From time to time, people have asked me about ‘investing’ in cryptocurrencies such as Bitcoin, LiteCoin, Ethereum, Zcash, Dash, Ripple, Monero, etc. If you want my short answer and recommendation, it would be ‘don’t’.
A cryptocurrency is defined as a digital currency in which encryption techniques (such as Blockchain) are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
The anonymous nature of cryptocurrency transactions makes them well-suited for dubious, under-the-table, non-reportable dealings and even criminal activities. While many proponents have advocated for their use in day-to-day monetary transactions between individuals and/or enterprises, the reality after many years is that the technology is cumbersome, slow, and not well-suited to this purpose.
What we normally consider to be ‘money’ is technically known as a fiat currency, something that a government has declared to be legal tender, but not backed by a physical commodity. So the value of any currency (other than one backed by something like Gold), including cryptocurrency, is all about the supply and demand.
In the case of cryptocurrencies, the price has been driven up in recent years by ‘investor’ demand, get-rich-quick types, and a general atmosphere of FOMO (Fear of Missing Out). Over the past few months, however, cryptocurrencies have fallen dramatically, sometimes in the order of 80 to 90 percent or more. In the perennial quest to get rich quick, many Average Joes have literally lost their shirts and/or their life savings.
OK, a cryptocurrency promoter might (or might not) say. It may not be the best way to facilitate a legitimate transaction, but it’s still a great store of value and a way to protect yourself from inflation and keep your riches from the government’s reach. Well, there’s a grain of truth in that, but it’s a little more complicated. Because it’s technology based, there is always a chance someone can hack into your currency broker’s system and clean out your digital wallet. It’s already happened, many many times. On a regular basis in fact. As an example, yesterday a Japanese Crypto Exchange was hacked, with $59 Million in losses reported.
If you really want to dedicate a portion of your globally diversified, balanced portfolio into a real, tangible store of value against inflation, put it into a time-tested product that’s been used for thousands of years and will always be there, even when your Venezulan pesos and Zimbabwean dollars have totally let you down. Yes, I’m talking gold and silver and other precious metals. That’s bullion, baby. And not everything…maybe 5 or 10 per cent of your investment assets. Or maybe not. Here’s what Warren Buffet, the Oracle of Omaha and the greatest investor of all time, says about gold:
“You could take all the gold that’s ever been mined, and it would fill a cube 68 feet in each direction. For what that’s worth at current gold prices, you could buy all—not some—of the farmland in the U.S. Plus, you could buy 16 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”