Despite a chorus of warnings from consumer protection agencies, Nobel Prize-winning economists, major banks, brokerage houses and others, there remains a feverish attraction to the virtual currency Bitcoin as a once-in-a-lifetime investment opportunity. The problem is, putting money in Bitcoin is more akin to gambling than investing, and the risk of losing money is far too great to represent a responsible use of one’s financial resources.
The Utah Division of Securities recently warned against investment in Bitcoin as a venture into dangerous speculation. The currency is being used as a vehicle for fraud by unscrupulous promoters and is reminiscent of many past bubbles that have led enthusiastic investors down a ruinous road. Yet it is easy to see why it has presented a powerful lure. A $100 investment in Bitcoin in 2011 would today be worth more than $3 million. At the beginning of 2017, a Bitcoin could be purchased for around $900. A year later, its value has been as high as $17,000.
The value of the so-called “cryptocurrency” skyrocketed last year, which is an indication of its true nature as a vehicle for speculative investment and not a product with appreciating wealth based on its intrinsic value. As an alternative currency stored electronically using blockchain technology, Bitcoin carries a certain mystique as a rogue medium for moving money outside the purview of central banks or financial regulators. But, as Nobel laureate Joseph Stiglitz said, “Bitcoin is successful only because of its potential for circumvention. It doesn’t serve any useful social function.”
While instruments have been set up on securities exchanges to trade in Bitcoin, most major investment houses have warned against it. Its daily value is subject to wide swings, which may be appealing to day traders who will buy long or sell short based on what they perceive is its next move in a highly volatile market. Average investors looking for ways to grow a nest egg have no sensible business in such a gambit.
The Bitcoin phenomenon is similar to the craze that infected Utah’s notorious penny stock markets in previous decades. Promoters would sell cheap stock in a company based on wild stories about its potential success in mining, oil exploration or any other potentially lucrative venture, then sell huge caches of the stock secretly held in their own accounts when the prices climbed from pennies to tens of dollars a share. Those “pump and dump” schemes are against the law, though there are many trades that occur in a bubble environment based not on the cumulative value of an asset over time, but on the potential to make money when it spikes as a result of investor hysteria. In such an environment, there may be lots of winners, but eventually there will be a multitude of losers.
Principles of long-term investing and wise money management, on the other hand, persist as smart methods of securing a safe financial future. Setting aside monthly savings and adhering to a budget may seem stodgy in contrast to the excitment of high-risk investments, but those who do are more likely find themselves in a comfortable retirement with few financial follies to regret.
The technology that has given birth to virtual currencies may indeed have potential value in new applications for the movement of money. But now, those thinking about taking a stake in Bitcoin might be tempted to see it as an investment with potentially large returns when, in actuality, it’s barely different from buying a lottery ticket or plunking down cash for chips in a casino.