In the 1980s, Barbara Woodhouse published a book called No Bad Dogs. Clearly, she’d never met my dog, though I know what she was trying to say. Her point was that inexperienced owners are the problem, not the dogs themselves.
In the same way, short of clear frauds or Ponzi schemes, there are really no bad investments. Assets do what they’re going to do; whether or not we as owners have the experience and foresight to know if we’ll be happy with the eventual outcome is our problem.
Sometimes obscure asset classes get a lot of press, and none get more these days than cryptocurrency. This column focuses on Bitcoin, as it’s the leader and has features copied by most other crypto.
A few things to know about Bitcoin:
It exists only digitally. All the stock photos of round coins with the Bitcoin logo are in circulation because journalists and others can’t think of anything better to use.
Bitcoin miners — those who process transactions and create new bitcoin — are incentivized by being rewarded with more bitcoin. Just like mining gold is expensive, creating or earning bitcoin requires a lot of electricity, so it is scarce.
Bitcoin uses advanced encryption technology so nobody can cheat. Transactions are final once logged; no chargebacks or help desks can reverse a clerical error.
The number of bitcoin that will ever exist is limited and strictly controlled by the algorithm and cannot be manipulated using any known techniques.
Bitcoin’s detractors point out that it is not backed or controlled by any government, so it is intrinsically completely worthless. Bitcoin’s supporters think this “statelessness” is a feature rather than a drawback, since modern currencies are easily manipulated or inflated and no currencies are backed by hard assets these days, anyway.
Does Bitcoin belong in your financial plans? Here are a few things to consider:
Bitcoin is volatile — we would not be surprised if Bitcoin goes up 75 percent or down 75 percent this year from here. Plus 75 percent would be great, but the likely possibility of something going down that much is just not the kind of risk we like to take.
Right now, the wave of positive returns for Bitcoin is due to increasing adoption and custody opportunities. If that were to suddenly change, particularly through the possibility of increased regulation, these impressive gains could quickly turn into devastating losses.
For the long term, there are few better places for your money than in stocks. The power to own shares in companies that grow earnings over years has always been the simplest path to long-term wealth accumulation, and we think that will continue to be true.
Consider: A dollar invested in the Dow Jones Industrial Average at the depths of the Great Depression is worth over $600 today. Bitcoin, gold, art, or most other alternative investments just don’t have the decade-in, decade-out promise that good old stocks enjoy.
Since 1978, for example, gold has gone up tenfold and silver is up about five times since then. What a deal, right? Well, yes, but the real story is that the Dow has quietly gone up from 794 to over 30,000 during this period, almost a 40-fold return.
Only time will tell if long-term holders of Bitcoin will look brilliant or absurd 43 years from now, in 2064. I for one believe a diversified equity portfolio will outperform Bitcoin. And I am certain that a diversified equity portfolio has a significantly lower chance of becoming worthless someday.
Of course, I thought my dog would be much more obedient by now, too.
Gene Gard is Co-Chief Investment Officer at Telarray, a Memphis-based wealth management firm.