By Jerry Fetta
On January 3, 2009 the first Bitcoins came into existence. When Bitcoin was first released, it was worth literally nothing. Today, 1 unit of Bitcoin sell for more than $35,000.
But what is Bitcoin? Well, it’s a form of crypto-currency. If we define the word crypto, it means “hidden or secret”. And if we define the word currency it means “something that is used as a medium of exchange; money”. So then crypto-currency is “something hidden or secret that is used as a medium of exchange; hidden or secret money.” I define this first because it helps me understand things better. Now that we know what it is, how does it work?
Well, in 2008 an unknown and “hidden or secret” issuer created crypto currency. Nobody truly knows who the issuer is, why they made crypto currency, or where they are today. But this unknown issuer created Bitcoin and began distributing it in limited amounts.
Bitcoin really isn’t anything tangible. It is an electronic transaction recorded on a digital ledger called “blockchain” that is verified by people who review and validate Bitcoin transactions for compensation. These people are called “miners”. They don’t really mine, they are basically Bitcoin accountants to reconcile the buying and selling of Bitcoin.
A person who buys Bitcoin is transferring their country’s currency into a digital form and placing it into an online account. No different than opening a brokerage account or a bank account. Except Bitcoin refers to these online accounts as a “wallet”. It’s not really a wallet though. It actually is just a secure online account like you’d get with a financial institution.
Once the funds have been placed into the secure online account, they can be used to buy units of Bitcoin. This is a digital transaction where the currency deposited into the online account becomes digital and then is exchanged for digital units of Bitcoin. This is much like buying stock on an online brokerage account. You can trade your money for shares of stock and then your account says you have shares of stock and credits you the growth or loss of those shares for the period of time they are owned. Only instead of shares of stock, it is units of Bitcoin. Let’s be clear though, when a person buys Bitcoin they aren’t actually getting a coin or anything of real value, even though the logo is a gold coin with a “B” on it. This is just a marketing attempt to create an association with Bitcoin and Gold, which we will address later. A Bitcoin buyer is simply trading USD denominated digits in an online account for BTC denominated digits in an online account and then being credited the growth or loss of those BTC digits.
Limited places will allow a person to pay for services with Bitcoin. So in theory in some very limited, but increasing circumstances a person could potentially buy goods and services with Bitcoin instead of with their nation’s currency.
A person can also either sell their Bitcoin at a gain or a loss or they can hold it and hope that it goes up in value long term. Those are the 3 end games of owning Bitcoin. Sell, Keep, or Spend.
If Bitcoin is kept it can be kept in the online “wallet” which again, is really just a secure online account or it can be downloaded onto a “cold wallet” which is really just a USB or Thumb Drive.
So now that we’ve very simply defined what Bitcoin is and how it basically functions, let’s talk about why I don’t own any. You may think I’m stupid not to be because 12 years ago it was worth nothing and now it’s worth $35,000 right? Sure, let’s talk about that.
First thing is a breakdown in the difference between price and value.
Price is defined as “the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale.” In other words, price is how much something costs. It’s what the tag says I’ve got to pay to own something.
Value is defined as “estimated or assigned worth.” Worth is defined as “good or important enough to justify.” So value is what something is worth and something is worth only what it is good enough to justify.
I start with these definitions to show you price and value aren’t identical. They aren’t actually even similar. They are different. What something costs and what it is worth are two entirely different things and in the world of investing to not understand this difference is a deadly mistake.
Right now Bitcoin’s price is $35,000. That doesn’t mean its value is $35,000. So my question then becomes what is Bitcoin worth. Again worth is the quality of something being good or important enough to justify its price. If it’s not good or important enough, it’s not worth what it costs. If it is good or important enough, it is worth what it costs. If it is more than good or important enough, it is worth more than it costs.
Right now, 1 unit of Bitcoin costs $35,000. We can all agree that is a very high price. But is Bitcoin good or important enough to justify $35,000?
With real investments, I determine the worth of something by looking at 2 main factors.
- Income produced
- Intrinsic value
Income produced means that the investment produces income, like real estate for example. I can look at the historical track record of income produced and see if it’s reliable and I can also count up the future value of the income it will pay and come up with an actual value or worth based on those future payments and the reliability of the past payments.
Intrinsic value is a measure of what an investment is actually worth via an objective calculation regardless of what its price is. This type of valuation takes into consideration utility or use value, underlying asset value, and other tangible values in order to come up with a total worth of an asset based on its components. An example of this could also be real estate where if it doesn’t produce income, it does have raw land, a structure, well & septic, and other qualities that make it valuable regardless of its price.
A reason I don’t own Bitcoin is because it fails both of these tests.
It produces no income.
