March 29, 2024
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Should You Invest in Bitcoin? 7 Reasons Why You Shouldn’t

With the price of Bitcoin reaching new highs, is it worth investing in? Here are 7 reasons why you should not invest in Bitcoin at this time.

Contents

High Price

On January 3, 2021, the price of Bitcoin reached a new high of $40,797 before retreating to slightly below $35,000. 

Yahoo Finance graph showing the price of Bitcoin as of January 11, 2021.
Source: Yahoo Finance

No one knows what will happen next. 

But let’s turn to history. 

Just three years ago, on 12/10/17, Bitcoin reached a new high of $19,140 before retreating to $3,252 just one year later. That is an 83% drop in one year!

Will Bitcoin see a precipitous drop a year from now? Only time will tell. But it appears that there is substantial downside risk. 

You may think: But the stock market just reached new highs recently too! Isn’t it just as risky?

Not really. The stock market reaches new highs almost every year. This is partly due to several factors including value creation, technology, and inflation.

Let’s look at the history of the stock market:

The average S&P 500 annual return was 10-11% from 1926 to 2018 according to Investopedia.

Based on those 92 years of history, I would say that the stock market continues to be a good investment. 

Competition

There are more than 2000 different cryptocurrencies available today. 

Ethereum, Litecoin, Ripple, and Tether, just to name a few.

The market is flooded with competition, with the little barrier to entry for new entrants to enter the market. 

Major companies have even contemplated creating their own cryptocurrencies. Facebook’s Diem (formerly Libra) is expected to launch in 2021.

Of all the cryptocurrencies, why is Bitcoin the most popular?

My hypothesis is that it is because it was one of the first cryptocurrencies widely available. It was an early adopter. 

However, there is nothing proprietary about its technology. Other currencies run on blockchain, much like Bitcoin does. 

Other cryptocurrencies actually perform better that Bitcoin in some aspects. 

Ripple can handle 1,500 transactions per second—more than other cryptocurrencies that exist.

Litecoin processes transactions faster than Bitcoin. In fact, Litecoin processes transactions in about 2.5 minutes while Bitcoin processing can take up to 10 minutes.

Source: The Hartford

With massive competition, low barrier to entry, and little to no competitive advantage, it remains to be seen whether or not Bitcoin can remain the most popular cryptocurrency. For that reason, I would not invest in Bitcoin at this time.

Speculation

Bitcoin is only as valuable as someone is willing to pay for it.

On May 22, 2010, now known as Bitcoin Pizza Day, Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two delivered Papa John’s pizzas. The value of the all of those coins in total was about $41.

Source: Investopedia

As of this writing, with Bitcoin priced at about $35,000, those 10,000 bitcoins would be valued at close to $350,000,000!!!

Three-Hundred Fifty… MILLION. I wonder how that guy is feeling today…

As I stated before. The value of Bitcoin is only as valuable as someone is willing to pay for it.

It is pure speculation. If people will buy it for $35,000, then that’s how much it is worth. 

If people are willing to trade it for two pizzas, then that’s how much it is worth.

If Bitcoin becomes useless or is no longer adopted by anyone, the value could be close to $0.

No Intrinsic Value

Stocks have intrinsic value. 

For example, Apple has valued its shareholder’s equity at $65 Billion as reported on its 2020 10-K filing. Basically, if it sold all of its assets and paid off its liabilities, it would be holding onto nearly $65 Billion in cash. 

But of course, the market cap of Apple is considerably higher because the value of Apple includes its expected future cash flows as well. The value of the brand also increases its value.

Bitcoin, on the other hand, does not have any intrinsic value.

It doesn’t have shareholder’s equity. It doesn’t bring in revenue. It doesn’t record profits.

It’s only value, really, is from its utility as a medium of exchange. However, since it is not widely used or adopted like fiat currencies, does it really have any value?

Gold has intrinsic value not only as a medium of exchange BUT ALSO in uses in jewelry and industry (think electronics and dental work). So even if people stopped trading it as a medium of exchange, it still would have utility elsewhere.

I would not recommend investing in something with little to no intrinsic value.

Bitcoins were Created

Back to Laszlo Hanyecz who paid 10,000 Bitcoins for two Papa John’s pizzas. The transaction was valued at $41 in 2010 and $350 Million today.

Back then it was fairly easy to mine Bitcoins. If you had a decent computer, and the right software, you could have mined Bitcoins. 

When he mined those Bitcoins, did he really create $350 Million dollars in value?

I’m still trying to wrap my head around that. Can you really justify that price today?

If Bitcoins were created, could they not just as easily be destroyed? It doesn’t quite add up to me.

Easy to Lose / Hard to Retrieve

  • James Howells accidentally threw away a hard drive with $127 million in Bitcoin. Source: CNBC
  • After Matthew Mellon died, his family was unable to locate the pass code needed to retrieve his fortune — said to have been worth as much as $1 billion — in XRP cryptocurrency. Source: NY Post

Can you imagine accidentally throwing away $127 million in cash or stock in the trash? It just won’t happen.

In addition, can you imagine not being able to access the estate of a late loved one? At least with banks or brokerages, you can probably prove your relation to the deceased and claim the estate. But you certainly can’t do that with cryptocurrencies because there is no bank or brokerage to speak to.

Here’s one more depressing story:

Stefan Thomas needs to unlock his IronKey hard drive which has the passwords to his bitcoins. However he only has 2 tries left to unlock the drive, otherwise the data will seize up and become encrypted. The value of the Bitcoins he can’t retrieve: $220 Million!

Source: SF Gate

I can’t imagine investing large sums of money in something that essentially has no paper record. If you lose it, tough luck.

Due to potential difficulties in retrieving your coins, I would not recommend you invest in Bitcoin at this time.

Security Risk

  • Michael Terpin lost $24 million in cryptocurrency due to a subscriber identity module (SIM) hack. Source: Wall Street Journal
  • In 2014, Gox stated that almost 750,000 of its customers’ Bitcoins, as well as 100,000 of its own Bitcoins, had been stolen. The total loss was worth around $473 million at the time. Source: Cointelegraph

Hackers can potentially steal your cryptocurrency in near anonymity. At least your bank or brokerage would be able to trace the account that took your money. The bank or brokerage might be liable for the loss if they were responsible for the security breach.

With no central agency to report to, there’s no such luck if your Bitcoins get stolen. 

Final Thoughts – Invest in Bitcoin?

With so much renewed interest in cryptocurrencies, is now the time to invest in Bitcoin?

I would not recommend you invest in Bitcoin at this time for the following reasons:

  1. High price
  2. Steep competition
  3. Value based on speculation
  4. No intrinsic value
  5. Bitcoins were easily created
  6. Easy to Lose / Hard to Retrieve
  7. Large Security Risk

I don’t see purchasing Bitcoin as much of an investment at all. At this moment, it is a pure speculation play and my recommendation would be to avoid it or minimize your exposure to it.

Stay the course and continue to dollar cost average your investments in a broad index fund if you want to get closer to financial freedom!

Note: I wrote this article before learning the ins and outs of Bitcoin. Full disclosure: I now own a small amount of Bitcoin. Check out my article here for some reasons why it actually might be a good idea to own a little bit of Bitcoin.

Wall Street Fat Cat

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