Bitcoin and other cryptocurrencies are all the rage. But should you invest your money in them?
I recently received this listener question:
There is a lot of talk going on about Bitcoin and Dogecoin. Are they good investments?
Bottom Line Up Front: I do not currently recommend putting money in cryptocurrencies, because it would be mostly speculation and not investing. Realize that if you do not participate there’s a good chance of FOMO with the constant news and watercooler discussion (is that still a thing?)
Julie and I discuss the following:
- A well-diversified, low-cost index fund portfolio will serve you well. There’s no need to speculate with cryptocurrencies.
- Realize if you put money into Bitcoin, it’s not an investment, but a speculation. There are no fundamentals - you are hoping that someone else will pay more in the future. The entire value right now is an implicit societal agreement that it’s worth something.
- Cryptocurrencies are built on the Blockchain. This technology is a massive breakthrough and will be heavily used on the internet. Speculation in crypto is not an investment in Blockchain.
- Bitcoin and other crypto assets are not currencies: they are too volatile. There is arbitrage in that a washing machine costs the same “amount” in any country. Currency exchanges do fluctuate, but not that fast. And when they do, it’s not a good sign!
- There are a lot of risks with putting money into cryptocurrencies: Regulatory, Security, Insurance, Fraud, Market and Liquidity. Be aware.
Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton chartered financial counselor and financial advisor. And with me today is our great friend Julie, welcome back to the show
Julie: [00:00:13] thank you. I'm excited for today's episode.
Mike: [00:00:15] and happy birthday.
Julie: [00:00:17] Thank you. 32.
Mike: [00:00:21] Congratulations on being 32. That is fantastic.
Julie: [00:00:24] you for the X number of years.
Mike: [00:00:27] Huh. That's right. Today's episode is going to be pretty fun. We were talking about cryptocurrencies. It's been all over the news of course, and figured, definitely have to address it, to give the listener some perspective, my perspective, your perspective on the cryptocurrencies. So we have, this is a listener question that came in and I figured now's a great time.
So let's go ahead and listen to the question and we'll take it away.
all right. Thanks for that. Great question. That's awesome. Thanks EJ. And what do you think Julie, about cryptocurrencies like everywhere today? Right?
Julie: [00:01:09] It is insane. Just a funny side anecdote. My kids took to calling our dog a dojo. From last year, like a long time ago. And then I was just telling them last night over dinner, that there's actually a dojo coin. And I said, it's a dog coin. And then of course the question was what do you do with it?
And my answer was, I have absolutely no idea, but probably after tomorrow, I can tell you
Mike: [00:01:34] That's right. Yeah. There's so many different crypto currencies and I love it. In the sense that it's fascinating to watch the news. Now, remember when we talk about news what's the point of the news and the media is to get you to read articles, to click on things and stay on their site.
Okay. So just realize that whenever you're reading any news, it's all about. You reading it. That's why they put the information in there. Now. It doesn't mean it's bad information, but just realize it's always about, keeping your eyeballs there. So investing in cryptocurrencies, I'm going to give you the bottom line up front, Julie.
I do not currently recommend investing in cryptocurrencies and. The reason why is because I have no idea what they're going to do next, and we're going to talk all about this. But currently I do not recommend investing in cryptocurrencies. If you want it to have a small amount of your portfolio or some fun money to play around with it.
That's great. That's fantastic. No problem. But the I don't recommend investing in it, but realize that you might have a lot of FOMO. All right. Fear of missing out, because you're going to keep reading these headlines. It's going to the moon. It's just doubled in a few weeks, you're going to get rich.
So that's important if you're not investing in it, that you might have a lot of that fear of missing out
Julie: [00:02:52] so that's a really good point because I remember a good friend, of mine Invested in Bitcoin years ago. And she was telling me all about it and I thought she was nuts. And I said, I don't understand the basis behind it, which I know you're going to get into. And she didn't either, but she invested it in any way.
She had a little bit of extra cash and then. I believe it was last year or so she came back and said, Hey, remember that thing you made fun of me for investing in. Yeah. I just made a ton of money off of it. So for sure the there's the FOMO piece of it. But also, you can make money from it,
Mike: [00:03:30] absolutely I'm going to call it getting lucky and making money on this. Now this gets into a topic I wanted to discuss briefly of investing versus speculating. All right. And these words are actually really important. I was reading an article yesterday, actually in the wall street journal.
