When discussions occur about Bitcoin or crypto, traders use the same argument. Stocks are investments while crypto or bitcoin is speculative.
Ewwww! This is wrong on so many levels.
According to Ben Graham, the Godfather of Investing, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory or ‘adequate’ return. Operations not meeting these requirements are speculative.”
The key phrase is “safety of principal” and “a satisfactory or ‘adequate’ return.” Which no stock or company can promise. Even one of the safest investments, U.S. Treasuries, has hardly delivered a “satisfactory” return of late.
Some amount of speculation always exists in principle.
The reason: the future is uncertain.
So why are cryptocurrencies, even more specific Bitcoin, singled out?
Investing is Speculating
As mentioned, no stock, no investment, no company, nor financial institution (as we saw during the financial crisis of 2008-2009) can offer safety of principal or satisfactory returns.
So why do people invest?
People invest so their money can grow. Most common investment vehicles, such as stocks, certificates of deposit, or bonds. Offer returns on your money over the long term.
This allows your money to build which creates wealth over time.
No one in their right mind invests with the intent to lose their money. They invest with the intent to make money!
Does it always happen?
Nope! And it happens more frequently than intended.
There are plenty of mistakes investors make, but, three of them are the most common. Not every bad investment is or was a mistake.
Sometimes, investments take a turn for the worst. That’s why investing is always speculating because the future is uncertain.
The $4.3 Billion Uncertainty
Let’s be honest, you could have done a thorough analysis of a stock or company. And the trends demonstrated a consistent safety of principle and adequate returns. Yet, after you invested you lost a considerable amount of your investment.
Could it have been $4.3 billion? Just ask Warren Buffett.
In February 2019, Kraft Heinz took a $15.4 billion write-down for its Kraft and Oscar Mayer brands and other assets. It slashed its dividend, and said the U.S. Securities and Exchange Commission was probing its accounting.
Kraft Heinz’s share price sank 27.5 %. Wiping out more than $16 billion of market value, and causing Berkshire to lose $4.3 billion on its stake. Berkshire owns 26.7 percent of Kraft Heinz.
Warren Buffett, the legend himself and investment guru, said his Berkshire Hathaway Inc overpaid in the 2015 merger that created Kraft Heinz Co.
“You can turn any investment into a bad deal by paying too much. What you can’t do is turn any investment into a good deal by paying little.” – Warren Buffett
I know what you’re thinking!
Kraft Heinz has been around for 143 years (started in 1876)! While Bitcoin and cryptocurrencies have only been around for 10 years. We have all heard the arguments that cryptocurrencies haven’t been fully established, are volatile, have security issues and hold no value.
Hmmm…that’s funny because Bitcoin just went over $11k today.
But does time and establishment really dictate a good investment? Warren Buffett thought so with the way Kraft Heinz was trending. But it wasn’t and it will take years for it to recover.
Let’s not use Bitcoin as an example and instead use Costco. More specifically their Kirkland brand established in 1992 which makes them 27 years old.
Kraft Heinz does $26 billion worth of business. Been around for 143 years and distributes their products through tens of thousands of stores and outlets.
Costco’s Kirkland does $39 billion worth of business. Been around for 27 years and only distributes through 775 stores.
Kirkland wins – interesting isn’t it since they have only been around for 27 years vs. a 143 yr. old establishment…
Investing is speculating.
We need to be aware and admit that when we buy rental properties, trade stocks or buy them for their long-term potential, we are speculators.
Investing in Crypto
Cryptocurrencies are investments and should be treated as such. They are digital assets backed by foundations and companies developing solutions to real-world problems.
But, they aren’t a typical investment like stocks or bonds, but they can be traded as if they were on crypto markets and exchanges. Investing in crypto is an unconventional investment type. Similar to commodities, gold, and foreign currencies.
A majority of cryptocurrencies, like Bitcoin and Litecoin, are meant to be used as currencies to purchase and exchange goods.
When you invest in cryptocurrencies. You’re investing in the infrastructure to make these solutions a reality.
Let’s use the same principles we discussed earlier for stocks for crypto, specifically Bitcoin.
If you analyze Bitcoin, it has been around 10 years and it has fulfilled its purpose. A decentralized peer-to-peer payment network powered by its users with no central authority.
Foundations and developers have continued to work together to improve the underlying technology (blockchain) through forks and updates. It has continued to grow and adoption has been ongoing.
We could apply a multitude of investment analysis techniques and benchmarks, but I am keeping it stupid-simple.
Safety of Principal
By definition, the safety of principle is the assurance that a person’s principal, or initial investment, will remain the same over the life of the investment. As stated before, no active “investment” can guarantee this. Unless its bank certificates of deposits or money market funds where the principal is federally insured.
Just like a stock – the safety of principle for Bitcoin depends on when you invested. But as stated before, the future is uncertain. You either bought when it was low and have seen significant returns. Stayed stable or bought at all-time highs (ATH) of $20k and have lost significantly.
Yet, we’re looking at Bitcoin as a long term investment.
Prior to the bull market of 2017. Where Bitcoin went from $6,500 to $20,000 in 33 days – followed by the bear market – the returns have been staggering.
Let’s say you invested $100 on January 1st of the following years: 2011-2019
We will see the total return, annualized return, and ending value. Had you invested $100 on the 1st of January the last 9 years.
Example: Invest $100 January 01, 2011 and forget it until now. What would be the returns?
As I said, besides hitting all-time highs in January 2018 and crashing. Bitcoin has provided “adequate” returns. Beating the S&P 500 easily…
If you’re still convinced its not an investment then I don’t know what will. We can argue semantics all day but in the end, those who invested in crypto saw significant returns. And continue to see consistent gains annually.
Like any investment, investing in crypto is not without risk. If you want to try investing in crypto for FREE – read this article to learn how you can ‘learn and earn’ free crypto through Coinbase.