We don’t own cryptocurrency. We have no immediate plans to buy cryptocurrency. And we believe that cryptocurrency is unsuitable as a long-term, buy-and-hold, wealth-building investment.
Simultaneously, the technology, mathematics, and philosophy behind cryptocurrency is super cool. It has lots of practical applications. And I would even go so far as to say that Bitcoin or something similar could be a widely-accepted, global money of the future.
So, how can all of these things be true at the same time?
Is Crypto a Good Long-Term Investment? The Fundamentals Say No
Let’s start with the investing side: Assuming that your goal is to reliably increase the real purchasing power of your money over the long run, buying and holding crypto isn’t really defensible as an investment strategy. The reason is simple: Cryptocurrencies aren’t productive. I’ll explain what I mean with a little thought experiment.
Suppose you owned a company (i.e. stock) for 3 years. In that time period, the “thing” you owned would literally be creating wealth. A tech company like Apple might use the brain power of its employees and raw materials from the Earth to make software, computers, and phones. A farming giant like Del Monte Produce would grow food from the ground and feed millions. And if you owned a stock market index fund instead of just one company, you could get a piece of all that productivity and more.
In contrast, if you purchased one Bitcoin and held onto that for 3 years instead, it would fundamentally be the same “thing” as it was when you bought it — 1 BTC. But more importantly, that Bitcoin would not have changed the world in any appreciable way. It would not have built any cars, provided shelter over any heads, or fed any hungry mouths.
Buying cryptocurrency is a poor long-term investment choice for this reason, compared to buying stocks, rental real estate, or (to a lesser extent) debt like bonds, mortgages, and other loans.
Companies make things. Houses supply people with a place to live. And providing capital by issuing loans at least facilitates these productive economic activities. Cryptocurrency does none of this. Since it doesn’t create new wealth in the world, there is no good reason why buying and holding cryptocurrency should provide returns exceeding inflation in the long run.
You could make the argument that blockchain technology itself is productive — Ethereum’s smart contracts can replace centralized intermediaries, and non-fungible tokens (NFTs) could represent better versions of traditional certificates of authenticity. I agree! Developing Ethereum-based software or running an Ethereum node could be a genuinely profitable venture. But that is different from simply buying and holding cryptocurrency. The usefulness of Ethereum blockchain applications isn’t guaranteed to translate into boundless long-term growth in the price of the associated token known as Ether (ETH)*.
“But Steven,” you might plead — “if you had purchased Bitcoin and held it for 3 years from May 2018 to May 2021, it would have returned +90% annualized, compared to the US stock market’s +17% per year over the same time period! How can you possibly say that stocks are a better investment?!”
The answer is simple: An asset’s past returns alone do not indicate whether it is a good investment today — especially not returns measured over such a short time span. In the long run (like a lifetime), there is no fundamental reason why Bitcoin, Ether, or any cryptocurrency purchased right now ought to return significantly more than another unproductive, durable financial asset, like gold or silver. And frankly, there’s probably still some chance they could go to zero.
Sure, you might get lucky and score big on a speculative, short-term bet. Maybe Dogecoin will go to the moon and be worth $10 next year — I have no idea. But there is no intrinsic reason it should continue to grow in value over a lifetime.
If one ever reaches some semblance of price stability, cryptocurrency will have similar fundamentals to gold (another unproductive asset), at best. And for reference, gold has returned +3.4% annualized for the last 40 years, which is only +0.6% after inflation — not very exciting.
Crypto vs. Gold and Other Currencies
So, we’ve established that crypto is more like an alternative currency than a productive investment. This really shouldn’t be much of a surprise to anyone, since “currency” is right in its name. But this raises a new question: How does it compare to other currencies? For simplicity, we’ll compare Bitcoin against US Dollars and gold.
When it comes to a historical track record of being accepted as currency at all, gold shines brightest. Gold has represented money internationally for over two millennia. The US Dollar has been around for over 200 years, but it was actually backed by gold for much of its history, and it has really only existed in its current form for about 50 years. Bitcoin has existed since 2009.
