Eric Tyson - Investing For Dummies

As its promoters have talked up its usefulness and dizzying rise, many people who have Bitcoins continue to hold onto them in the hopes that the price will keep rising. People don’t hoard real currencies with similar pie-in-the-sky hopes for large investment returns.

Online Bitcoin transactions can be done anonymously, and they can’t be contested, disputed, or reversed. So, if you buy something using Bitcoin (or most other cryptocurrencies) and have a problem with the item you bought, that’s too bad — you have no recourse unlike, for example, a purchase made on your credit card. The clandestine nature of cryptocurrencies makes them attractive to folks trying to hide money or engaged in illegal activities (criminals, drug dealers, and so on).

As of September 2020, about $370 billion is tied up in these cryptocurrencies (down substantially from more than $830 billion in early 2018), according to CoinMarketCap.com, which now tracks more than 5,200 cryptocurrencies. This parallels what has happened to Bitcoin, which peaked in value near $20,000 per coin in early 2018 and was recently trading around $11,000.

So, what is a given cryptocurrency like Bitcoin worth? Cryptocurrencies have no inherent value. Contrast that with gold. Not only has gold had a long history of being used as a medium of exchange (currency), gold has commercial and industrial uses. Furthermore, gold costs real money to mine out of the ground, which provides a floor of support under the price of gold in the range of $1,300 per ounce, not far below the recent price of gold at about $1,950 per ounce. (Bitcoin does have a made-up mining process whereby you need special computer equipment and end up using a bunch of electricity to solve complex math problems.)

The supply of Bitcoin is currently artificially limited. And Bitcoin is hardly unique — it’s one of thousands of cryptocurrencies. So, if another cryptocurrency or two or three is easier to use online and perceived as attractive (in part because it’s far less expensive), Bitcoin will likely collapse in value even more than it already has in recent years.

Even though Bitcoin has been the most popular cryptocurrency in recent years, few merchants actually accept it. And, to add insult to injury, Bitcoin users get whacked with unfavorable conversion rates that add greatly to the effective price of items bought with Bitcoin.

I can’t tell you what will happen to Bitcoin’s price or that of any other cryptocurrency next month, next year, or next decade. But I can tell that it has virtually no inherent value as a digital currency, so those paying thousands of dollars for a Bitcoin will probably eventually be disappointed. With more than 6,600 of these cryptocurrencies, the field keeps growing as creators hope to get in on the ground floor of the next cryptocurrency, which they hope will soar in value.

Recently, a number of online articles and videos (from people with an agenda) suggest that Bitcoin will replace gold because it has attributes and qualities that are as good as or better than gold. For those putting money into cryptocurrencies like Bitcoin, this is an appealing marketing pitch with the total market value of gold around $8 trillion and the value of Bitcoin about $210 billion. Bitcoin and cryptocurrency advocates reason that if just a few percent of the money that’s in gold moves into Bitcoin and other cryptocurrencies, it could move their price quite a bit higher.

Gold sometimes enjoys multi-year periods with generous returns; over the long term, it has produced returns just comparable to the rate of inflation. Gold isn’t a place to put your money for long-term growth, as you can attain in stocks and real estate, but it does seem to do a decent job with protecting the purchasing power of your money over the long haul.

Following are the common arguments that Bitcoin advocates use to promote it in comparison to gold:

Just like gold, Bitcoin is scarce, highly divisible, can’t be counterfeit, and is very portable. Bitcoin is one of thousands of made-up cryptocurrencies. There is nothing scarce nor unique about all of them as a group.

Bitcoin has real utility, unlike gold. Bitcoin proponents derisively argue that gold is maybe good for jewelry and some electronics. Gold has real commercial uses and people also enjoy its durability and beauty in jewelry. Bitcoin offers none of those benefits and uses as it is a made-up thing that exists online only.

Bitcoin enables you to move value all around the world instantaneously and is basically free. This is the most preposterous and demonstrably false statement of all. It takes time and effort to transfer Bitcoin, and it’s far from widely accepted. Furthermore, there are significant transaction costs associated with its use given the spread between the buy and sell price at any given moment.

Over time, Bitcoin will become more stable than gold and grow at a much higher rate than gold. While the extraordinary volatility that Bitcoin prices have had should lessen over time, it’s highly unlikely it will ever be as stable in price as the price of gold is. There’s also no legitimate reason to expect Bitcoin, or the thousands of other online made-up cryptocurrencies, to grow in value faster than the price of gold or to grow in value at all. (Interestingly, during the COVID-19 crisis in early 2020, the stock market, Bitcoin and other cryptocurrencies dropped in value, while gold rose.)

Bitcoin is a unique cryptocurrency as it enjoys a strong brand name, amazing community, and is finite in supply. There are thousands of cryptocurrencies, and Bitcoin is far from unique. It does have relatively strong name-brand recognition and certainly devoted followers and believers (who are, of course, talking up something they have put their own money into). While it is supposed to have an upper limit placed on its eventual supply, there’s no forever guarantee of that being honored. Also, there are thousands of other cryptocurrencies that are close substitutes.

The term collectibles is a catchall category for antiques, art, autographs, baseball cards, clocks, coins, comic books, dolls, gems, photographs, rare books, rugs, stamps, vintage wine, writing utensils, and a whole host of other items.

Although connoisseurs of fine art, antiques, and vintage wine wouldn’t like to compare their pastime with buying old playing cards or chamber pots, the bottom line is that collectibles are all objects with little intrinsic value. Wine is just a bunch of old mushed-up grapes. A painting is simply a canvas and some paint that at retail would set you back a few bucks. Stamps are small pieces of paper, usually less than an inch square. What about baseball cards? Heck, my childhood friends and I used to stick these between our bike wheel spokes!

I’m not trying to diminish contributions that artists and others make to the world’s culture. And I know that some people place a high value on some of these collectibles. But true investments that can make your money grow, such as stocks, real estate, or a small business, are assets that can produce income and profits. Collectibles have little intrinsic value and are thus fully exposed to the whims and speculations of buyers and sellers. (Of course, as history has shown and as I discuss elsewhere in this book, the prices of particular stocks, real estate, and businesses can be subject to the whims and speculations of buyers and sellers, especially in the short term. Over the longer term, however, market prices return to reality and sensible valuations.)

Here are some other major problems with collectibles:

Markups are huge. The spread between the price that a dealer pays for an object and the price he then sells the same object for is often around 100 percent. Sometimes the difference is even greater, particularly if a dealer is the second or third middleman in the chain of purchase. So at a minimum, your purchase must typically double in value just to get you back to even. And a value may not double for 10 to 20 years or more!