Right now, buying cryptocurrencies like Bitcoin is skyrocketing in popularity. It seems like everybody is talking about it as an investment, too.
Maybe it’s the news articles or friends who are talking about Bitcoin that have you intrigued. Or perhaps it’s the fact that it has completely blown up in price in the past six months.
However, I am going to burst your bubble (no investment market pun intended). Bitcoin isn’t for everyone. And experts might even argue that it isn’t for most people.
So in this article, I’ll lay out why you shouldn’t invest in Bitcoin. This is meant to give you an alternative look at all the exciting buzz out there about this cryptocurrency right now so you can make a more informed investment decision.
What are the downsides of investing in Bitcoin?
Before you dive into Bitcoin investing, you must have a good understanding of the downsides. Here are a few to consider:
The scarcity may not hold
So this is a highly-speculative thought, but as you probably know, Bitcoin has a limit as to how much can be mined. It was designed that way. But I’m not sure that’s true. Bitcoin is limited only by the programming behind it.
Meaning, if programmers (conceptually) wanted to, they could increase the amount of Bitcoin available. It’s not like gold, where there’s actually a finite amount available on the planet. So could a massive surge in support (or a push from a large hedge fund perhaps) drive programmers to increase the limit of Bitcoin?
This is a downside because many people are rushing to buy Bitcoin as we approach the limit of 21.5 million Bitcoins. It would dramatically shift the market if, for some reason, another 10 million Bitcoins became available.
It’s incredibly volatile
Since its inception, the price of Bitcoin has gone up and down dramatically. For example, if you bought Bitcoin in early November 2013, you could have gotten it for around $350. Over the next four years, it quadrupled in value and then came back down, seemingly over and over again.
By December 2017, it was close to $20,000, only to drop down to $3,300 by December 2018. And today, it’s closing in on $60,000. So as you can see, the market for Bitcoin is irrational. You might score big, or you might lose it all.
It’s so volatile that it’s tough to nail down a conservative guess on what return you can expect (like you can reasonably do with stocks). To avoid losing EVERYTHING, you have to monitor the market constantly, which may be a deal-breaker for some investors.
Beating Bitcoin is possible for competitors
Bitcoin is probably the most well-known cryptocurrency. But that’s primarily because it was first. Realistically, an intelligent developer who understands blockchain could create a new digital token reasonably quickly. And many have – as you start to see lots of new cryptocurrencies all the time.
What’s to stop a significant investment from backing a new cryptocurrency development and becoming the “next Bitcoin”? Nothing. There are no truly unique qualities of Bitcoin that make it impervious to replication. This would mean the relative value of Bitcoin could go down.
What are the risks of investing in Bitcoin?
There are also some significant risks in investing in Bitcoin you should be aware of:
Believe it or not, the risk of hackers as a Bitcoin investor is something you have to be acutely mindful of. With Bitcoin exchanges, you can buy and sell your coin through either their website or an app.
Because of this “digital connection,” exchanges are just as vulnerable as any other website or online brokerage. While that risk may be low, it’s still worth noting. Plus, since Bitcoin isn’t regulated, if the exchange you use was hacked, you’re out of luck (i.e., no FDIC insurance, for example).
You can lose your Bitcoin wallet
For those investing in Bitcoin, most experts recommend a Bitcoin wallet. This allows you to take your Bitcoin anywhere and invest it on any exchange. It’s yours. But there’s also a significant downside to this. Remember that this isn’t a physical wallet – it’s digital.
So if somehow it’s hacked or your hard drive or server gets corrupted with a virus, you could lose your wallet and the Bitcoin inside it.
It’s not regulated
Bitcoin, like all cryptocurrencies, is entirely unregulated by any governing body. While some people buy Bitcoin because it’s unregulated (and anonymous), it also poses a tremendous risk for investors.
If the exchange you’re using went belly-up, if someone stole your coin, or if something else happened that left you without the Bitcoin you’ve purchased, you’re out of luck.
There is no governing body to help recoup your loss or to file precedented lawsuits against exchanges. On top of that, most Bitcoin trading happens outside of the United States. Therefore, the SEC can only do so much.
Challenging tax implications
I hate doing my taxes. I’m guessing most people don’t love doing taxes, either. But when you buy and sell Bitcoin or use them as part of a transaction, they become part of your taxes. You’ll need to report them like investments – with capital gains and losses – but also make a note of the profit or loss tied to goods or services you’ve purchased using Bitcoin, where things become even more complex.
Say you bought Bitcoin today for $58,000. You then paid a marketing company to do advertising using $5,000 of Bitcoin (a fraction of the total coin). Not only would you have to determine the value of the Bitcoin when you make the transaction, but you’ll also need to specify any capital gains or losses associated with the cost basis of the transaction.
Not to mention if you’ve personally bought Bitcoin and then used it for a business transaction. Yikes.
It’s still hard to use
A study done last year by HSB shows that just over a third of small to medium-sized businesses in the United States accept Bitcoin. While that’s progress, that still leaves two-thirds of businesses that don’t take it. Many businesses still don’t see Bitcoin as an actual type of currency.
Therefore, your options are to use it as an investment or hope you can find a merchant that accepts it.
Is Bitcoin a secure investment?
