Brian Perry, CFP® explains the basics of cryptocurrencies and their value in an investment portfolio.
“So if you’ve been paying any attention to the news lately, you’ve probably heard about Bitcoin and the other cryptocurrencies. Today we’re going to talk a little more about what exactly are these cryptocurrencies, and should you be buying them?
Well for starters, are cryptocurrencies an investment? At its most basic level I would say that no, they aren’t. The reason that they are not an investment in the typical sense is that an investment produces cash flows which can be valued. There are no cash flows associated with a cryptocurrency. So at the most basic level, their value is unknowable. That doesn’t mean that they’re worthless. It just means that we can’t know their value, or calculate it in any way. So any forecast as to what it may ultimately be worth is truly a speculation.
The second part of Bitcoin or any of the cryptocurrencies is, are they are indeed a currency, as the name implies? And there I would argue no as well, simply because the IRS has come out and ruled that they are not legal tender in the United States. Now, just because they’re not a currency doesn’t mean that they may not be a store of value. There is an increasing number of places where you can use them to transact. Maybe that’s on Paypal or something like that. Maybe it does make sense to have some sort of a cryptocurrency that you can exchange between one person and another, they could perform that function. But right now, they’re not legally considered currency.
What about Bitcoin itself? Is Bitcoin the best cryptocurrency? Well, it’s the biggest, it’s the most popular. But keep in mind this: anybody that sat in traffic recently will agree that the auto industry has been pretty successful over the last century. There’s a lot of cars out there. But as it turns out, throughout the course of the United States history there have been 1,800 different car manufacturers. Today there are what, 4? 5?Something like that? I don’t know. So not only did you have to successfully predict that automakers were going to be a successful industry, you had to pick the right winners against horrific odds. I have no idea if Bitcoin is going to succeed or not. Maybe it’s the next Google, and it’s going to do great. Or maybe it’s the next Netscape, and it’s an early leader in its industry but it can fade away over time.
The final part of this cryptocurrency question I want to address today is what’s the future for them, and should you buy them? And what the future is and whether or not you should buy them is an individual choice, and frankly, I don’t know the answer to that. I don’t know where Bitcoin and other cryptocurrencies are going from a value perspective. I do know that recent price movements, obviously, have a highly speculative feel to them, and in a lot of ways, the movements look characteristic of other historical bubbles. But I also know that the underlying blockchain technology, by all accounts, has the power to really, really do a lot of things around banking transactions, financial transactions, exchange of value, so I don’t think it’s fair to dismiss out of hand the underlying technology.
So again I don’t have the answer as to whether or not somebody should buy any particular cryptocurrency, or frankly what price movement we’re going to see from cryptocurrencies going forward. I do think the underlying blockchain technology is likely here to stay and could have some potentially significant impacts on our daily lives in the not too distant future.”