Bitcoin Investment: Bogleheads' Perspective On Crypto

Bitcoin is a virtual currency or digital payment system with no intermediaries or banks. It was released as open-source software in 2009 by a person or group using the alias Satoshi Nakamoto. Bitcoin is strongly not recommended for use in an investment portfolio by Bogleheads, who are passive investors following Jack Bogle's message to diversify with low-cost index funds and let compounding grow wealth. However, some Bogleheads are considering a long-term investment in cryptocurrency, viewing it as an alternative investment and a way to further diversify their portfolio.

Bitcoin is a risky investment

Bitcoin is also susceptible to government regulation, as it is not legal tender. It is also vulnerable to security concerns, such as fraud, technical glitches, and hacking. It is a new and developing currency with no established track record of credibility and trust.

Bitcoin payments are irreversible, and due to the anonymity it offers, it has been used for illegal activities. As a result, law enforcement agencies could shut down or restrict the use of Bitcoin, limiting or shutting off the ability to use or trade bitcoins.

Investing in Bitcoin should be considered similar to the gambling portion of your portfolio. Only invest in Bitcoin if you can afford a total loss.

Crypto is volatile

Cryptocurrency markets are highly volatile. In traditional financial markets, a significant price swing is considered a major event. In the world of cryptocurrency, however, such price movements are a regular occurrence.

There are several reasons why crypto is more volatile than traditional financial markets. Crypto is a relatively new asset class, and investors are still finding their feet. Bitcoin, the oldest cryptocurrency, has only been around for 15 years. This means that prices will fluctuate more as new participants continue to enter the market, trying to establish a consensus on the fair value of digital assets.

The crypto market is also much smaller than traditional financial markets, with a total market cap that is just a fraction of the total U.S. stock market. This means there is less liquidity and depth to accommodate larger traders. The distribution between supply and demand also plays a major role in the volatility of crypto prices. The limited supply of certain assets, such as Bitcoin, often creates conditions where sudden increases in demand can put even greater upward pressure on prices, increasing volatility.

Investor Sentiment

Crypto markets are heavily influenced by investor sentiment. The immaturity of the overall crypto market means that positive or negative views can spread like a contagion. This is due to the psychology of the crypto investor, who is typically an individual/retail investor who is less informed and more impressionable than more seasoned traditional investors. For example, when Tesla bought Bitcoin in January 2021, the markets reacted with exuberance and over-optimism, buying up BTC, which ignited a price rally to an all-time high of around $69,000 in the months that followed.

Regulation

The lack of clear regulation in the crypto market also contributes to its volatility. Unlike traditional financial markets, the crypto market is not comprehensively or clearly regulated by any government bodies globally. The unique digital and decentralised characteristics of cryptocurrencies present major challenges for regulators. Without regulation, there are no circuit breakers like in traditional markets. Circuit breakers are interventions by exchanges that dampen volatility caused by panic selling or destructive events. With no training wheels or guard rails in place, crypto's free-market dynamics are susceptible to high volatility.

The crypto market is still an infant asset class; it is relatively underdeveloped, immature, and highly volatile. This volatility is a feature and a right of passage for crypto's high-growth phase, presenting both challenges and opportunities for traders and investors alike. As the market matures, many of the factors that drive volatility will subside, and volatility will likely decrease.

Crypto is not a long-term investment

Regulatory Risk

Many governments have yet to fully regulate the use and trade of cryptocurrencies, which can make it difficult to know what to expect in terms of legal and financial risks. There is even a possibility that cryptocurrencies could be made illegal, as has happened in China. This uncertainty creates a significant regulatory risk for crypto as a long-term investment.

Volatility

The crypto market is known for its extreme volatility, with wild swings in prices. This makes it challenging to predict the value of cryptocurrencies over the long term and increases the risk of losses for investors.

Loss of Capital

The elevated volatility of the crypto market increases the risk of significant losses for investors. For example, Bitcoin has experienced drops of more than 50% in a single day. This high level of risk makes crypto unsuitable as a long-term investment for many people.

