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What Bitcoin is NOT

I am increasingly fielding questions from clients about whether or not it would be a good idea to add Bitcoin or some other type of Cryptocurrency to their portfolios. Of course, adding any investment is always a question of appropriateness related to goals, needs, and risk tolerance. Still, no one wants to miss out on a good opportunity, so it seems fitting that I provide information that will help investors to make more educated selections.

In a recent Goldman Sachs newsletter, an interview with Nouriel Roubini, professor of economics at New York University’s Stern School of Business and the co-founder of RGE Monitor, an innovative economic and geo-strategic information service, was highlighted. (You can also view the full 27m interview here.) Now I don’t claim to be a crypto expert, and I’m not even sure if Roubini is, but the points he makes seem very reasonable to me. My biggest red flag in regards to Bitcoin and other cryptocurrencies is their extreme volatility (see the chart below). Unless this changes, I will likely never integrate this “asset class” into my portfolios. It’s very hard to justify “investing” in something that has repeatedly dropped in value by huge amounts over the last decade without a whole lot of rhyme or reason influencing these massive swings.

Here’s a few takeaways from the interview which reflect the title of this post . . . What Bitcoin is NOT:

  • Bitcoin is not really a true currency. Currencies are a unit of accounting – nothing is priced in Bitcoin. Logistically, Bitcoin cannot be used as a standard mode of payment. Compared to credit cards that handle many tens of 1000’s of transactions per second, Bitcoin can only manage around 7 per second. As transactions increase, Bitcoin processing tends to get even slower. Unlike most true currencies, it’s an unstable store of value for goods and services because price volatility can cancel out all of a company’s profits overnight.
  • Bitcoin is not an asset. This has always been my biggest issue with cryptocurrency –there’s no means to determine value. Assets usually have some sort of utility or cash flow like dividends from stocks or rent payments from a property. Bonds make a coupon payment; loans provide interest, and real estate provides housing services that can all be measured. Commodities like oil or some precious metals can be put to immediate use and have historically maintained relatively stable value. Cryptocurrencies have none of these features, therefore it’s very difficult to make an argument that they are an actual asset class. The difficulty with valuations and pricing bubbles is summarized well by Nouriel:

“Bitcoin and other cryptocurrencies have no income or utility, so there’s just no way to arrive at a fundamental value. A bubble occurs when the price of something is way above its fundamental value. But we can’t even determine the fundamental value of these cryptocurrencies, and yet their prices have run up dramatically. In that sense, this looks like a bubble to me.”

  • Bitcoin is not a Socially Responsible Investment. Look for our next post to find out why!

Jack Schniepp is a CERTIFIED FINANCIAL PLANNER™ (CFP®, ChFC®), financial advisor and the owner of Cascade Financial Strategies. CFS is a registered investment advisor licensed in Oregon, California, Washington, Arizona and Idaho. They specialize in socially responsible investing which integrates environmental, social, and corporate governance (ESG) criteria into portfolio construction.