Bitcoin is cool, but not cool to own.
Bitcoin and its brethren of ‘crypto-currencies’ may seem to be cool. But they’re not cool enough to actually own. That’s because they fail to pass the “Brockmann Test of Common Sense“. Here are five compelling reasons to stay away. Stay. Far. Far. Away.
1. Cryptocurrencies aren’t associated with anything of value. A wise financial advisor discusses cryptocurrencies with a parable about a village and monkeys:
A lot of monkeys lived near a village. One day a merchant came to the village to buy these monkeys! He announced that he will buy the monkeys @ $100 each. The villagers thought that this man is mad. They thought how can somebody buy stray monkeys at $100 each? Still, some people caught some monkeys and gave it to this merchant and he gave $100 for each monkey.
This news spread like wildfire and people caught monkeys and sold it to the merchant. After a few days, the merchant announced that he will buy monkeys @ $200 each. The lazy villagers also ran around to catch the remaining monkeys! They sold the remaining monkeys @ $200 each.
Then the merchant announced that he will buy monkeys @ $500 each! The villagers start to lose sleep! … They caught six or seven monkeys, which was all that was left and got $500 each. The villagers were waiting anxiously for the next announcement.
Then the merchant announced that he is going home for a week. And when he returns, he will buy monkeys @ $1000 each! He asked his employee to take care of the monkeys he bought. He was alone taking care of all the monkeys in a cage. The merchant went home. The villagers were very sad as there were no more monkeys left for them to sell it at $1000 each.
Then the employee told them that he will sell some monkeys @ $700 each secretly. This news spread like fire. Since the merchant buys monkey @ $1000 each, there is a $300 profit for each monkey. The next day, villagers made a queue near the monkey cage. The employee sold all the monkeys at $700 each. The rich bought monkeys in big lots. The poor borrowed money from money lenders and also bought monkeys.
The villagers took care of their monkeys and waited patiently for the merchant to return. But after a week the merchant hadn’t returned. Then they ran to the employee, but he was gone too! The villagers then realized that they had gone into debt to buy the useless stray monkeys for $700 each and are unable to sell them.
Cryptocurrencies are a monkey business. It will make a lot of people poorer and a few people rich.
2. Cryptocurrencies are not regulated by agencies like the Securities Exchange Commission. All other financial instruments – stocks, bonds, mutual funds, exchange traded funds, options, derivatives, commodities, certificates of deposit – are regulated by one or more government agency whose job is to protect the public. The SEC uses the force of law and the police/courts/jail to enforce fair trading rules consistently, minimize fraud and punish those guilty of financial crimes.
Cryptocurrencies have no such oversight, and owners of cryptocurrencies have no such protection against abuse. For this reason (and several others) cryptocurrencies are a magnet for criminals and unsavory types because they can be easily manipulated and others abused without fear of discovery or punishment.
3. Cryptocurrencies valuation are extremely volatile – dropping 40% of their value in a single day, for example. This could happen again. Probably, sooner than everyone expects.
4. The Venezuelan government, which has been condemned by the US government as dictators, crooks, drug dealers and thugs who have presided over fake elections, the mass starvation of their own people and are in process of creating a complete economic collapse, plans to use cryptocurrency to magically bolster their floundering economy. Clearly this is a desperate act by desperate people. It can only end badly – sadly, both for the Venezuelan people and the cryptocurrency.
5. Cryptocurrencies are vulnerable to theft and fraudulent behavior. Unlike the bank robber who has to go to a bank vault to physically remove the contents in order to steal them, cryptocurrencies can be stolen by hackers from the convenience of their living rooms.
So, with these 5 compelling reasons in mind, I think I will avoid cryptocurrencies. And, as I look at the S&P 100, I realize these are pretty cool companies in a stable, transparent and old-fashioned kind of way.