Are you feeling the desire to get in on the action?
Bitcoin, Ethereum, and even Dogecoin are the buzz of financial media right now. Maybe you and your family or friends have even talked about it. Let’s review how crypto-currencies fit or do not fit into your long-term financial plan. Investing based on the fear of missing out is dumb – being objective and thoughtful about future returns and your behavior makes you an intelligent investor (as legendary investor Ben Graham would say).
Recent Price Action & Market Value
Bitcoin recently hit $65,000. But, what does that even mean? Perhaps it’s better to put the size of Bitcoin into perspective. The value of Bitcoin is slightly under $1 trillion as of this writing. It could be $500 billion or $1.5 trillion, depending on when you are reading this. It’s that volatile. All of the crypto-currency markets are about $2.3 trillion. It’s even hard to wrap your head around that number!
Let’s put it this way – the value of all the world’s stocks ($112 trillion) and bonds ($118 trillion) is $230 trillion. So virtual currencies are worth about 1% of the investable financial market. Bitcoin is big, but crypto is dwarfed by the value (and worth) of traditional investments.
The Difference Between Virtual Currency & Traditional Investments
Keep in mind that Bitcoin doesn’t pay dividends. It doesn’t generate profits. So tried-and-true methods to valuing assets do not apply – kind of like when trying to value gold. It’s merely ‘worth’ what others are willing to pay for it. In contrast, when you own a stock or bond, you are buying a piece of future profits & dividends (for stocks) and coupon payments & a return of principal (for bonds).
So that’s the rational perspective of crypto-currencies versus stocks and bonds. Do you feel better? I’m guessing not so much. Particularly when you just heard about some kid who may have made mega-money on Dogecoin.
Thinking Long-Term
Here’s a trick to staying grounded and not jumping in the dangerous virtual currency pool – suppose that in 40 years, a portfolio of stocks returns 7% per year. $50,000 earning 7% per annum would yield a final value of $750,000. Do you think Bitcoin will be $750,000 by then? It could be. But it could also be ‘virtually’ worthless if it’s not in fact the wave of the future. A diversified stock portfolio will never be worthless, though it may be volatile over the course of a few years. Also, Bitcoin could be a mainstay, yet STILL trade near $50,000 decades from now. Who knows?
We aren’t trying to put the kybosh on crypto. If you really want, you can toss 1-2% of your portfolio to Bitcoin or Ethereum. For even more risk, you could buy up some of the smaller currencies. Just be aware that all of these assets are tremendously volatile. Can you stomach an 80% decline? Historically, Bitcoin has routinely fallen 80%+ from a prior peak. It’s currently in a 20% ‘drawdown’ from the all-time high touched earlier this month.
Bitcoin Drawdowns From Peaks Since 2010 – Bitcoin fell 80% or more in 2011, 2014-2015, 2017-2018
Coinbase Debuts on the Nasdaq
The recent Coinbase direct listing only added fuel to the fire. Naturally, it was the talk of CNBC. What’s interesting is that the event could have marked a near-term top in the virtual currency markets. We’ll see how much further the coins fall. Be glad you didn’t buy Coinbase on its first day of trading – the high on April 14 was $428. Shares went on to fall below $300 last week. It’s a dangerous environment.
The Point
Investing is all about understanding your long-term goals and knowing your personal ability and willingness to take risks. If you get nervous when you see your portfolio value falling, trading volatile individual stocks is not for you. And cryptos are like volatile stocks on steroids!
If you are a natural risk-taker, then go ahead and play the game, but always ensure your long-term plan is on track.
We’ll talk next week!