As most of my readers know, I’m an optimist.
This belief applies across my life, and to various investments as well. So I am intrigued by the success of cryptocurrencies, such as Bitcoin and Ethereum. The competition they are putting up against the gold standard looks insane, as Bitcoin goes off to the races.
There’s no way to fully understand what’s going on in the crypto world — and I am not even sure anyone could if you tried to. Still, I can tell you that Bitcoin’s recent surge is really an opportunity to buy long-term real assets.
Cryptocurrencies are new and don’t even have a useful underlying technology. They will probably fail, probably sooner than later. If people forget about them quickly, it is likely to be because the underlying technology will finally mature and win out. We don’t even know whether that will happen in a generation or maybe a century, but it’s still possible it might.
Why invest in crypto now, if it’s unlikely to last?
The crypto world is more than one day old, and a lot of its early enthusiasts are looking back at what they did wrong. But most are still in it. There is still a lot of potential, and potentially a lot of wealth to be made.
Imagine the world right now, say 10 years from now. Have you invested in things like gold, real estate, or corporations?
Do you think your assets will continue to appreciate, or will you have lost out to inflation and depreciation?
Gold has a history of doing that, but with corporate stock I’d be worried. Why? If you look at the past, corporate stocks and bonds aren’t exactly reliable long-term sources of capital. They tend to move in the same direction, and in the short run they tend to go down.
So if you do want to buy gold or corporate bonds, you have to choose between those things and Bitcoin. If you think Bitcoin has long-term promise, and you are willing to hold it for some time, then it can be a great investment for this period. But if you think stocks and bonds can be held forever, no more Bitcoin?
Next up is long-term property. Does property have a future, or will it continue to deteriorate?
Unlike stocks, real estate is very difficult to evaluate, at least in the short run. People sometimes test this with “short flips,” i.e., going in and out of homes in order to find out how the house is doing, and the rush to invest in Bitcoin is kind of like trying to invest in what is going to be the housing market for decades.
Meanwhile, I’m not sure the technology is ready to replace the limited networks of physical real estate. As with the stock market, asset prices are set by supply and demand, as people want to buy assets when they are cheap and sell them when they are expensive. And I don’t know if there will be a future demand in the bitcoin form, as people will turn off the internet when bitcoin runs out of steam, and then demand that their digital wallets be converted to a third-party wallet or sent to some old-fashioned brick-and-mortar store.
I wouldn’t invest in Bitcoin now, but if you wanted to let your crypto assets perform real asset management, you could. After all, what would be the downside of Bitcoin losing the race against the gold standard? Even just turning it into digital cash would benefit people who are really serious about maintaining a stable-price money supply.
If you got bitcoin at a drop in the bucket, you could buy some property, maybe even a small business, and make enough money off it that it could pay for itself. But as with real estate, I wouldn’t want to be a long-term owner. I want to be able to live in the house I own for as long as possible and to rent it out while I am doing so.
So in the long run, I would favor buying some real estate or perhaps stocks, and getting some life insurance or a home equity line. For real estate, that’s probably 15 to 20 years, and for stocks it’s probably more like the next 30 years.
But in the long run, if you are going to be long-term buying the crypto economy, you should not be short-term speculating. You should own bitcoin or Ethereum, and be happy to be holding it for 10 to 20 years.