Not really. As I mentioned above, it’s completely unregulated, and there’s the potential risk of your Bitcoin getting hacked or stolen. But there are two additional arguments for why Bitcoin shouldn’t be considered a secure investment:
The “Gamestop” effect
The investing industry has changed significantly in the past couple of years. With apps like Robinhood becoming so popular, the whole idea of investing has become somewhat gamified to many people. You click a bright, shiny button on a cool-looking app to buy a hot stock. That’s not investing, and it’s led to some areas of the market turning more into gambling than actual investments.
What we are starting to see, though, is investors taking a flier on more risky investments, and those investments are becoming overvalued (or at least re-valued to a level we never expected). What happened with Gamestop is an excellent example of this.
You can find another example by looking at Tesla’s price-to-earnings ratio. It just recently passed 1,300. That’s insane. It’s almost like when the stock market “burst” in the early-2000s and tons of internet-based companies went bankrupt. Or the 2008 bubble that burst in the mortgage industry.
This isn’t to say that Bitcoin will suffer the same fate. But it could.
Think about it. If you were around the markets 12 to 14 years ago, you remember how excited everyone was at the economy’s uptick and how mortgage rates were cheap. How everyone was buying homes and jobs were plentiful.
I’m exaggerating for the sake of making a point, but this is what tends to happen before a bubble bursts. Everyone gets excited, doubles-down on something, and then it bursts.
It’s not designed for producing long-term wealth
The other issue, and maybe the bigger one, is the long-term viability of something like Bitcoin. Not only do we not know if it will be around in the future, but if it is, what it will look like. Will there be tons of competitors driving the value down?
Will it just not exist? We don’t know.
And because of that, it doesn’t provide a substantial enough safety net for long-term, buy-and-hold investing. Bitcoin doesn’t pay dividends. Its valuation is irrational and not linked to anything other than other people’s excitement over it.
So for someone looking at this as anything more than a possible short-term win, you might be stuck. Remember, with the increase in value, there isn’t more Bitcoin to buy – it’s still a stagnant and finite number of coins you can mine.
Who shouldn’t be investing in Bitcoin?
If you’re still on the fence at this point, I will help make it a little clearer. If one or more of these applies to you, you probably shouldn’t be investing in Bitcoin:
You buy value stocks
Are you someone who prides themselves on finding undervalued stocks? That’s one of the core tenants of value investing – the approach Warren Buffett subscribes to. So if you’re a value investor, definitely don’t invest in Bitcoin. Bitcoin doesn’t have a set value outside of the value that people think it’s worth. Therefore, you can’t truly place a value on it – at least within real value investing parameters.
Warren Buffett has said that cryptocurrency is a toxic investment. He’s not on board with Bitcoin. And you could argue he’s the most intelligent investor of all time. So if you’re following Buffett, avoid Bitcoin.
You don’t like the idea of losing your money
Buying Bitcoin is very unlike all other types of investing. When you invest in things like stocks, bonds, ETFs, and mutual funds, there are regulations in place to help protect you as an investor from a complete loss (like if a brokerage runs off with your money).
You might still make a bad investment, but there are at least rules and regulations around publicly traded stocks, including consistent and transparent financial reporting from the companies you invest in.
And as I said before, Bitcoin is unregulated. So whatever you invest, you can lose. There have already been stories of people buying Bitcoin and losing every dollar they’ve put in. And this is just the reality of Bitcoin investing. You have to be okay with the idea that you might lose it all. If you’re not, then stay away from it.
You’re generally risk-averse
If you’re someone who tends to panic-sell, then Bitcoin won’t be for you. It’s stressful to own Bitcoin. Sure, you might get in at the right time and experience the ride upward as your money grows and grows.
But what if you don’t? What if you buy at the wrong time and it crashes right away? Can you handle that?
So if you’re someone who likes to realize the loss and just cut it, Bitcoin won’t be for you. You’ll end up taking on way more stress than is necessary. And you’ll probably lose sleep watching the constant price fluctuations, too.
Who is a good fit for Bitcoin?
Since this is an article about why you shouldn’t invest in Bitcoin, I want to keep this section brief. However, it’s essential to know who would be a good fit for Bitcoin investing. To start, I think someone who understands all the risks, is comfortable losing all of their money, and is savvy enough to understand the technology behind Bitcoin would probably be a good fit to invest in it.
Additionally, someone who has the money to lose (meaning, you aren’t bankrupting yourself by losing this money) and has an overall low-risk portfolio. For example, someone who has $500,000 in dividend-paying stocks or index funds and has an extra $25,000 to invest (or gamble with a bit) might consider Bitcoin.
Is it still worth investing in Bitcoin?
If you meet some of the “qualifications” I outlined above, it might be worth investing in Bitcoin, but it also might be too late. As of this writing, the price of Bitcoin has gone to over $58,000. The more people talk about it and generate excitement, the higher the price will go.
If you want to jump in on it and maybe even buy a part of a Bitcoin, sure, but I’d recommend finding another type of cryptocurrency at this point or just putting the money in stocks.
There you have it—some pretty blunt reasons as to why you shouldn’t invest in Bitcoin. For most traditional investors, it won’t match your overall strategy. Nor will it have a practical application.
If you’re not into gamified investing and riding the thrill of a gamble with an investment, you’ll want to steer clear of Bitcoin.
Now, remember, I laid this out in a pretty stark way. That’s not to say everyone should avoid Bitcoin. If you’re going to invest in it, make sure you’re well aware of the risks and lack of control you will have.