Jason's why ag was lambasted his bosses around using the word investing when people were really speculating. And it's important to use the right words so that we have the right context. So speculating is when you don't have a lot of information about what you're putting your money into. And you're just deciding to go for it.
So at this could be obviously gambling. You're speculating. I hope it lands on black. This could be horse racing. I'm speculating that this horse, might win and it could be in. Stocks, you could say, look, I th I think Airbnb is going to do really well.
I'm going to put money in it. If you haven't researched it, looked at the numbers, the fundamentals put together, projections, all that kind of stuff. You're basically speculating. All right. You're just going on a couple of bits of information and saying, I think it's going to go up in value.
So that's where most, I would say 98% of. Bitcoin investors, cryptocurrency investors are speculating. They're hoping that it goes up that someone else will pay more for it in the future that they've paid without understanding, what the inherent value might be and really crunching numbers and really understanding where it's going.
Julie: [00:04:55] so let's back it up to what is. Bitcoin, what is cryptocurrency?
Mike: [00:05:00] Yeah. So cryptocurrencies are obviously digital tokens. That are passed around. They're very safe, secure in terms of knowing who has what and people have decided they're worth value. So Bitcoin People have said, oh, this is worth money. So I trade my dollars, whether the us dollars, Australian dollars whatever it is into the cryptocurrency, exchange rate and then they fluctuate U S dollars fluctuate, compared to Australian dollars and Bitcoin, depending on what people want to pay for it.
Fluctuates in value. Now, some places will accept it as currency. You've seen that Tesla is going to accept a Bitcoin. You could buy a Tesla with it. They had come out a while ago saying that, and then they backed off and they're on again, off again as Elon Musk tends to do. But there's other places that said we'll take Bitcoin as currency.
So that's where the currency piece comes. Okay. But cryptocurrencies are literally just digital ledgers that are public ledgers that are passed around that are very safe and secure if you treat them the right way. So there's obviously Bitcoin and Ethereum, and about a thousand doge coin and like a thousand other ones, people have decided that these are worth money.
It's like baseball cards. You buy a pack for a dollar and then some of them people decide are worth more because they really like those players. Okay. So they just decide this is worth money and you could sell it for, a card for a hundred dollars. You can sell a Bitcoin for $50,000 because someone else has decided that it's worth that amount of money.
Julie: [00:06:26] So, here's the part that I'm confused on, there was only a certain number of baseball cards printed with babe Ruth, let's say so there's a value to it because. There aren't it's exclusive right there aren't that many of them who decides how many Bitcoins are out there and therefore how much each one is worth.
Mike: [00:06:48] Good question. There are a limited supply of Bitcoin. So I think it's 21 million. I can't remember the exact number, but that's how many there will ever be. There is a limited supply of Bitcoin, just like there's a limited supply of those pay booth cards. Now, how do you decide it's worth money? That's just societal.
How do you decide gold is worth money? It's because it was using some manufacturing, but basically people decide, oh, I really like gold. And there's not that much of it. I'll spend a lot of money for that little chunk of gold because I know it's scarce resource. Now this gets into another topic around cryptocurrencies in general.
And here's one of my theories. not my theory? Sorry. I stole this from other smart economists. All right. So this is not my theory, but when there's a unlimited supply of something, it drives the price to zero. All right. And there's a limited supply of Bitcoin. We just said that, but there's unlimited supply of potential challengers to Bitcoin.
Anybody can come along and make another digital coin. The U S government could decide to jump in and say, you know what? We're going to make a us dollar coin. And it's a digital currency. And do you know that we'll be able to be traded X, Y, and Z ways, make some rules around it. So there's unlimited supply of potential coins, digital coins out there.
And when, again, when there's unlimited supply, typically economics says that there's , very little value. Too. That's resource.
Julie: [00:08:07] okay. So in essence, what you're saying is that what happened with doge coin? Some woman randomly made it up. From what I understand of it anyway, it was about her dog. And so she made a doge coin and people bought it and it was almost a joke, but now they're actually worth something.
