Okay, I’m trolling here a bit. At the same time that I don’t own any cryptocurrencies and I don’t plan to buy any, either, I’m also not a crypto-hater, I just think there is a broader understanding of asset classes that is useful to understand when looking at this. It’s also funny how predictably libertarian most cryptocurrency investors are, I suspect because it tells them what they want to hear – that decentralized currency is viable. I don’t have a strong opinion on this, I just think it’s funny.
There have been many winners and many losers in crypto over the years. This has driven rampant speculation. Whereas Bitcoin used to be this interesting social experiment that the occasional obsessive nerd “mined” from a server in his basement, once it exploded it was like the gold and silver booms of the the mid and late 1800s: people fucking lost their minds. The usual shills came out of the woodwork, as well as the fortune tellers, hocking their wares and promising to get you into the action. People began to lust over the possibilities, dreaming how they could have become millionaires if only they had bought when it was pennies. All their worries would have gone away, right? (rookie mistake: money solves money problems and pretty much nothing else).
Enter the “Alt Coins”: little bits of junk that started popping up left and right and drawing money by offering the slim chance of getting people in on the action they missed with Bitcoin. You, too, could buy shares for pennies and watch this explode and become rich!
Of course, we’ve never heard this before, right? It’s not, like, the entire history of civilization, right? Sure, just invade this guy over here. You’ll make out like a bandit, and not live in fear for the rest of your life. Everything will be fine!
And of course there are the stories of someone who invested early and stored their bits on a hard drive that got lost. “If I hadn’t lost that, I’d be a millionaire now!” It’s just El Dorado all over again. Gold fever. People love these stories of near success because it makes them feel like they are just a few coin purchases away from extreme wealth. After all, that other guy was so close, but I’m smarter than him, right? But as for the “lost hard drive” motif, it turns out even those people didn’t expect much to come of it all, or else they would have taken it more seriously in the first place. Meanwhile, the winners always like to fancy themselves geniuses.
Of course, these days things have matured a bit (pun intended?). I mean, blockchain technology isn’t going away, and cryptocurrency in general isn’t going away, either. There have been surges and contractions. Some people continue to win and some people continue to lose. It hasn’t been regulated to smithereens, and likely never will be because too many people are in on the action, and as long as the rich are in on the action, you have lobby power. Never underestimate lobby power.
Does that mean you should buy any of it, though?
Well…that’s up to you.
Because here’s the deal: I personally think that crypto is extremely risky. It’s also extremely volatile. Bitcoin is the big name in town, but transactions are also incredibly slow (from what I hear), and although it was revolutionary technology, it’s kind of an old dog at this point, and other crypto currencies have implemented better versions of the technology. But it’s funny how technology works: bad tech dies very slowly. That’s why Microsoft Office still uses Visual Basic, one of the most arguably shit programming languages in existence. So the technology itself isn’t even as powerful as the social consensus around its value. And it’s an interesting and useful technology. But of the dozens, perhaps even hundreds of “alt coins”, most of them are only invested in as speculation. Again, everybody wants to be the person who bought for pennies on the dollar just to watch things explode, and they get to live that fantasy out by buying these other currencies.
But at the same time, what is “too risky”? I primarily invest in stock index funds. What if somebody who primarily invests in bond index funds comes to me and says, “Your investment is stupid because stocks are riskier than bonds!” How dare you! Now, historically, stocks outperform bonds, that’s why you’ll often hear asset allocations with a higher stock to bond ratio (60/40, 70/30, 80/20, etc, etc). But it’s also true that historically, bonds are less volatile. Cryptocurrencies are both far riskier and more volatile than stocks and bonds. But does this mean they are “wrong”?
And this leads to some interesting questions. What’s riskier and more volatile than cryptocurrencies? Gambling. What’s riskier and more volatile than gambling? Playing lotteries. And what’s less risky and less volatile than bonds? Cash. But cash is eroded by inflation, and will almost always lose value with time. What is the big picture on all of this?
