Over the past 12 months, bitcoin has almost doubled in price. The advent of exchange-traded funds for the leading cryptocurrency has helped. But as bitcoin and its kin are not backed by governments, they long have been controversial. How should an investor look at this asset class, now that it is gaining momentum? We asked the ever-sage Rick Kahler, president of Kahler Financial Group in Rapid City, S. D.
Larry Light: Bitcoin
Rick Kahler: You’re looking for a heart-pounding roller coaster ride into the uncharted territory of financial wild things, so forget boring old S&P 500 returns. Look no further than the shiny new bitcoin ETFs hitting the market. Or not.
You may have seen ads for the newest, easiest way to invest in bitcoin using EFTs offered by Wall Street giants like Franklin Templeton, Fidelity and BlackRock
Light: At least ETF bitcoin investors can take comfort that a financial powerhouse like BlackRock is behind the funds.
Kahler: A bitcoin fund managed by a reputable brokerage firm may provide an air of respectability. It may make it easy for ordinary investors to own cryptocurrency without necessarily having any idea what “blockchain” means or what a “digital wallet” is. That does not make bitcoin an investment instead of a speculation.
Investments, by definition, offer ownership of something with intrinsic value. Think tangible assets like South Dakota farmland or gold, ownership in companies in the S&P 500, or even an original painting by Picasso. But bitcoin is just lines of code floating in the digital ether, backed by hype and speculation.
Light: But despite all the fluctuations, bitcoin has soared over the last decade.
Kahler: Bitcoin could be in contention as the mother of all speculations. Fans will assert—correctly—that someone who had bought it in mid-2013 would have enjoyed a 2,500% return by the end of 2023. Detractors, like me, shudder at its lack of tangible existence or government backing and its tsunamic volatility. It crashed over 70% in 2018 and 65% in 2022, enough to make even the bravest investor wince.
By comparison, the S&P was down 4.23% in 2018 and 18% in 2022. But then bitcoin soared a mind-boggling 307% in 2020 and 155% in 2023. Comparatively, the S&P was up a boring 18% in 2020 and 24% in 2023. Any “currency” that makes the stock market look boringly stable is no currency, much less an investment.
Light: Bitcoin is not going away. In fact, it shows every sign of sticking around for a long time.
Kahler: I do believe that eventually bitcoin may mature into a stable currency, widely accepted and used in transactions around the world as a currency. I may not be alive to see that, but time will tell.
Light: Being approved for ETFs does lend bitcoin an air of legitimacy.
Kahler: Here’s the thing: these new ETFs open the door for everyday folks to dabble in this digital frenzy without diving headfirst into the crypto rabbit hole. There is no need to wrestle with exchanges or fear hackers lurking in the shadows. It’s speculating in bitcoin made easy, perhaps too easy.
The Securities and Exchange Commission, bless their cautious hearts, warns that these are “highly speculative investments.” Wise words, considering bitcoin’s volatility could make even a roller coaster operator blush. The SEC’s suggested maximum exposure is 5% of your portfolio. That’s an allocation for wild-eyed gamblers. I suggest a 1% holding would be for those with a strong case of FOMO-—fear of missing out—and 0% would be for an evidenced-based, long-term investor.
Light: Any other downside to bitcoin?
Kahler: Remember, too, that the Internal Revenue Service does not treat bitcoin like dollars or other currency. Buying and selling bitcoin incurs the same capital gains taxes as stocks, which means those wild swings could land you a hefty tax bill.
Calling bitcoin an investment is like calling a lottery ticket a financial strategy. It’s a gamble, pure and simple. One fueled by hype, speculation and a dash of digital snake oil. If you are looking for a dependable store of value, look elsewhere, such as at a diversified portfolio of real assets.
Cryptocurrency is the circus sideshow of the financial world, dazzling and dangerous in equal measure. My recommendation? Just watch the show from the sidelines. The entertainment value is likely to cost you much less that way.