Mike: [00:08:25] Yup. So the doge coin actually was started as a joke, literally. So you can create these things. It's not super difficult. And it was started as a total joke, and I'm not sure where it originally took off, but it started taking off and people decided this has value. I will trade $10 to buy a coin, or 40 cents to buy one coin.
And then mark Cuban gets in and is promoted Elon Musk, tweets about it. And all of a sudden it's just like jumping up, like for no particular reason. Again, people have just decided society has decided it's worth that much. It's like a painting. The painting that your daughter does could be worth nothing.
But if people decide like, ah, it's gorgeous, we really want this. There's only one of it. So it could be worth a million dollars because society has decided that's really rare and valuable and I would like to own it. So the same is true of doge coin Bitcoin, Ethereum, right now they're entirely decided that society has decided, Hey, they're worth this amount.
We'll trade them at this rate though. I will buy it at this amount. And so other people will sell it for that.
Julie: [00:09:21] But unlike. Your traditional investments. They're not making money. They're not generating income. Therefore they're , from what I'm understanding, correct me if I'm wrong, an extremely high risk investment
Mike: [00:09:34] yep. Correct. I agree. That's why. Yes, that's right. Speculation. So I totally agree. This was why I said at the start. I'm not currently recommending going into cryptocurrencies, if you want to a little bit. It's totally fine. Of course. I'm not really recommended because you'll be fine with your super diversified low cost index fund portfolio, because that is made up of companies that make products and we buy those products.
So those companies have revenue and they invest it, reinvest that in making more products and they reinvested in their R and D and then they give it back to their shareholders. And that, you know, has been around for hundreds and hundreds of years, and I believe we'll continue if capitalism continues.
And so that portfolio should do very fine over the future. Now, the fear of missing out of course, is that any speculation, whether it's in the meme stocks, you could have put it into GameStop or AMC and made a thousand percent, 10000% in just a few months. Or the same in Bitcoin. It's this fear of missing out.
That's really driving, oh, I should get into this. I should get into this because you just see it going straight to the moon and people making a lot of money, paper, money so far. Yes.
Julie: [00:10:44] it sounds like if somebody has play money, let's say they've already maxed out their IRAs and their HSS, which everyone knows is my favorite account. And all of the safe tried and true investments. And they've got some cash that they're looking to just play with. Would you recommend cryptocurrency over the racetrack?
Mike: [00:11:08] That first of all, there's no, in my opinion, there's no fun money. It's all your money that you could decide what to do with, you could decide to invest it in your broker. If you've already maxed out all those other great tax saving accounts, you could just invest in your brokerage account.
Lots of people have ever liked to have fun with some of their money. They like to travel with it. They like to spend it on personal care spa days, whatever it is, they enjoy going to the racetrack, whatever it is. That's all great. And so part of that can be putting it into some of these cryptocurrencies to see how they do, to have fun with putting money in watching it go up and down.
You're part of the game. And it's really exciting. Now other people treat maybe five or 10% of their overall portfolio. As wanting to make more personal investments, to maybe juice their returns, scratch that itch of researching companies and investing in certain companies. So again, that's fine if you keep it to a small portion of your overall portfolio, but realize that could go to zero, whereas the index fund portfolio is not going to really go to zero ever.
But it's just going to chug along. So any money that you do, any of these ventures with. Could go to zero or they could make a lot of money and be a part of your portfolio.
Julie: [00:12:23] so it's almost. And my son used to play Fortnite and it used to drive me bananas because he'd want Vbox all the time. And I kept telling him you're literally flushing dollars down the toilet. You get nothing in actuality in return. And he. Articulately had a nice rebuttal, which was that no, mom I have fun and I enjoy playing the game and I enjoy what the Vbox allow me to do.
And so Bitcoin sounds similar in that if you think about it in a gaming perspective versus an investing perspective,
Mike: [00:13:00] Yeah,
it reminds me of going to the arcade when I was a kid. And taking my $5 and putting in all the quarters and be like, you're just like wasting quarters. No, not I'm having a great time. This is fantastic.
Julie: [00:13:10] Yeah, exactly. That's what I'm equating it to but with the chance like in an arcade, you could win, that clogging game, you might win that big Teddy bear or the iPhone or whatever they put in them now. The chances are low, but if you're having fun,
Mike: [00:13:28] Yeah, it used to be like the rubber ducks. Now it's like the
Julie: [00:13:30] I know isn't that crazy.
