Several years ago, I went to the movies and noticed a machine selling Bitcoin in the lobby. I’d read about Bitcoin and thought about buying one just to keep an eye on it. Then, I thought that $3,500 was an expensive night at the movies and just enjoyed the show.
A year later, I went back, and the price had risen to $16,500 per coin, and I realized that night had cost me $13,000. As of this writing, Bitcoin trades above $60,000, and I missed out on a 17x investment in a few short years.
Since I’m pretty happy with my bank account and credit card, I also resisted Venmo, the payment system. Enough people asked me to pay them this way, so I decided to get it and noticed that I can buy Bitcoin, Ethereum, and Litecoin.
I don’t know what any of them are, but I decided that I couldn’t miss any more gains bought a whopping $100 worth of Bitcoin. That was 19 days ago, and in that time, I’ve seen prices as low as $90 and as high as $120.
Little did I know that the first Bitcoin-related exchange-traded fund (ETF)
would launch right after my purchase on Venmo. The fund already has more than $1.17 billion in assets, despite launching last Tuesday.
Will I buy the ETF?
While I like ETFs and own plenty, I’m going to avoid this one for a few reasons. First, this fund owns futures contracts on Bitcoin, not actual Bitcoin.
When used correctly, futures and other derivatives don’t bother me. We have some exposure in our funds, but not much (more on that here). In this case, though a fund that is nothing but futures will likely cause two issues.
First, the fund is likely to trade at prices that are quite different from the actual coin. I’ve read that it isn’t likely to be more than five percent on any given day.
Second, I’ve read that arbitragers do an old trade, known as ‘cash and carry,’ that involves buying Bitcoin and selling Bitcoin futures. I’ve read that the arbs have made 30 percent a year on this trade, unleveraged. That tells me that the futures market is extremely wild and markets assume that there are likely some rough days ahead.
In the end, though, if I wanted exposure to Bitcoin, I could live with these things. The bigger issue beyond these technical matters is that I don’t want to own cryptocurrencies, beyond my current investment.
I’ve written about Bitcoin in more detail here and here, and the summary is that I just don’t understand the appeal. The argument that it’s a digital version of gold, sort of makes sense to me, but one of gold’s attractions is that you can look at it and hold it in your hands. Oh, and although I don’t mind when clients buy gold, I don’t own any of that either (physical or ETF).
I also hear the argument that Bitcoin doesn’t have a government that vastly overspends and is mired in debt. I think I’d buy gold to remedy that, but gold isn’t very exciting these days compare to Bitcoin.
At the moment, Bitcoin reminds me of the Dutch tulip mania in the 1600s where the price of tulips rose because more and more people bought into the fact that their prices were going through the roof. One day, someone realized that they were just tulips, and the prices just collapsed.
I have no idea what will happen with Bitcoin, or any of the other crypto-currencies, other than they will be volatile. I don’t know what will happen with any markets, for that matter, but I do take solace in the idea that an investment is the present value of its future cash flows.
For a bond, the future cash flows are pretty easy to understand. Stocks are a little more theoretical, but if a business makes money, then it ought to be more valuable over time. Neither gold nor cryptos have cash flows, so they are harder for me to understand.
Gold has been a store of value and unit of exchange for thousands of years, which makes it hard for me to argue with.
It’s also hard to argue with crypto returns. Maybe I just can’t see what’s perfectly obvious, I don’t know. Given my 10 percent return in 19 days (which annualized, is ~700 percent), do I wish I had more?
Sure. I wish I had invested $200.