventually, people are left with a negative expected value asset and being left bag holders, unwittingly.
Is there where you want to be? Maybe, but maybe you think you can get out before that happens which could also be true. But that is why at the moment, I believe Bitcoin is largely a lottery ticket as the lottery also has a negative expected return over the long run, except it has one huge exciting benefit, a large payout.
Regarding my own investments regarding Bitcoin/cryptocurrency:
Given my view of Bitcoin and most “currencies” which extent to all PoW consensus methods coins in the cryptocurrency world, you might ask why I bother investing in cryptocurrency at all. I’ve stated elsewhere on my website that I invest about 1% of my assets into it. Well, it’s mostly because the possible payout of the MLM scheme in the next “bull market cycle” (assuming Tether doesn’t go bust before then), could be worth the risk. I know full well I’m exposing myself and my assets to a large number of unknowable variables, but the payoff could be worth it.
However, I do not expect any readers to invest, and I would cation any reader against investing in cryptocurrency of any sort, primarily those PoW coins like BTC or LTC. However, if you want to gamble with your money, feel free. And at least you can control your losses in cryptocurrency, unlike an actual lottery (use stop losses). Regardless, you should have the vast majority of your wealth and savings, not in cryptocurrency, but in proven, long term investments for your future.
If you wish to grow your wealth long term, I’d recommend investing with using m1 finance (you’ll get an extra $30 dollars with the referral link) it’s a great platform for long term investing. And finally, if you’re looking for further ways to enhance returns check out our high risk and ultra-high risk newsletter. If you’re a first-time investor, try checking out the easiest portfolios out there. Or if you’re looking to get out of debt, try getting motivated with “The power of Budgeting .”
However, if you’re hell bent on getting into cryptocurrency, at least give yourself an extra $10 dollars with this referral link. It’s free money after all.
Note: the m1 referral link gives the reader $30 extra dollars to invest with if they choose to fund a taxable with $100 dollars within 30 days of opening the account or fund an IRA with $500 within 30 days of opening an account. The author of this article will receive a $10 dollar compensation as a result of the reader opening an account. The compensation for both parties occurs 30 days after the deposit occurs and assumes the full amount is retained in the account until the end of 30 days from the deposit day. YNAB offers a free month of use this will be given to both the author and reader if the reader subscribes after the free trial period and buys a month of subscription. The author uses both Coinbase and M1 Finance and both links are affiliate links. Coinbase referral link gives the reader an extra $10 if they purchase $100 worth of Bitcoin.
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