Revisiting Cryptocurrency 02/12/21

News of Tesla buying $1.5 billion of Bitcoin last week pushed the price of the cryptocurrency to record levels. Many advocates of Bitcoin viewed this as a validation of using cryptocurrency as a new class of investment. In a filing with the Securities and Exchange Commission, Tesla said it bought the cryptocurrency to “provide us with more flexibility to further diversify and maximize returns on our cash.” It must be nice having an extra $1.5 billion in cash.

There is no disputing the fact of the large gains Bitcoin has seen over the past year. But is it an appropriate investment for the long-term investor who has a financial plan?

There are several questions the long-term investor needs to investigate further when looking into cryptocurrency like Bitcoin as a long-term investment:

1. If Tesla was indeed looking for an alternative to cash, how does this apply to the individual investor? How much cash does the long-term investor have sitting on the sideline that they are looking to invest? Most likely, the long-term investor has their funds invested in a balanced and diversified portfolio of equities and fixed income.
2. Are long-term investors able to tolerate the volatility of Bitcoin? Our February 2021 newsletter discussed how much more volatile the price of Bitcoin is when compared to the S&P 500. From June 2014 through January 2021, Bitcoin has lost more than 5% in one day 179 times. In the same period, the S&P 500 has declined more than 5% in one day just 5 times. Bitcoin has lost more than 10% in one day 45 times while the S&P has lost more than 10% only twice in a day over this same 61⁄2 year period.
3. Many cryptocurrency advocates see Bitcoin as a currency for the future. It may be and only time will tell. But, if this is really true, how much does the long-term investor invest in currencies now? Probably very little.
4. For any investor with a financial plan, the volatility of Bitcoin and the lack of long-term history makes that plan less reliable. What is the expected future value of Bitcoin in 10 or 20 years? Will it appreciate at all? If so, how much can we expect annually? With stocks and bonds there is verifiable historical returns going back almost 100 years that can be used as a guide for the future. Reliable data makes financial plans more stable and reliable. With Bitcoin, there is much speculation and little history.

At Prato Capital, when we discuss the questions above with our clients, it is very difficult to recommend investing in cryptocurrencies as part of a long-term investment strategy. These questions often bring up more questions and right now, we do not see how investing in Bitcoin helps our clients achieve their future financial goals as part of their Financial Life Plan.

This quote was used in our latest newsletter and we feel it still applies to cryptocurrencies:

“You must never delude yourself into thinking that you’re investing when you’re speculating.” – Benjamin Graham