Editor’s note: This article was first published in November 2017, near Bitcoin’s first big peak; the price references and the survey it cites reflect that moment.
Buying Bitcoin at 1,000 dollars and selling it at 2,000 dollars doesn’t make you an investment guru, let alone an investment genius, but it does make you a good speculator.
If, on the other hand, you’re investing in Bitcoin with the long-term future in mind, as if it were a long-term investment, you’re very likely making serious mistakes from a financial point of view, regardless of whether Bitcoin one day collapses or climbs above 100,000 dollars, as some speculators believe it will.
There’s nothing wrong with speculating on Bitcoin, as long as you’re clear that that’s all it is: speculation.
A survey of Bitcoin speculators and investors, carried out through the polling firm Pollfish, reveals that the reasons people are investing in Bitcoin are absurd from a financial intelligence point of view.
Three quarters of the Bitcoin holders surveyed could not identify a single sound financial reason to justify their investment, and more than half said they weren’t worried about the technological security of their cryptocurrencies, even though online hackers have already stolen hundreds of millions’ worth of “tokens”.
Why are you buying Bitcoin?
- 41% of respondents said the digital currency was the technology that would change the world.
- 21% said it was a long-term store of value like gold and silver.
- 15% said they were following the advice of a friend, a family member or an online outlet.
None of these is a sound financial reason for making this investment in Bitcoin.
The digital currency is the technology that will change the world
Even if the blockchain (the technology behind Bitcoin and the rest of the cryptocurrencies) did change the world, that wouldn’t imply any investment valuation or financial rationale, because Bitcoin has no patent on this technology. So nothing stops that same technology from being used tomorrow to launch the cryptocurrency of the future that displaces Bitcoin.
Bitcoin is a long-term store of value like gold and silver
This argument is absurd from every financial point of view at the stage Bitcoin is in. It has only existed for a few years, and right now it is one of the most volatile “financial assets” in the world.
Most of the US respondents said they plan to hold their Bitcoins for years, while others say they won’t sell until they see Bitcoin above 200,000 dollars.
The payment currency of the future
In theory, one of the arguments most often used to persuade people to buy Bitcoin is that it will be the way we pay in the future and that it will put an end to the financial system as we know it today. In practice, only 8% of respondents say they plan to use it to pay for their purchases.
In other words, the overwhelming majority admit that they are simply speculating on the value of Bitcoin, and there’s nothing wrong with speculating on any financial product or vehicle. There’s nothing wrong even with speculating in a bubble, because you can make a lot of money as long as you know what you’re doing: speculating.
As Brett Arends says in his MarketWatch column, those who have bet big on Bitcoin have so far won big financial prizes. But the same happened to those who bet big on the dot-coms in the 1990s and to those who bet big on real estate in the last decade. The speculator who knows they are only speculating makes a lot of money, but the one who treats it as a serious long-term investment is left holding the glass as soon as the dance is over.
History is very likely to repeat itself: those who know when to get out will make money, and those who join the dance just as it is about to end will find misery.
See also: Bitcoin versus gold as a safe-haven asset
Featured image: Xiangfu, CC BY-SA 4.0, via Wikimedia Commons.