You see, gambling isn’t wrong because it involves spending money. It’s wrong because it caters to addiction. Insofar as you can gamble without become addicted, going into debt, or otherwise injuring your life, your family, or others, I’m not going to say that you are wrong for doing it. But it doesn’t usually work that way, which is why society generally discourages it (as do I). Likewise, I’m not going to say that buying cryptocurrencies is a waste of money, I’m just not convinced it’s a solid investment. That doesn’t mean you can’t get lucky – hell, you “could” win the lottery – but I’d rather put my money somewhere it’s more guaranteed to grow. You can absolutely be a level-headed crypto investor, though. I’ve seen some people in the FIRE community allocate, say, 1% of their portfolios to it. But the entire subject turns me off because so much of what I’ve seen of it has been gold chasers, hoping to strike it rich. Most of these people have no financial discipline whatsoever, they just want to get lucky, and in those cases, winning won’t help them much in the long run anyway, should they experience that. I tend to avoid investments that are pumped up by shills. Maybe one day this will die down and I’ll have a little more respect, but of course, my respect is not an objective view of reality, I’m just largely reacting to my experience.
You can get lucky and have things work out. Or, you can make decisions that don’t require you to get lucky in order for things to work out. Everyone has their own risk tolerance, but I’m generally shooting for the latter.
I have one more thought on asset classes, and it involves houses. As I’ve mentioned before, my gripe with homeownership is not that I think it’s wrong, by any means, but that society has crafted this image of it as one of the key cultural achievements. The idea is that by buying a house, you free yourself from the drudgery of rent and you become a proud owner of property, an accomplishment worth celebrating (for some reason). While houses can be a really good thing under the right circumstances, I’m just not convinced they are the ace-in-the-hole they are made out to be. They are much riskier than most people realize.
A friend bought a house before the huge surge in pricing Colorado experienced in the mid 2010s. It sold for nearly double the purchasing price. I was curious what the actual return was. I knew how much my friend had paid for various renovations and repairs, and I knew the buy/sell price, so I sat down to figure out the return. I had to take a guess on things like the realtor fee and the interest rate of the mortgage, but I guessed fairly low. It was a rough calculation, but the ultimate return came out to about 10% per year. Which is no small feat, and I’m certainly happy for my friend. But considering that the run up in prices was absolutely historic…I wasn’t impressed. For all the time and effort put into it (which I was not able to calculate), it didn’t seem like a great return, but people are usually just looking at the delta. “Look how much I made!” [not that my friend acted like this – his response was very level-headed and grateful] But there’s always more to the calculation than just the delta.
At the same time, most houses will in fact grow in value over time. I’m not going to tell anybody it’s their moral responsibility to get a higher return, because that would be ridiculous. It’s just that so many people think it’s this huge money-maker when it’s usually not. But on that note, thinking you are right is one thing, but wanting other people to be wrong is another. I always hope my friends’ houses are a blessing to them, but if you want to argue that everyone should buy a house, I’m going to laugh at you or at least be a little annoyed.
And I think that’s critical to understand with all asset classes: everyone’s goals and risk tolerances are different. If you only invest in bonds, your money will probably not grow very much. But it will probably still grow (not much these days, though 🙁 ). And let’s say that instead of buying a $25,000 car, you buy a $5,000 car and decide to put a few thousand dollars into various cryptocurrencies. Sure. Personal finance is so relative, objective statements are difficult to come by (and I’ve started writing a post on money and judgement, but I have no idea when it will be finished).
To sum up, I don’t own crypto because I’m not interested in its culture, which is extremely greedy and full of people betting on pure luck. Of course, you could also say this about the stock market, too, but at least the stock market is somewhat related to productivity. And mutual funds avoid much of the risk/greed/gambling aspect. But many people who own cryptocurrency are very level-headed about it, and I highly encourage that. Sadly, it is not the norm. I like the idea of getting rich overnight as much as the next person, but I still think the slow path of building wealth through work and discipline is the surest path. The best way to speed up an early retirement is not to get lucky but to earn more or spend less. A higher return is not necessarily superior to a lower return because return is almost always a product of risk, and every person has a different level of comfort when it comes to risk.