Bitcoin’s inflation-adjusted value has risen almost 10,000% cumulatively in just the last 5 years (May 2016 – May 2021). In contrast, gold has gained an inflation-adjusted 29.6% over the same time period, and the US Dollar has lost 10.4% of its purchasing power. At first glance, this would seem to indicate that Bitcoin is superior, but all that it really means is that Bitcoin is subject to the most extreme volatility of the three — at least for now. An equilibrium Bitcoin value level could be reached in the future (and it could be much higher or lower than today’s price).
One unique advantage of the US Dollar is that it has official government support. It is federally considered legal tender in the United States, and some jurisdictions mandate its acceptance for goods and services. Gold and Bitcoin must be voluntarily considered valuable in order to be accepted as payment, and there is some risk that their acceptance as currency may be regulated by governments in a damaging way in the future (especially Bitcoin because of its association with illicit activity).
The flip side of government support is that the US Dollar is also subject to centralized control. In extreme cases, like the economic crisis in Venezuela, government mismanagement of money supplies can lead to a currency collapse. In those cases, decentralized money like Bitcoin and gold can have life-changing utility.
On a related note, another advantage of Bitcoin and gold is that their inflationary aspect is limited. The total supply of both gold and Bitcoin is capped, and the amount that can be mined in a given timeframe is limited as well. On the other hand, the US Dollar experiences constant and unlimited inflation by design, as new Dollars are created all the time. It is reasonable to expect the Dollar (and most other forms of money from central banks) to continually decline in value.
Because both Bitcoin and gold have to be mined using significant resources, there is a negative environmental impact associated with the production of both. This is a problem that the US Dollar doesn’t suffer from as much.
As you may have noticed, gold and Bitcoin share a lot of the same advantages and suffer from many of the same disadvantages. This is another reason why we consider the two to be fundamentally similar. When considered as a medium of exchange or a store of value, both have the potential to be attractive! We just don’t like them much as investments.
So — Should I Buy Crypto?
Listen, I know you want me to just tell you the best thing to buy to get the maximum possible return, but the truth is that I don’t know. Nobody does.
What I can say is that a lot of retail investors are treating crypto markets like a casino. Just like playing blackjack or roulette, short-term gambling on a volatile asset like crypto might be fun for some, but personally, we’re not interested in that.
Additionally, the current pop culture frenzy and meteoric rise in the price of cryptocurrencies should probably be triggering some alarms regarding the possibility of a bubble. It’s worth considering that crypto could be dramatically overvalued right now compared to its future equilibrium price, especially given its short lifetime. Nobody knows! Some or all of today’s cryptocurrencies could even be completely wiped off the map in a decade’s time.
Concerns about a bubble aside, crypto tokens like Bitcoin seem pretty lackluster as a buy-and-hold asset due to their fundamentally unproductive nature. The main reasons we’d consider owning any in the near future would be to diversify and hedge against inflation in a novel (albeit very unpredictable) way.
If we were to buy any, it would be with the expectation of big price fluctuations in the short term and a high probability of underperforming productive assets like stocks and rental real estate in the long run. It would also probably represent a very small portion of our overall portfolio.
For now, though, we’re happy without it.
— Steven
Just for fun, here’s the price of assets mentioned in this article at the time of its publication (May 2021):
1 BTC = $54,915.22 USD (see current price)
1 ETH = $4,146.70 USD (see current price)
1 DOGE = $0.464 USD (see current price)
1 troy ounce of gold = $1,825.27 USD (see current price)
1 troy ounce of silver = $27.06 USD (see current price)
S&P 500 Total Return Index = 8,464.84 (see current price)
Note: We are not financial advisors. We’re just a couple of bloggers honestly sharing our thoughts. This article contains personal opinions for your consideration, not professional financial advice. Check out our Disclosures page for more information.
* I will admit that a popular cryptocurrency with useful blockchain applications and plans to implement a proof-of-stake model (like ETH) has more interesting long-term prospects than something like Bitcoin, but I say this with extreme skepticism and no intention of buying any myself. If I really wanted to make money with Ethereum, I’d rather find an interesting way to use it productively than to simply hold the coin and hope for a price increase.
