The Case Against Bitcoin

by JDH on February 13, 2021

As the price of gold remains stuck in a trading range between $1,800 and $2,000, there is nothing much to discuss about gold.  I have my core gold stocks, and I’m holding them.

So, over the last few weeks, I’ve commented on the crypto market:

Ethereum: The Best Crypto Investment?
QBTC, QETH, Bitcoin, and How to Invest
Bitcoin: The Runaway Train
Will Bitcoin Replace Gold as a Safe Haven in 2021?
Bitcoin, Ethereum and Gold

You get the point; lots of crypto discussion, all of it positive, and for good reason.  Bitcoin started the year around $28,500 USD, and as I write this on Saturday morning, February 13, 2021 Bitcoin is trading at $46,880 USD.  That’s a decent run for the year, eh?

Etereum has performed even better so far in 2021, rising from $704 USD to $1,800 USD.

Both cryptos have made all-time highs, so, in hindsight, it was important to have them in your portfolio.

But what about tomorrow?  Will they keep doubling in value every two months?

No, that’s not how math works.  It is unlikely that Bitcoin will be worth a billion dollars by Christmas.  So, today, I present the case against the cryptos, because you have to understand both sides of an argument to make an informed decision.

Bitcoin is air

The most obvious argument against all cryptocurrencies is that they are made up, a fiction, digital air.  Unlike gold, or silver, which can be used to make stuff, Bitcoin has no value other than the value that we assign to it.  It has value because we believe it has value.

So what happens when we stop believing that it has value?

Good question.  It will crash, I assume.  It’s happened before.

But isn’t the value of everything entirely determined by what we believe it to be?  Yes, gold and silver have industrial uses, but so does copper, and copper doesn’t trade at $1,800 per ounce.  If we figure out how to mine gold from meteors, perhaps its value will plummet.

The dollar is purely air, and it has crashed by over 99% since it was created, when measured in purchasing power, so while the criticism of Bitcoin is valid, it applies to other assets as well.

Bitcoin is volatile

We all agree Bitcoin is a “store of value”, but do you really want to be storing value in something as volatile as Bitcoin?  On December 1, 2017 Bitcoin peaked at just over $19,000 before crashing, in one year, to just over $3,000 on December 1, 2018.  Do you really want to store your wealth in an asset that can lose 85% of its value in a year?  If you bought at the peak on December 1, 2017 you had to wait three years, until December of 2020, to get break even.  That’s a long time to wait, and if you wanted to cash in your crypto during that period you would have lost money.  That volatility is not good for a store of value.

The counter-argument, of course, is that other assets also crash.  The stock market crashed in March 2020.  Gold has big swings, although neither have crashed by 85% in one year.

You Can’t Use it For Anything

That’s true.  Bitcoin is a store of value, and that’s it.  Elon Musk has said that he will start accepting Bitcoin as payment when you buy a Tesla, but will we ever get to the point where you will buy a coffee with Bitcoin?  No, because the network can take 15 minutes to propagate a transaction, and that’s not as fast as tapping my debit card.

I don’t think Bitcoin will ever be used as a medium of exchange, but other cryptos will, perhaps something built on Ethereum, so don’t automatically rule out all cryptos.

It’s Too Complicated

To buy and sell and store Bitcoin is more complicated than buying a stock, or holding cash.  That’s due in large part because we have been trading stocks for hundreds of years, so we have established the infrastructure to do it.  Bitcoin is new, so it will take some time.

But, if you invest some time to learn how it works, it’s not that complicated.  Once you are set up, it’s easy.

And, if you want to invest, there are now investment vehicles available, as I discussed in QBTC, QETH, Bitcoin, and How to Invest.

My point is that there are disadvantages to everything, but that does not mean you should ignore them.

Do some research.  Learn.

For the record, I am not a big crypto guy.  I do own QBTC and QETH in my registered accounts, but they are not a significant portion of my portfolio.  But, I see no reason why, bought at the proper time (likely not as new highs are being made), cryptos cannot represent 1% to 5% of a prudent portfolio.

Just my two cents.

Or my 0.0000001 Bitcoins.