29 Feb 2024 Is It Time To Talk About Bitcoin Again?

This week in the Wall Street Journal there was an article about…well actually the title, subtitle and your imagination are probably everything you need: “The TikTok Generation Turns to Sports Betting to Chip Away at Student Debt. Young men are trying to use ubiquitous online betting to deal with big college loans.”

Also this week Bitcoin was up, as of the time of this writing, over 18% and up over 43% in the last month.

Here is a very crude framework I have for thinking about asset classes on the risk/return spectrum, ranging from highest risk and possible return to lowest risk and possible return:

1. Own a business. A business provides its owners with the most direct exposure to the possibility of turning an idea and some capital (and maybe some debt) into a scalable and highly profitable venture that sells products and/or services. This is why basically all the wealthiest people in the world are entrepreneurs who own extremely large and obscenely profitable businesses. But also of course most businesses that get started end up failing, and a business owner can be bankrupted by their business. Never forget that risk and reward are two sides of the same coin!
2. Own many businesses. Putting your capital to work in many businesses through a portfolio of stocks is not going to make you a billionaire unless you are good enough to run a hedge fund and charge other people 2% plus 20% of profits to also invest their capital. But it is also a very efficient way to grow wealth over time, without going bankrupt (I mean the companies can still go bankrupt and you won’t get a dime, but this is why a portfolio has many stocks that reduce the risk of any one bankruptcy having a material impact on you personally). You also get to avoid the tremendous stress of owning and managing a business.
3. Lend money to the U.S. government and/or some highly rated businesses. Bonds are what we call lending someone money for a stated interest rate over a certain period of time. Bonds are less risky because if the company you’ve leant money to goes bankrupt, you as a bondholder are at least theoretically going to get something back for your trouble. Maybe just pennies on the dollar, but still, pennies are better than nothing. The company makes promises to you as a bondholder that they do not by any means make to its shareholders, and because you can go take their furniture and equipment in the event of default, they pay you less in interest than you might expect in capital appreciation as a shareholder.
4. Currency. This is the money you spend, and which you hope is fairly stable, with a slight inflationary tendency. You get some nominal interest rate for storing this stuff at banks so they can in turn participate in number 3 above, but overall you would not expect this rate to beat inflation, and that is because it is guaranteed by the FDIC. There is zero risk of loss assuming you spread your cash according to their limits.

So most everything fits on that crude framework somewhere. But then there is a side framework/narrative I have for the asset class known as “Gambling” which is basically this: Most people, except for professional poker players, do not rationally give their capital to a bookmaker or dealer expecting a financial return (because there is so obviously a negative expected payout for almost every scenario of gambling, even with large enough sample sizes). So instead, gambling tends to be something we engage in financially but for entirely social reasons, ranging from “this is fun to do with my friends” to “I am desperate and addicted.” I’ll leave you to decide where the guys in the Wall Street Journal article fall on that spectrum. And it’s important to say here that you can, through your behavior, take anything from the asset framework above and turn it into gambling.

So is it time to talk about Bitcoin again? It seems to be going gangbusters again! But here is a question: where would you place Bitcoin in those frameworks? It doesn’t fit into the top one, certainly. There is no underlying business. No products or services are being sold. Putting capital into Bitcoin is neither getting you on the equity section of its “balance sheet” as a shareholder nor the debt section as a bondholder. In fact, there is no balance sheet at all. And though there in the name it says “coin” and is categorized as a cryptocurrency, it definitely does not function well as a currency. It’s dreadfully clunky to use to buy anything, it’s difficult to store, and it’s anything but stable.

If it is time to talk about it again, I’ll go ahead: Buying Bitcoin is very close to gambling. I don’t know if it’s actually gambling, and I don’t know that the semantics matter. Unlike more traditional forms of gambling, you could make the case that there is an option-like value to buying Bitcoin, betting on the possibility that fundamentals come later, or that its status as a purely social phenomenon will become semi-permanent (like gold) at a price higher than what you bought it for. Maybe it will even provide some additional diversification at the margins of your portfolio.

But even if those things were true, they would only be true after the fact. They would only be true in the way that guys paying off student loans by getting lucky on Fanduel could say they made the right choice. Perhaps with Bitcoin you are on slightly thicker ice, but it’s still thawing.

In the meantime, the price of Bitcoin is much more than $60,000; it’s your time, attention, and energy. You can choose to spend them; just be careful and remember: There are no get-help hotlines to call for those addicted to crypto gambling.

The content above is for informational and educational purposes only. The links and graphs are being provided as a convenience; they do not constitute an endorsement or an approval by Beacon Wealthcare, nor does Beacon guarantee the accuracy of the information.