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Is bitcoin a good investment?

Whether or not Bitcoin is a good investment depends on your personal definition of what makes an investment “good.”

Most investors would define a “good” investment as one that follows an asymmetric risk profile where the potential rewards outweigh the risk.

By that definition, let’s look at some examples of good and bad investments.

Scooping up shares of a high-yield S&P 500 index fund like the Vanguard 500 Index Fund ETF (VOO) is widely considered a good investment.

VOO makes up the backbone of many low- to mid-risk portfolios because it presents us with a pretty clear example of asymmetric risk. The diverse fund has a low expense ratio (0.03%), high float, and has generated consistent returns of around 14%.

Medium returns + low risk = good investment

By contrast, gambling in Vegas is a bad investment. Even though all the gambling I ever did was to turn $100 into $150 on the poker table, generating a 50% return in five minutes, it was still a bad investment. Statistically, gamblers in Vegas win less than 40% of the time—and since I have the poker skills of a blind dog, my personal chances were even lower.

High returns + extremely high risk = bad investment

So where does that leave Bitcoin?

Well, Bitcoin certainly has no issues in the potential returns department. Bitcoin is the fastest appreciating asset of the decade. And despite the recent crash, Bitcoin is still valued at $15,767.40 today compared to $3,891.31 just three years ago.

Sure, the granddaddy of digital currency has had its ups and downs (and it's currently in a major down). But let’s give it a score of “very high” in the potential returns category for now.

But the risks… Hoo, boy.

Bitcoin doesn’t fit into an asymmetric risk profile

The problem with Bitcoin isn’t just that the risk is high; it’s that the risk is incalculable.

You see, in order to assess the risk of a potential investment, you have to look at the data. Stocks and pieces of real estate give us plenty of ammo in this regard, including but not limited to:

  • Forms 10-K
  • P/E ratios
  • Floating stock
  • Competition
  • Sector performance
  • Market perception

So whether it's a retail trader’s homemade formula or a hedge fund’s sophisticated AI-driven algorithm, this data fills in the gaps to help investors predict the likelihood of good performance—and therefore the risk—involved in an investment.

Bitcoin, by contrast, gives us so little to chew on. Instead, it is upheld by demand and demand alone—and as a metric, investor demand is just too fickle and transient to predict.

Who can accurately predict and model when perceptions of a particular asset or trend will change? Who could’ve predicted that Elon Musk’s SNL appearance would instantly wipe 24% off the value of DOGE?

That’s why it’s impossible to fit Bitcoin into an asymmetric risk profile. The digital asset is so volatile and unpredictable, with so little tangible data upholding its value, that the risk can’t even be properly assessed.

And without certainty that it’s a good investment, we have to assume otherwise:

Very high returns + ??? risk = bad investment

Despite the performance, Bitcoin simply isn't a good investment on paper.

At the same time, it’s hard not to feel FOMO when everyone knows someone who’s gotten silly-rich just by buying Bitcoin at the right time. So even if it’s hard to justify on paper, isn’t the chance at gaining sky-high returns worth the risk?

Still no, and here are two reasons why:

  1. You make strategic decisions with your money–and FOMO isn’t an investing strategy
  2. FOMO also implies that you’ll be “missing out” on Bitcoin’s huge returns year over year. But remember, Bitcoin value is unpredictable; so to assume it’ll keep rising because it has been rising would be falling prey to the gambler’s fallacy.

In short, Bitcoin’s volatility—and its shortness of factors dictating its market value—make it too hard to predict, and thus not a fit for an asymmetric risk profile where the house (you) always wins.

More: How to trade cryptocurrency (and whether you should)

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What are the additional risks of investing in bitcoin?

A Bitcoin investment isn’t just subject to market volatility; it’s also vulnerable to some serious outside threats that could wipe out large amounts of value overnight—or even your entire portfolio.

Here are some examples to keep in mind while considering a Bitcoin investment:

Hacks, scams, and theft

Hackers and scammers stole a record $14 billion worth of crypto in 2021, according to CNBC, which is a 79% rise from 2020 levels. Mt. Gox was handling 70% of the world’s Bitcoin transactions when it was hacked in 2014—and 650,000 bitcoins have never been returned to their rightful owners.

Now, you can safeguard your crypto from hackers by storing your private keys in a cold crypto wallet, which unlike a hot crypto wallet lives entirely offline. However, using a cold wallet introduces a whole new form of risk as we'll see next.

More: How to spot a crypto scam (in-depth guide)

Losing your cold wallet

What do a USB stick, hard drive, or even a scrap of paper have in common?

They can all be lost.