It has no intrinsic or underlying value.
Okay well what about my other test? I have a 4 point test I run all investments through and if I cannot check off all 4 points I don’t invest.
Point 1: Do I like the investment?
For me, no. I don’t like invisible money or assets. It’s called fiat. Meaning it is non-tangible and has no value other than the confidence of the issuer and those who buy and sell it. I don’t do fiat investing and I don’t like it.
Point 2: Do I understand the investment?
Yes and no. I understand all of the definitions of Bitcoin and crypto-currency and how it works…but the question I’ve never been able to answer and frankly nobody I’ve ever spoken to about Bitcoin has been able to answer is: what am I getting? You see, when I invest in gold, I get a real bar of gold. When I invest in private real estate lending, I get income. When I invest in Bitcoin, I get…. Safety? Security? Those are all things I can get for a lot less than $35,000. Deep down, I believe not one person really understands what they’re getting when they own Bitcoin. Instead they justify this illogic with the hype that Bitcoin rides upon.
Point 3: Does the investment fit me as an investor?
No. As an investor I have a very low tolerance for risk and loss. I have a very low tolerance for volatility. I have a very low tolerance for intangible investments. I have a very low tolerance for investments that receive media hype. I’m also an income investor, not an appreciation investor. Meaning I invest in things that pay me that I don’t have to sell. I don’t invest in things that I speculate on the price increasing that I then have to sell.
Point 4: Does it fit my goals?
No. My goal as an investor right now is to achieve Passive Income that exceeds my Savings, Expenses, & Taxes. Bitcoin doesn’t and cannot provide passive income.
Alright well it failed that test. What about my final test? I operate on the following rules with any investment:
- Never invest if I can’t accurately draw it with a pen and paper.
- Never lose money.
- Always make money.
- Never invest in something with less than a 5 year track record of profitability.
Bitcoin fails this test as well. For one, I have already discovered I don’t truly understand it which means I’m not going to be able to sketch it out with a pen and paper. Bitcoin has lost money so this rule is violated as well. By nature of losing, it hasn’t always made money so that rule is also violated. And finally, yes Bitcoin does have a 5 year track record of profitability, but that’s only 1 of 4 rules.
In total, I’ve showed you 10 qualifying points that an investment must meet for me to put money into it. Bitcoin passed 1 of them, which is only the fact that it’s been profitable over the last 5 or more years. Which brings me to my conclusion:
The average person only invests in Bitcoin because the price has gone up over the years. That’s it.
What’s not being considered is the fact that Bitcoin is volatile. So it isn’t a store of value. I’d never let a customer pay me in Bitcoin because it could be immediately worth less than what I received because the market drops down. Another thing not being considered is regulation. Bitcoin is currently classified as a commodity. This means it is largely unregulated. But as more and more institutions begin to own Bitcoin it will become more regulated and potentially even be re-classified as a Security under the 1933 Securities Exchange Act. At this point, Bitcoin will no longer be a wild stallion of possibility. It will be another government regulated, Wall Street mule. And lastly, Bitcoin will soon be competing with Fed Coin. That’s right. The Federal Reserve Bank is creating their own digital currency and the moment they do that Bitcoin will either be even more heavily regulated or potentially even just outright illegal to own. The government currently issues paper currency and because of that any private citizen who issues paper currency of their own is considered a counterfeiter. When the government begins issuing digital currency, it’s not far fetched to see that any private citizen who issues their own digital currency will also be considered a counterfeiter.
So what is Bitcoin?
It’s a speculation. It’s an idea. It’s a dream. It’s a fad. It’s hope. These all make for terrible investments.
What isn’t Bitcoin?
It’s not a real asset. It’s not “digital gold”. It’s not reliable. It’s not proven. This is why I don’t own any.
We can go into so much more on this topic and get into speculations, conspiracies, and opinions. But this article is just the facts and my personal analysis of those facts.
Maybe in 10 years I’ll look back and wish I bought Bitcoin.
But maybe in 10 years, you’ll look back and wish you hadn’t bought Bitcoin.
We will see. And that by definition is speculation, not investing.
I’m going to end this article with a quote from Warren Buffett (who owns no Bitcoin)
“If somebody gets mad when you criticize their investment, they are gambling.”
— Warren Buffett
I hope you enjoyed this article and please like, share, and follow!
To Purpose, Wealth & Freedom,
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Fox, Chicago Weekly News, and other publications with dozens of features on popular podcasts and has earned endorsements and affiliations with names like Grant Cardone and Dave Ramsey. Jerry’s mission in life is to help create millions of financially educated and wealthy families navigating their economic futures with certainty and building more prosperous communities around them. Learn more at www.WealthDynamX.com