Should You Invest in Cryptocurrency?

Who here has heard of digital currency, otherwise known as cryptocurrency?

(Everyone raises their hand).

Who hear can explain what it is?

(crickets chirp).

The first step when determining whether something is a good investment and suitable for yourself is to roll up your sleeves and do some research.

So what exactly is cryptocurrency? Investopedia’s definition is that “a cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.” Admittedly this definition is a bit tedious, and even I have to confess that explanation of how digital currencies work is a stretch.

While there are now thousands of forms of Crypocurrency, the original (and most famous) is Bitcoin (BITCOMP). Bitcoin was founded in 2009 by what is presumed to be an alias named Satoshi Nakamoto. What is interesting about Bitcoin, is that there is only a finite amount of it. There are only 18 million “coins” in circulation. As we talked about in my last post, this fixed number of coins is similar to the concept of market capitalization with publicly traded companies. Despite intimidating words like “decentralized” and “blockchain”, at the end of the day Cryptocurrencies trade on supply and demand.

So now that we have a very basic understanding of what Cryptocurrencies are, should we invest in them? Personally I am not a fan, but to quote early 90’s thrash-metal band Suicidal Tendencies “Just ‘cuz you don’t like it, don’t mean it ain’t no good.” Putting all double-negatives aside. The rise of digital backed currencies and particularly Bitcoin has been nothing short of spectacular. As I write this blog the exchange rate for 1 bitcoin is approximately $10,400. Had you been at the forefront of this technology you could have purchased 1 bitcoin for as little as a penny back in May of 2010. Or another way of putting it, an investment of one whole dollar in bitcoin in May of 2010 would have turned you into a millionaire based upon current market prices ($1,040,000).

“So Ben, didn’t you say that don’t you like cryptocurrency, what the heck man!?”

Yes, one cannot deny the astronomical returns that have come for those who were early investors in Bitcoin, and the truth is more opportunities like this will come and go, and I can say with almost 100% certainty that you will miss it. Sorry, but that is the cold hard truth. The good news, however, is that with the rule of 72 one can easily double their investment returns in roughly a decade by only needing to return 7% per year. It is because of this, that I am respectfully of the belief that buying into a decentralized currency is something that should only be left the most speculative of investments.