I am a big advocate for investing. I run a personal finance blog for heaven’s sake. One of the most popular questions I get asked is what I think about bitcoin and other mostly non-productive assets. I think the important thing to understand is that these are indeed non-productive. They don’t do anything or create anything over their lifespan. For example:
If you took all of the gold in the world and plopped it down in Times Square it would be beautiful and shiny to look at, but it would not actually produce anything. The only value it would have would be the DEMAND of the people who may or may not want to buy it tomorrow. This is all controlled by the economical laws of supply and demand. The more people that want it, the higher it’s price should be.
The more it’s price goes up, the more people might want it, then it’s price goes up more until nobody wants to buy it, then it’s price goes down due to lack of demand, and less people want it, and it’s price gets pushed down further, then it looks appealing because it’s so cheap, etc etc and on and on forever.
This may be a great way to speculate, but it is certainly no way to invest. Investment, in my opinion, is driven by the analysis of cash flow and relative productivity. If you and I both run lemonade stands, which one makes more money per cup? Who has a more valuable lemonade brand?
You can not ask these types of questions in regard to non-productive assets like bitcoin or gold. They simply do not produce any cash flow or dividends. The only way that you can make money is if there is someone out there who wants to buy it from you at a higher price at a later date. Not a gamble I am willing to take on a large scale.
Is there ANY value in owning these things? Sure, depending on your outlook of the economy or the monetary system you could hit the jackpot by owning these alternative forms of currency. But hitting the jackpot is something that happens at casinos. I am not in this business to gamble my money away, I am trying to find the most efficient place to put my little green soldiers to work with the least amount of risk.
The issue is that humans LOVE to speculate and gamble. We are fascinated by the possibility of doubling or tripling our money in a short span of time. (Even when the odds are blatantly stacked against us) I have no idea how to do that, so if that is what you read this blog for then maybe there is some Twitter guru out there that is better suited for you to follow. Remember:
When things like bitcoin are hot everyone talks about how much money they are making and how lucrative it is. The tide is high. But as the tide rolls out and the money stops flowing, you will see who was skinny dipping the whole time.
If you think of investing like buying a farm, with land that produces a harvest every year, it is much easier and more intuitive. It is simpler for you to mentally grasp what your farm produces, how much land it has, how much it produces for each square foot of land. Through this process you will start to see that the farm in the next town over (another company in a similar industry) may be more efficient at growing crop and producing a more fruitful harvest. It becomes clear that you want to buy something that produces value and does it in the most efficient way possible. If you are interested in reading my article on long-term investing check it out HERE.
A big portion of what I recommend can be learned by reading The Richest Man in Babylon by George Clason. In it, he recommends saving and investing 10% of your money in ventures that you can understand! It is a relatively short read and it is DEFINITELY worth your time!
Non-productive assets derive their value by counting on other people to become more excited about the asset than you are. This is called the greater fool theory. You are trying to sell to someone who is a greater fool down the line because he/she will pay a higher price than you did. This is ESPECIALLY lucrative when people don’t know what the hell they’re buying. I would be willing to bet that 90% of cryptocurrency investors have NO IDEA how the blockchain functions at its most fundamental level. They are just jumping in because it’s hot, and that is a great way to get burned.
If you thought this was helpful, terrible, or somewhere in the middle, please leave me feedback in the form of a Direct Message on instagram @MakeDollarsAndSense, or feel free to send me an e-mail/text to the information on my Home Page. I truly appreciate constructive criticism and opposing views, so bring em on!
P.S. New blog posts coming your way every Monday!
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