No.
Cryptocurrency is not an investment.
Well, they do say, “don’t bury the lead.”
First, what is cryptocurrency?
Cryptocurrency is a currency that exists digitally and secures transactions with cryptography. Cryptocurrencies use a decentralized system to record transactions and issue new units.
Second, what is an investment?
An investment is a property acquired to produce future financial returns.
Third, doesn’t cryptocurrency act as an investment?
If I own 1 unit of cryptocurrency, let’s call it eTulipBulb, how many of them will I own next year, assuming I don’t add or reduce my units? I would own exactly 1 eTulipBulb next year. So, to make any money I need eTulip to increase in price faster than inflation.
The only way for my eTulipBulb to be worth more is for someone else to be willing to pay extra to get it. Why would someone do that? That person would have to hope that, in the future, someone else would pay even more for the eTulipBulb. This is known as the “greater fool theory of investing.”
But does that hope make sense?
Here’s the problem: cryptocurrencies produces nothing. If I buy a cow the cow produces milk and more cows. If I buy a company’s stock it produces my fair share of the business profits.
But, the cryptofan triumphantly says, “Look at all the people who’ve made a fortune in crypto!” Fair enough. Let’s do that, but let’s also consider how many people have lost a fortune in crypto and what our probability of success is.
To make money you should:
- Identify a cryptocurrency which will be successful. Currently, there is tracking on 9,000 of the 20,000 available.
- Be an early adopter of a successful cryptocurrency, preferably a founder.
- Sell before the crash. Many cryptocurrencies trade below the original price.
- Avoid having your cryptocurrency stolen. $3.2 billion in 2021
- Avoid having your cryptocurrency scammed. $7.8 billion in 2021
- Avoid being trampled by one of the failing crypto exchanges.
Did you notice the common element? We’d need to know the future (or get really, really lucky). Unfortunately, knowing the future is not only helpful, but impossible.
Fourth, don’t stocks share the same problem with cryptocurrencies?
No.
| Comparisons | Stocks | Crypto |
| Costs in trading | Low | High |
| Liquidity for easy buying and selling | High | Low |
| Regulation to protect you | High | Low |
| Track record in long term | Excellent | Nonexistent |
| Transparency | High | Low |
| Change Nov 10, 2021 – Nov 2022 | –15% | -73% |
| Transactions/second | >83,000 | 7-1,500 |
Fifth, what’s the bottom line?
- The price of a stock is based on its real return plus or minus speculation. It can vary but its primary component is real.
- The price of a cryptocurrency is based on speculation only. I.E. pure gambling.
