So here's the thing about Bitcoin: Yah, it had a big run, and yah, its sharp slide this week might look like a buying opportunity, but really, what are you actually buying? And is it worth it?
For those not in the know, Bitcoin is the most famous cryptocurrency-basically, funny money for cyberspace. It isn't backed by governments or created by central banks. Instead, a dude or dudette going by the pseudonym Satoshi Nakamoto wrote a computer program that basically spits out one Bitcoin at a predetermined rate, and capped the amount available. To get Bitcoins, cyber whippersnappers would fire up mega-powerful computers and run an algorithm to "mine" them, with the winning miner getting whichever Bitcoin was up for grabs based on Nakamoto-san's program. Once in possession of Bitcoins, you can either hoard them-a popular choice-or spend them wherever they are accepted. While that includes an array of stores and websites, Bitcoin's real allure is its untraceability-transactions are logged on this thing called "blockchain," and they don't include details like who exchanged them, where or for what. Hence, Bitcoin has become the currency of choice on the Dark Web, which is where, according to media reports, unsavory folks go to do unsavory things. (DISCLOSURE: WE DON'T RECOMMEND YOU PARTICIPATE IN UNSAVORY THINGS.)
Now, purportedly unsavory folks' conducting transactions in an untraceable currency wouldn't be a noteworthy story for a finance website, but for this wrinkle: The price of one Bitcoin rose from about $10 in 2012 to $2,871 last Friday.[i] Even as recently as March 31, it was at only $1,074. A 167% gain in just two months and nine days? Yowza. But here's another yowza: Since then, in just four days, it tumbled near $2,000 in intraday trading. The boom giveth, the afterboom taketh away.
So is it a bubble bursting, or a buying opportunity? By Friday morning, Bitcoin was back over $2,400, suggesting plenty of folks think it's the latter.[ii] Not my place to say whether they're right or not, as this isn't my area of expertise. But I will say this: The technical definition of a bubble is a runaway price increase alongside fast-rising supply, with no discernible, fundamental logic.
Bitcoin's supply may be limited, but Bitcoin is not the only cryptocurrency. There are 752 others, at last count, and Bitcoin's market share has plunged since 2013, when Bloomberg pegged it at 95.8%. As of June, it's down to about 39% of total cryptocurrency market cap. The next-closest contender, Ethereum, jumped from 11% of the market last year to nearly 32%. Another, Ripple, is up from 1.8% last year to 8.7%.[iii]
If Bitcoin has lost market share even as its total market cap has soared, that is a sign that it is not the only cryptocurrency with a soaring price. Ethereum opened the year at $8.18. On June 13, it closed at $395.13. Ripple is up from $0.006 in January to $0.38 in mid-May (it has since eased to $0.26). The fourth-largest, NEM, ran from $0.0037 at 2017's start to $0.28 on May 22 (now down to $0.19). If you go to CoinMarketCap.com and look up pretty much any of the top 50 or so cryptocurrencies, you'll see a similar exponential rise this spring. Throughout the cryptocurrency world, supply and prices are up massively.
Here optimists might say, "Bitcoin is going to win the race, so it's still worth it." But I think it's important to consider what "winning the race" actually means. In this case, it seems to mean "being the surviving cryptocurrency that everyone eventually uses." Well, if it does win, will that make it a viable investment? For something to be a widely used means of exchange for goods and services, it generally needs to have a stable value and be plentiful. There is a reason no one ever marches into Trader Joe's and tries to pay for their Two Buck Chuck with a bar of gold. Its price is not stable or predictable.[iv] And there is a reason pure cash is not a long-term growth investment vehicle. For Bitcoin to "make it" as a currency, there is a good chance its returns would have to be much more cash-like. Which seems like a weird thing to speculate on.
Much of Bitcoin's allure stems from its untraceability and the blockchain, making it a potential alternative for financing in today's new, um, "green" economy-which is where everyone's favorite unofficial North Korean ambassador comes in. Dennis Rodman's current trip to North Korea was funded by-and appears to be a promotion for-a cryptocurrency called PotCoin, which is "a digital currency for the cannabis industry." While marijuana is now legal in a few states, supposedly creating once-in-a-lifetime ground-floor investment opportunities, it is illegal at the federal level, making banks shy away from working with cannabis merchants. Hence, PotCoin, which aims to fill the void. But: What if federal legalization happens? There is no way to be sure, but if it does, two big developments could pretty easily follow: Big Tobacco could use its massive infrastructure and agriculture might to become Big Pot, and Big Finance could fund Big Pot's investments in this new cash crop. Obsolete PotCoin would go up in smoke.[v]
Obviously that's a special case, but it speaks to the broader point of the risks in investing in an e-asset with such a, well, hazy future. Even if other cryptocurrencies-Bitcoin or otherwise-have staying power, you're buying either something's potential to have long-term cash-like returns, or you're buying a volatile commodity. If that's your jam, fine, but keep in mind that commodities tend to swing high and low in big cycles over time, making investment success dependent on your market-timing skills. Bitcoin has already demonstrated that in spades. I've heard a lot of "aw man, if only I bought Bitcoin two years ago, I'd be rolling in it now!" over the past few weeks. But not many people actually wanted it two years ago, when the price was in the toilet after crashing from 2013's big run. Market-timing is hard.
We aren't anti-cryptocurrency around here, and if you want to try one out, it's your call. But if you're investing for long-term growth, with goals that require market-like returns over the next couple decades or more, in my view there are far better, less speculative options.
If you would like to contact the editors responsible for this article, please click here.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.