The price of bitcoin is up 57.2% year-to-date in 2020. This bullish move has emboldened bitcoin bulls who say that the cryptocurrency is an excellent store of value for investors concerned about inflation.
In reality, the cryptocurrency bear thesis is alive and well. Bitcoin and funds like the Grayscale Bitcoin Trust (OTC:GBTC) are not safe investments. Cryptocurrency transactions are far from the anonymous, risk-free transactions they are advertised to be.
Bitcoin is a terrible store of value and an equally terrible long-term investment. And the more bitcoin becomes mainstream, the more the most powerful governments in the world will make it their mission to undermine the cryptocurrency.
Why I’m Staying Away From Bitcoin
There are three main reasons why I’m staying away from bitcoin. First, I don’t need it as a payment option. For most people making legal transactions, credit cards or payment apps like PayPal (NASDAQ:PYPL) and the Square (NYSE:SQ) Cash App make digital payments a breeze.
Bitcoin bulls love the decentralization of the cryptocurrency. But the fact that there’s nobody policing bitcoin transactions means there’s little recourse for scams or theft. If someone makes a fraudulent transaction with my credit card, I contact my bank and the charges are cancelled. If someone makes a fraudulent transaction in bitcoin? Tough luck.
There’s this perception out there that cryptocurrency is secure because blockchain technology is secure. The blockchain system may be secure. But that’s a far cry from cryptocurrency transactions and storage being secure. In fact, more than $4.5 billion in cryptocurrency was stolen via hacking or fraud in 2019.
Second, bitcoin is a terrible store of value. There’s a difference between an asset generating high, short-term market returns and an asset being a strong store of value. Sure, the price of bitcoin is up 57% this year. It was up 89% in 2019, and it was down 69% in 2017.
The point is, it’s extremely volatile. Volatility is great for a day trader, but few reasonable people would ever switch over their life savings from dollars to bitcoin if those savings could potentially be worth 69% less just 12 months later. When it comes to savings or retirement, most people aren’t looking to gamble.
Greater Fool Theory
Finally, if bitcoin isn’t a store of value, what is it? At its core, the answer is that it is a bunch of code. It has no intrinsic value. It has no unique utility. In essence, any person buying bitcoin is buying it for one reason alone.
They are buying it in the hopes that at some point in the future, whether that be a week, a year or 30 years down the line, they will be able to sell it to someone else at a higher price.
There’s a name for that type of investment that is often used to explain pump-and-dump schemes related to penny stocks. It’s called the Greater Fool Theory. In essence, the theory states that by buying something with no value, you are essentially acting foolish. but the hope is that at some point in the future you will be able to sell the asset to a greater fool at a higher price.
As a general rule of thumb, I try not to make foolish investments, even if I believe there are even bigger fools out there.
‘Rat Poison Squared’
Perhaps the best argument I can make against bitcoin is how many of the smartest and most successful investors and business leaders think it is a horrible investment.
Bill Harris, founding CEO of PayPal, once called bitcoin the “biggest scam in history.”
“Bitcoin is a scam. In my opinion, it’s a colossal pump-and-dump scheme, the likes of which the world has never seen,” Harris said.
Young investors love Tesla (NASDAQ:TSLA) CEO Elon Musk. Musk once said his stance on cryptocurrencies “gets the crypto people angry.”
“In order for illegal transactions to occur, the cash must also be used for legal transactions. You need an illegal-to-legal bridge. That’s where crypto comes in,” Musk said.
In other words, bitcoin has plenty of utility…when it comes to illegal money laundering.
But by far the best quote comes from iconic Wall Street investor Warren Buffett, who famously called bitcoin “rat poison squared.”
“Cryptocurrencies basically have no value…You can’t do anything with it except sell it to somebody else,” Buffett said in early 2020.
I agree with Buffett. Bitcoin is a cool concept, and blockchain technology is a revolutionary idea. But bitcoin is a terrible store of value.
The average person has no use for it in legal, day-to-day transactions. And it’s closer to a scheme than a viable long-term investment, which is why the Securities and Exchange Commission has repeatedly rejected bitcoin ETFs as safe investments.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.