Buying Cryptocurrencies Is Not Investing



Blockchain is an interesting and useful technology. It may revolutionize contracts and may serve as the underlying backend to the decentralized internet or internet(s) of the future.

But cryptocurrencies themselves are not useful. They do not solve any economic problems, nor do they allow anyone to do anything that was not already possible without cryptocurrencies. Worse still, they are expensive systems to operate.

Buying cryptocurrencies is not investing. There is a difference between speculation and investing.

Yet the public at large does not understand this distinction, and so there is now currently a massive run-up of values of cryptocurrencies. In the end, I fear that a lot of people — mostly young people — are going to lose their shirts. At the root of this trend toward cryptocurrencies is a misunderstanding about the classic investment asset classes, namely stocks, bonds, and real-estate.

When you buy a stock, you are buying a real piece of a company that is staffed by actual humans with skills, talent, and years of experience. Companies very often also own valuable equipment and property. They may own futures in raw materials, or they may have valuable contracts for future business. Your stock represents a claim on the real material wealth generated by a real company run by actual human beings. Yes, you are hoping that the stock will go up – but you only believe it may due to the hard work and commitment of these individuals.

What are you buying when you buy a cryptocurrency? In a word — nothing. Behind a cryptocurrency, there is nothing of value. Cryptocurrencies do nothing. Literally. They do nothing. There is no material wealth behind it, only speculative value. A cryptocurrency “coin” only has value if someone else will buy that “coin” from you for a higher value. The only reason that anyone is buying cryptocurrencies is because they believe, irrationally, that the value will continue to rise.

This is not true with stocks, bonds, and real-estate. Real-estate can be rented out for income or redeveloped. Stocks often pay dividends. Bonds generate income from interest.

Enthusiasm for cryptocurrencies as a replacement for these asset classes usually comes with a political motivation. Since political motivations are weaker than economic forces, we can safely ignore cryptocurrencies and stick to “the basics.”

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