Lack of Mainstream Adoption

Despite its growing popularity, crypto still has limited mainstream adoption. Very few cryptocurrencies are widely accepted for the purchase of goods and services. As of late 2020, only about 2,300 US businesses accepted cryptocurrency for payments, which is a small fraction of the total number of businesses in the country. This lack of widespread adoption limits the potential for crypto as a long-term investment.

Security Concerns

The decentralized nature of crypto also makes it vulnerable to security risks, such as hacks and fraud. Cryptocurrency exchanges and digital wallets can be targeted by hackers, and there is a risk of losing access to your crypto if your private key is lost or stolen. These security concerns are a significant barrier to crypto as a long-term investment.

Competition and Technological Advancements

The crypto space is highly competitive, with thousands of blockchain projects vying for market share. It is difficult to predict which projects will succeed in the long term, and there is a high failure rate among crypto ventures. Additionally, the technology is still evolving, and new advancements could render current cryptocurrencies obsolete. This uncertainty makes it challenging to identify cryptocurrencies that will be viable long-term investments.

Crypto is not a serious investment

The case against investing in crypto is strong. Here are some of the main reasons why crypto is not a serious investment:

• It is not a long-term investment: Crypto is an unproductive asset without internal cash flow, so its price is driven by short-term speculation, FOMO, and Greater Fool mechanics, ultimately forming a speculative bubble.
• It is unreliable: Crypto has not proven to be a reliable hedge against economic downturns or inflation. For example, in 2022, Bitcoin was down more than 65% while core inflation was up more than 7% year-over-year.
• It is not a safe investment: Crypto exchanges are vulnerable to hacking and other criminal activity. There is also a risk of losing your private key if you use offline "cold storage".
• It is not a stable currency: Crypto is extremely volatile, with wild swings in price. This makes it unsuitable as a currency, as it is not a stable store of value.
• It has failed as a currency: Transactions are slow and expensive, and the transaction volume is inherently unscalable. Usability for consumers is generally terrible.
• It is not widely accepted: Despite the hype, crypto has very limited real-world adoption. In 2020, it was estimated that only around 2,300 U.S. businesses accepted cryptocurrency for payments, out of more than 35 million businesses in the country.
• It is not regulated: Crypto is an unregulated asset, which means there is little consumer protection if something goes wrong. The lack of regulation also makes it attractive to criminal organisations.
• It is not easy to value: There is no tangible way to value crypto as an asset. There is no underlying data, such as income statements or balance sheets, that investors can use to make informed decisions.
• It is not a good hedge against inflation: Crypto has failed as a hedge against inflation. Despite the claims of its proponents, history suggests that crypto will not be able to match lofty expectations.
• It is not without opportunity costs: Investing in crypto means missing out on the broader market. For example, an investment in the S&P 500 over the same period as someone's bitcoin investment would have yielded better results with less volatility.

Crypto is a scam

Cryptocurrency is a scam. It is a full-on fraud, a Ponzi scheme, and a negative-sum game. The enormous waste of resources renders the whole enterprise a poor and costly form of currency and a ludicrous long-term investment.

Cryptocurrency is not backed by any government and is not legal tender. It is not a productive asset, and its price is driven by speculation, FOMO, and the "greater fool theory" of investing. The high volatility of cryptocurrencies means that an investment worth thousands today might be worth only hundreds tomorrow, and there is no guarantee that the value will increase again.

Cryptocurrency is also associated with illegal activity, including drug dealing, money laundering, and other forms of illegal commerce. Law enforcement agencies could shut down or restrict the use of platforms and exchanges, limiting or shutting off the ability to use or trade cryptocurrencies.

Additionally, there are numerous scams and fraudulent schemes within the cryptocurrency space, such as phishing and social engineering attacks, pump-and-dump schemes, and blockchain-wide attacks.

Cryptocurrency exchanges and service providers also take a significant cut of any gains, further reducing the potential profits for investors.

The high energy consumption and carbon footprint associated with cryptocurrency mining are also significant concerns. The electricity used in mining Bitcoin and other cryptocurrencies is approaching 1% of global usage, greater than the total electricity consumption of many smaller developed nations.

In conclusion, cryptocurrency is a scam that preys on individuals with little financial literacy, and it is a poor investment choice that offers little to no real-world benefits.

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