Just ask James Howell, who accidentally threw away the wrong hard drive in 2013 and has been searching for it in a landfill ever since. And who can blame him for getting his hands dirty and not giving up? There’s 7,500 BTC on that hard drive now worth more than $277 million.

In total, 20% of Bitcoins are lost due to misplaced or forgotten private keys.

Regulation

Increased regulation doesn’t just threaten the portfolio of traders within that country’s borders, it can send global prices tumbling.

India tried enacting anti-crypto legislation in 2018, but in 2020, the Supreme Court struck it down. This led Indian investors to “pile into the market,” according to Reuters, only for a new proposed ban to surface in 2021—one that “officials are confident in getting enacted into law.”

Russia’s central bank also proposed a ban on crypto activity in 2022, and when China published plans for a renewed crackdown in May of 2021, Bitcoin fell $10,000 or ~25% in a matter of days.

More: Learn more how future regulation may affect crypto

Bad press

In addition to regulatory nooses tightening, Bitcoin seems especially vulnerable to bad news.

When Terra folded earlier this year, Bitcoin fell. Then when Three Arrows Capital went bankrupt (and brought multiple crypto lenders down with it), Bitcoin plummeted again.

And most recently, the collapse of FTX has sparked a new crypto contagion and pulled Bitcoin down to the lowest level we've seen since November 2020.

The metaverse

Although Facebook's investors seem to strongly disagree, Mark Zuckerberg thinks we’ll all be in the metaverse within the next five to ten years.

And while investors are already seeing vast opportunities in virtual real estate and NFTs, the one asset that doesn’t seem to have a place waiting in the metaverse is Bitcoin. Ethereum powers NFTs. Cardano uses proof-of-stake to make smart contracts more eco-friendly. Companies like Meta, Walmart, and others are developing their own proprietary stablecoins to use as stores of value.

So where does that leave Bitcoin?

With high power consumption and limited practical uses, it appears that Bitcoin might be too old-fashioned for the metaverse. And as more investors realize this, they might start converting their BTC to more future-proof cryptos.

More: Best metaverse stocks to invest in today

What about buying and HODLing?

Is Bitcoin a better long-term investment, then? Should you just buy and HODL?

Bitcoin’s messy short-term volatility, but staggering overall gains since 2012, have led many investors to consider a long-term investment.

After all, HODL is the unofficial creed of dedicated crypto investors.

To the uninitiated, HODL derives from a BitcoinTalk forum post in 2013, where user GameKyuubi, admittedly tipsy on whiskey, proudly declared “I AM HODLING.

HODL eventually got its own backronym: Holding On for Dear Life.

So, is buying and HODLing still valid right now?

While Bitcoin had a heckuva bull run from 2012 until now, the mounting threats may indicate that it’s finally out of jet fuel.

“It just seems like the asymmetric payoff you can get when these coins are trading at pennies is no longer possible with 5 digit valuations,” says David Hunter, CFA, CAIA, Director of Research and Investments at CPC Advisors. “In fact, it looks like the payoffs might be asymmetric in the wrong direction.”

Varun Marneni, CFP, Executive VP of CPC Advisors, pointed out that crypto has lost over $2 trillion since its peak so “Investors should not miscategorize crypto as a safe haven asset class.”

Varun’s final word of advice is to tread carefully before you follow crypto stans into the breach.

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How can I still make money off of crypto (without the risk)?

There’s a classic idiom that I think applies well to Bitcoin:

During a gold rush, sell shovels.

Buying Bitcoin directly is just too risky for anyone trying to manage their money using asymmetric risk.

But there’s still money to be made.

So, what’s the equivalent of “selling shovels” for Bitcoin? How can you profit from Bitcoin’s (potential) rise in value while simultaneously hedging your risk?

Here are a few ways to invest in crypto without actually buying any:

  1. Buy crypto stocks
  2. Buy crypto ETFs
  3. Invest in the Grayscale Bitcoin Trust
  4. Mine it and essentially get free crypto (check out How to Start Mining Bitcoin in 60 Seconds)
  5. Buy blockchain stocks and ETFs
  6. Invest in companies that invest in crypto

The bottom line

Bitcoin is the Willys Jeep of the crypto world. And just like that venerated army truck, it’s fought and won some extremely important battles, helped to pave the way for its successors, and deserves our respect for all the trailblazing it’s done.

But at the same time, it’s an antique. It’s unsafe, unstable, and with each passing year, modern regulations are trying to phase it out.

If you’re seeking a more future-proof investment “vehicle,” check out our guides How To Invest In Cryptocurrency and ETF Investing 101.

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Chris Butsch Freelance Contributor

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie (now Moneywise) and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.