Is Bitcoin Safe?
Bitcoin may be soaring lately, but there are plenty of reasons to steer clear of the digital currency, our staff writers say
If you're wondering whether bitcoin is a safe investment, the short answer is no. That's not necessarily a knock on bitcoin: All investments bring some risk of losing money.
Still, investing in bitcoin carries some unique risks that potential buyers need to note. To break down these dangers, a team of NerdWallet financial reporters recently sat down for a Slack discussion on bitcoin, its risks and where digital currencies belong — if anywhere — in the typical investor's portfolio.
Question 1: So how safe is bitcoin?
Tina Orem, NerdWallet taxes writer: First, no investment is "safe." Companies can fail, interest rates can change, credit ratings can tank, regulations can shift and demand can drop off all before the sun sets today. Second, the price of bitcoin is extremely volatile. Volatility begets risk, and "risky" is the opposite of "safe."
“While it may be appealing to watch an investment in bitcoin soar higher, that’s only great if you get out at the price you want and get access to your profits.”
Dayana Yochim, NerdWallet investing writer: Similarly, put anyone who tells you that something is a "sure thing" or will deliver X percent returns in your rearview mirror, stat.
James Royal, NerdWallet investing writer: I’ve gone on record saying that it’s worthless or near-worthless. I’m not the only one; super-investors such as Warren Buffett have made similar comments. Part of the issue is that as long as bitcoin remains this volatile, it’s useless as a currency.
Andrea Coombes, NerdWallet investing writer: With bitcoin, the underlying value is in question. I mean, you can lose money on a mutual fund investment, but if you believe U.S. and international companies are likely, over the long haul, to continue to make money, you can trust that there will be a general move higher for stocks over time. With bitcoin, it's hard to even understand what the value is. The value is in the demand itself right now.
Anna-Louise Jackson, NerdWallet investing writer: Another consideration for safety is liquidity, or how easy it will be to sell your investment when you need that money. And while it may be appealing to watch an investment in bitcoin soar higher, that’s only great if you get out at the price you want and get access to your profits as intended.
Question 2: If it's risky, why is bitcoin rising in value so quickly?
Orem: One word: hype. I'm not hearing a lot of stories saying "this is an incredibly useful tool in my life" so much as I'm hearing "look how rich that other dude just got!"
“Because supply is capped at a certain number, bitcoin is unusable as currency when the money supply tightens. Right now that means as demand increases, so does the price.”
Jackson: FOMO (fear of missing out). Also, on a more practical level, people are greedy for higher returns — even in a year when the stock market is up, like, 17%. There's a "search for yield" out there that you're not finding so many other places — e.g., bonds.
Yochim: Not to mention endorsements from celebrities like the Winklevoss twins, who dumped their Facebook lawsuit winnings into bitcoin to build a $1 billion portfolio.
Royal: Bitcoin is structured to be deflationary. Because supply is capped at a certain number, bitcoin is unusable as currency when the money supply tightens. Right now that means as demand increases, so does the price. If bitcoin were ever used as a currency, someone would have to manage the money supply, increasing it during recessions when money supply is tight or risking a destructive deflationary spiral.
Coombes: The quick spike in value is surely a combination of FOMO, greed and media coverage, but it's possibly also due to bitcoin's usefulness to those who wish to conduct financial transactions secretly.
Question 3: What's a good alternative investment to bitcoin?
Royal: Avoid silly, flavor-of-the-minute speculations such as bitcoin and focus on well-managed, cash-producing businesses. They increase their profits over time and offset inflation.
“There's no better education than buying an actual stock and following its trajectory.”
Orem: Generally speaking, if you're interested in bitcoin because you're interested in rolling the dice with a little bit of your portfolio (emphasis on "little"), there are plenty of other high-stakes options out there if you want an adrenaline rush. Here are some common ones, in order of my personal preference: trading individual stocks, house flipping, options trading, the track, and back-alley poker games.
Coombes: Head to your local casino? Honestly, I just wish more people would invest in low-cost index mutual funds. So boring, so staid, so great for long-term investing success. But you certainly don't get the rush of a bitcoin win in a mutual fund.
Jackson: I don’t think it’s terrible to throw a little (key words: a little) money at an investing fad. But make sure it’s with money you’re comfortable losing. If one of these investments gets you excited about investing — and teaches you a few lessons in the process — it’s not a terrible outcome, even if you don’t make money.
Yochim: I agree. There's no better education than buying an actual stock and following its trajectory.
Question 4: In 20 years people will hear 'bitcoin' and say ...
Jackson: That's so 2017.
Royal: Vanilla Ice? Pet Rock? Beanie Babies?
Orem: Didn't bitcoin date one of the Kardashians?
Yochim: Why oh why didn't I sell at $16,000?
Coombes: Bit-what? I actually tend to think cryptocurrency is here to stay. But it's probably going to be regulated, and it's probably not going to be bitcoin.