Similar to politics, investing in cryptocurrency can be a controversial topic with passion and unwavering certainty on both sides of the issue. The more you research and understand an investment idea, the more you recognize the risks associated with that investment. So, let’s dig into Bitcoin!
Why Everyone Should Own Bitcoin
The reasons why you should own, or invest, in Bitcoin have changed over time. The original story was extreme; “you should own Bitcoin because the US dollar will be worthless in the future due to unlimited printing (money supply).” Since Bitcoin is limited in supply, the value will continue to increase as demand increases while providing currency stability. Some first adaptors viewed it as the only currency accepted by merchants in the future. This story has refined itself over time. Now supporters of digital currency view it as an alternative investment, similar to gold. Some refer to it as digital gold, highlighting it as a non-correlated investment to stocks and an inflation hedge.
The refined story is far easier to accept. No matter your political view, everyone can agree with near certainty that the US government has no plans to stop printing money. However, suppose Bitcoin gains momentum as an accepted form of digital payment by most retailers, and the US dollar begins to devalue. In that case, we could see a stable currency with longevity in our economy. If that is the case, maybe we should consider buying now while the currency is still in an infancy stage.
Why No One Should Own Bitcoin
- It’s not tangible. Unlike gold, you cannot hold it or store it in your safe at home.
- It’s new. This digital currency started in 2008 but was unknown to most investors until 2017.
- It’s considered less secure than other investments. If your account gets hacked, your value could disappear.
- The pricing is speculative. Unlike a stock, you cannot value the asset based on revenue or other income generated.
What Does the Future Hold
Today’s arguments of why you should NOT own Bitcoin could slowly disappear over time. As our lives become more digital, the acceptance of owning an asset online is becoming more normal every day. Many millennials have never walked into a bank and don’t carry cash. Similar to Bitcoin, a banking app on their phone holds and transfers money for them. Not a teller. The longer the currency is around and discussed, the more it gains stability. The technology around security and fraud prevention should increase as more institutional money is infused into the cryptocurrency asset class.
Bitcoin will never generate revenue, but neither will gold. As money is passed from one generation to another, the children of Gold Bugs could become Bitcoin Bugs with the same anti-money printing mentality as their parents, but with a different way of investing.
Enough is Enough! So Should I Buy Bitcoin or Not?!?!
When I weigh the pros and cons, the risk level of Bitcoin reminds me of a micro-cap stock or a start-up company gaining steam. Using this example, is there exciting company momentum that could triple your investment in the years to come? Absolutely! Is there a chance it will not be around 10-20 years from now? Indeed there is!
Every investment has a different level of risk and potential reward. As an investor, once you understand the risk level, you can determine its place in your portfolio more comfortably and confidently.
I tell my clients interested in Bitcoin that it should make up no more than 5% of your portfolio. As the asset class matures over time, our thoughts may change, but the current risk does not justify making up a large, or even a moderate, portion of one’s portfolio. As long as our clients have a well-diversified portfolio and principal loss will not affect future standards of living, then it’s okay to take a little extra risk in a start-up company or cryptocurrency. Plus, for some, it could be a FOMO (fear of missing out) psychological relief as well!
If you understand the risk of any investment, then you can determine its placement (or not) in your portfolio. Bitcoin should be considered a higher than average risk investment. If you plan to add to your portfolio, we suggest proceeding with caution as a smaller than normal allocation. You will find strong opinions on both sides relating to this investment, but no one has a crystal ball.
Evan Bedel is the Director of Finance and Strategy with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Evan at firstname.lastname@example.org.