Bitcoin has been on a tear lately. The cryptocurrency has rocketed from $636 to a record high of $5,750 over the past year, according to data from industry website CoinDesk. Should bitcoin be part of your retirement portfolio? People are actually asking this question. And it’s not just retirees either: everybody’s talking about the digital currency. I think that investing in bitcoin is just a passing fad that will undoubtedly end in pain for many people.
This trailing-twelve-month chart of Bitcoin illustrates just how fast it moved up:
Now to defend bitcoin a ‘bit’ and stay objective, I actually like the idea behind the currency. Bitcoin works in a similar manner as gold. Gold used to be used as a currency, instead of just a stored value asset like today. The supply of gold is limited and that supply increases only as fast as miners can dig it up from the ground. This is part of what gives gold value. Governments can’t simply increase the gold supply at the whims of their elected bureaucrats. This is one of the many problems with paper money; governments can print as much as they want. Too much printing will crush the value of your currency. This is where bitcoin comes in.
Bitcoin is designed to have limited supply increases because computers have to “mine” for bitcoin. The digital currency is designed to have no central authority and instead relies on open source blockchain. The value is determined by people’s perception of the value of a bitcoin. Since bitcoin is technically scarce, the price increases if many people are buying bitcoin. Classic supply demand relationship here. Bitcoin doesn’t generate a cash flow from the underlying business as there is none. Bitcoin doesn’t pay a dividend. There are no revenues. No earnings. Nothing at all – bitcoin is nothing except a construct of your mind.
People can get bitcoin by either buying it or mining it. Most people buy it of course. Maybe they bought 1 bitcoin for $636 last year and now that 1 bitcoin is worth over $5,000. That’s as real as it gets. You can actually buy $5,000 worth of merchandise while the price is high. And if you are sitting on gains like these, I’d recommend you buy as much physical merchandise you can with your bitcoin.
No investor in their right mind would put their hard-earned money in bitcoin. It’s pure speculation: you’re buying an “asset” that you’re hoping will increase because other people will eventually pay more for it. I think that’s the definition of speculation. It’s like the tulip-mania during the Dutch Golden Age. A passing fad that people will look back on and scratch their head. So no, there’s no place for bitcoin in your retirement portfolio. Not only that – bitcoin doesn’t belong in anyone’s portfolio. If you want to speculate though, knock yourself out.
I’ve never seen so much interest in a financial tool that very few people understand. I look at bitcoin as a tool to be used to buy things that you otherwise wouldn’t be able to purchase. You could trade in some of your dollars for bitcoin and immediately buy what you want. You may need bitcoin for whatever reason. The seller might not accept USD or maybe you’re in a foreign country where dollars are scarce and you need a currency in which to transact. That’s the acceptable way to use bitcoin. What’s not acceptable is thinking it’s some sort of investment. This is laughable at best. Have people gotten rich off of bitcoin? Yes. Will you? No.
Luckily, there are many investment choices in the marketplace. Not just stocks and bonds either. You can invest in alternative assets and I recommend everyone have a portion of their portfolio in alternatives. Your investments should generate some sort of cash flow from operations. Here are some different alternative investments that generate cash flow:
- Real Estate – Real estate is considered an alternative investment and there are various modalities for investing in real estate. You can buy a rental property and become a landlord or have someone manage the property. You could buy into a REIT, which provides with a high degree of liquidity. You could also invest in real estate through crowdfunding platforms.
- Options – Options are the right, but not the obligation, to buy an asset for a pre-determined price by a pre-determined date. You can buy or sell options. I sell call options against stocks that I currently own. I also sell options on oil. You can check out my returns here.
- Lending – You can lend money to consumers through platforms that handle all the administrative work for you. You can check out the credit worthiness of a prospect before investing. You can also invest in a diversified portfolio of borrowers based on your risk profile. I like these types of investments because, while you’re not going to get rich, the returns are better than what you’d get on many investments.