Mike: [00:13:32] I think this is a little bit different, because it is speculating and an asset, I put that in air quotes that has been going up and down and people have decided it has some value to it and it might end up having value.
So I do believe in digital currencies. So I do believe in the sense that the way that money is processed right now is really slow and antiquated. Let me give you some examples. If I want to transfer money to you, Julie, we could use a Venmo. That's pretty new and fast. That's great. If I have more money, I want to get to you.
What would I use? Maybe a bank transfer or a wire transfer. Okay. These not only cost some money. They also take 2, 3, 4 days. That's ridiculous in today's environment. Okay. If I trade stocks and sell a stock, it takes three days for that to settle. All right. The trading day, plus two more days called T plus two.
That's pretty nutty in today's environment. Now there's reasons for it. There's multiple banks and multiple accounts and they got to talk to each other and they got to make sure the money's really there. And it's not a fraud situation, all these things, but that's where the blockchain technology behind the cryptocurrencies can really help.
So I do believe there will be cryptocurrencies. I do believe that blockchain will be incredibly
useful in The financial sector. Will it be Bitcoin? Will it be Etheureum, them or doge coin or one of these existing coins that becomes the default digital currency across.
The U S and across the world that I have no idea. And even if it is one of those, you still don't have to get in. Now, you don't have to put in money now to figure that out us dollars are still taken for any kind of good that you want to buy. And I believe they will be in the future. Even if there becomes a quote unquote default digital currency.
Julie: [00:15:19] Wow. Okay. So I know we're going to back up and you're going to explain the blockchain technology, but just as another question and maybe this is too big picture, but now that you've explained this and the rate of transfer, could there be a world in which. Dollars and pounds and euros no longer existed.
It all becomes digital currency.
Mike: [00:15:41] Yes, that could be a case. And that might happen sometime in the future. My point is, since the U S dollars are backed by the U S government, and right now we buy washing machines with us dollars. So even if, you can buy washing machine with Bitcoin, there will be a massive transition time, right?
If it's like, Hey, we're going to get rid of these paper currencies and go to digital currencies. In other words, there's a exchange rate between currencies. If I want to buy a washing machine in Australia, It costs 50 Australian dollars. And if I want to buy a washing machine in the U S it costs 100 us dollars.
Okay. So one's 50, one's a hundred, but that's still basically the exchange rate because the washing machine costs what it costs to make in raw materials and raw goods. Okay. So now you can understand there's exchange rate between those two currencies and you can essentially buy the washing machine for the same amount of value in either country.
Okay. So even if we have a digital currency, it has to act the same way, whatever it takes to make that raw good is going to be the amount that it costs to buy that I can't go and buy it in one currency for 10 times less than I could buy it. Another currency, I can't go to Australia and buy a washing machine for one 10th.
The price that it costs in the us, it just, there's arbitrage. It wouldn't make sense. Okay. So that's the same with the digital currencies, you will still be able to buy goods. Even if we're moving towards a digital currency.
Julie: [00:17:05] fascinating in terms of it's essentially providing economics lessons right. To the masses is you explain it. It'll be very interesting to see what our kids learn in economics
Mike: [00:17:18] That's right.
Julie: [00:17:19] to this stuff. So
Mike: [00:17:20] Now let me back up to the blockchain. I didn't fully explain cryptocurrencies they are, or built on top of a technology called blockchain technology. Just think of it as software. That's all it is. It's software and it's super useful. And the reason it's useful because it's a public ledger that is very safe and secure.
Okay. So you and I can agree that I own a hundred of some tokens and I can prove it. All right. Literally prove it with software and with mathematic algorithms out on the internet. That's what the blockchain is really great at doing. That technology will be super useful in a variety of applications. Now that we can prove things mathematically, we can agree.
I can challenge you. And the internet will say, yes, this is correct. We can do what's called smart contracts where we can set things up and agree, and it gets posted on the internet. We can do public ledgers of monies or accounts or whatever it is. This is all on blockchain technology and that technology.
Super useful. I think it's going to be fantastic in a number of applications and cryptocurrencies, one of the things that's first built on top of it.
Julie: [00:18:29] What is the difference between the blockchain technology and what we have or what we had in place before it, give me an example of how it would
make it easier.
Mike: [00:18:40] Yup. Very good. So right now we have a database. So I have an account at fidelity and fidelity says you have $10,000 and it's in a fidelity database. no one else on the internet can prove if I have $10,000 or not, they go to fidelity and fidelity says, yes, he does have 10,000. That's the only way to get that proof.
Blockchain is a public database, think of it that way. Public software, across multiple computers that I say I have 10 Bitcoins. And you on your computer can say, is that true? And it'd be like, yep, it's true. Or anybody on anybody's computer can say, yes, that is true. This wallet has 10 coins in it.
Julie: [00:19:15] So what is the applicability of it? Who would say to you? You have proved to me, you have
Mike: [00:19:22] it's, that's what makes it a decentralized system. So we don't have to rely on fidelity account, one single company or a government, the U S government. To be the source of truth for something we can now say the source of truth is out on the internet. And we can just talk directly to each other.
You no longer have to go to fidelity to get my $10,000 or to do a wire transfer. I can say I've got 10 Bitcoins and you can say, yep, I see them. Can I have them? Yep. And we transfer them and it's all done in just a matter of seconds. And everybody knows that's happened.
And now you have the 10 Bitcoins and we didn't rely on any one single source of truth for that.
Julie: [00:19:59] Which is. Hysterical that.
you would call the internet a source of truth.
Mike: [00:20:04] right.
Julie: [00:20:04] I think this is my sticking point where I'm just not understanding
Mike: [00:20:08] Yeah, no, that's exactly how it works though, because all the computers agree, the code all agrees to the system. And it turns out when you have the group, it can prove things and do things together much better than individuals. So the blockchain technology, which we're coning down a little bit of a rabbit hole really is going to be super
useful. , especially when you talk about single governments or single corporations as a set of truth for the, for some of these types of things. And there's other ways of doing it, that can be really fast and scalable.
Julie: [00:20:36] and it sounds like it will be particularly useful in terms of a global economy.
Mike: [00:20:42] Yeah. All right. Now, a couple of other things I wanted to mention on investing or speculating on cryptocurrency, there's a number of risks. That are inherent, of course, with any investment or speculation, but cryptocurrencies have a long list of risks from regulatory risk, which is the government just saying, Hey, we're making our own .
Government coin that could drive Bitcoin to nothing, or they just decided to regulate like China, you can no longer, trade these cryptocurrencies it's illegal. So you have regulatory risk, security risk of your wallets, your cold wallets, or if you're storing on the internet, you've got fraud, potential, around those insurance.
You can't get insured for this type of thing. Like you got FDI C insurance. For up to hundreds of thousands of dollars in your bank account, none with these cryptocurrencies already mentioned fraud. And then of course your regular market volatility, right? This is a big risk and liquidity.
I said, it's easy to transfer this stuff around. That's true. But it's also pretty hard sometimes to get your money back out of some of these exchanges. And so I've heard a lot of stories around that. So just want to mention some of those risks as
Julie: [00:21:46] Yeah, no, that's good.
Mike: [00:21:47] Anything else, Julie, that we haven't covered? I think we got through most of our topics here.
Julie: [00:21:51] Yeah, I think so. It was enlightening. And to your point about the rabbit hole, I feel like we could spend hours talking more about this and trying to learn about it, but it's an evolutionary process. It sounds and we'll just keep learning as it goes.
Mike: [00:22:06] That really takes us back to the start. It is a. Big new thing that is happening and to really understand it is going to take a lot of work. So do you want to get an early with speculating on one of these things, being a next big thing and some asset class that is going to have a lot of intrinsic value or just stick with your low cost index fund portfolio that chugs along year in and year out.
And that's where I am right now, again, with the understanding that you're going to keep reading about it. And so if you want to get a little bit involved that's great, but I don't think it's going to make a big difference at the end of the day. And I definitely wouldn't bet a lot on it at this point.
Julie: [00:22:45] Good advice. I appreciate it. Thank you to the listener EJ for that question.
Mike: [00:22:50] yeah. Thanks for being here and we'll catch you next time.
Julie: [00:22:52] See you later.
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