By Dr. Jim Dahle, WCI Founder
I've written several posts about Bitcoin and other cryptoassets over the years. The whole subject is fascinating, even though I don't invest in these assets. It has been fun to watch the wild ride from the sidelines over the last decade and a half. Along with its severe problems as an “investment,” investing in Bitcoin has some really attractive aspects. In this post, we'll talk about the attractive and the unattractive aspects.
6 Reasons to Invest in Bitcoin
People think I'm anti-Bitcoin for some reason, or they tell me, “You just don't understand it.” I view myself more as neutral on it. I'm not blind to its benefits.
#1 Crazy Good Returns
Anytime you write a piece about Bitcoin returns, you had better put a date on it. Its massive volatility means returns change frequently. This is being written on April 11th, 2024. The price of Bitcoin today is $69,813.40, and the “timeline” is in between the introduction of Bitcoin spot ETFs and the latest “halving.” Anyone who bought Bitcoin before November 2020 or between June 2022-October 2023 has experienced spectacular returns with their Bitcoin “investment.” I put quotations around it, simply because I don't view Bitcoin as an investment. It's more of a speculative instrument. But the government certainly treats it as an asset class, so perhaps we should, too. Look at the returns:
That chart starts in 2015. Bitcoin's returns were just as good before then. Here's a slightly out-of-date chart from Investopedia that includes that time period. They had to make it logarithmic for it to make any sense. THAT'S a good sign for your returns.
It's pretty easy to understand why there is so much interest in Bitcoin when it has produced returns like that. FOMO is very real, and if you don't feel any FOMO at all looking at charts like that, you might be the most Spock-like investor on the planet.
#2 Maximally Tax-Efficient
One cool thing that speculative investments have in common is their tax efficiency. Bitcoin is almost perfectly tax-efficient. There are a few benefits of real estate investing that it does not enjoy. You can't depreciate it and use those depreciation losses to offset other income and then recapture that depreciation at a lower rate. You also don't get any tax-exempt capital gains like you do when you sell your personal residence. But there are no other investment tax breaks that Bitcoin does not enjoy. If you never sell your Bitcoin, you will never pay taxes on it. Thanks to the step up in basis at death, neither will your heirs if they sell it soon after inheriting it. If you do sell it and have owned it for at least one year, you will only pay taxes on it at long-term capital gains rates.
The least tax-efficient asset class in my portfolio is real estate debt. It's almost perfectly tax-inefficient. It qualifies for the 199A deduction, and that's it. Every other bit of its return is fully taxable at ordinary income tax rates every year. Even if Bitcoin and real estate debt had the exact same returns (let's say 10% a year for illustration purposes), you'd end up with a whole lot more money with Bitcoin due to that tax efficiency. My marginal tax rate is 45.8%. Ignoring the relatively small 199A deduction that is scheduled to go away in less than two years, that means a real estate debt fund held in a taxable account is only growing at 10%*(1-45.55%) = 5.45%. Over 50 years, a $100,000 investment earning 5.45% will grow to $1.42 million. At 10%, it would have grown to $11.7 million, more than eight times as much money.
I love that about Bitcoin. While its capital gains tax treatment makes it even sillier to use as a currency (supposedly the original intent), it sure is nice for those trying to use it to get rich. Not even gold gets the same treatment. Gains in gold and other precious metals are paid at a higher “collectibles” tax rate (28% instead of 20%).
More information here:
Why I’m Still Buying Crypto
#3 Best Tax-Loss Harvesting
The tax aspects get even better. I cannot explain this one, but for some reason, Congress was convinced to give Bitcoin and other cryptoassets their own special tax-loss harvesting treatment. Normally when you tax-loss harvest, you have to wait 30 days to buy back the same investment or you get a “wash sale” and your loss is disallowed. Not with Bitcoin. You can sell it and buy it back 30 seconds later and still claim the loss. Those losses can be used to offset capital gains in an unlimited amount and even up to $3,000 a year of ordinary income. That's awfully powerful, especially when combined with charitable donations or the step up in basis at death that keeps you from ever paying capital gains.
#4 Low Correlation with the Rest of Your Portfolio
Bitcoin does Bitcoin. Who knows why? Who knows when? It goes up. It goes down. It's all over the place. But what it doesn't do is move in lockstep with anything else. As a general rule, it's a risky asset, and when investors are fleeing all risky assets like stocks and real estate, you may also tend to see Bitcoin go down in value. But as correlation goes, it's pretty low between Bitcoin and most typical portfolio assets. Some people call it “digital gold,” but that's a lousy description. People flee TO gold when the excrement hits the ventilatory system, but they flee FROM Bitcoin.
#5 Rabidly Religious Fan Base
If you've ever discussed Bitcoin on the internet, you know about the “Bitcoin Bros.” These folks live, breathe, eat, sleep, and die Bitcoin. It has almost a religious fervor to it. They are true believers. Now, this sort of thing is mostly irrelevant to your life. There are plenty of people in this country and in this world who believe all kinds of crazy things or conspiracy theories. However, there is a benefit to this fervor when it comes to investing in Bitcoin. It puts a fairly reliable floor under its price; it's what the technical analysts would call a level of support.
These “diamond-handed” people have come to believe that Bitcoin will grow to the moon. They are absolutely convinced, and nothing you can say to them and nothing that happens will ever change their opinion. If they see its value fall dramatically, they don't become scared of it and sell it off. They buy more. They take every penny they earn or that they may have in some other asset and put it into Bitcoin. They've seen it fall precipitously numerous times in the past, and each time it recovered and grew like mad afterward. This group of people puts a fairly reliable “floor” under the price of Bitcoin. Can it go to zero? Sure. But there will be a whole lot of people who ride it all the way down there, and that should be somewhat comforting to you. No. 1, it makes it a lot harder to go to zero. No. 2, you won't be alone when you get there! You'll have all your Bitcoin Bro buddies there with you. It doesn't seem to hurt as bad to lose money when you're doing it with your friends.
More information here:
A Neurologist’s Road to Becoming a Bitcoin Maximalist: Why Bitcoin Is Not the Next AOL
#6 Portability
Over the years, people have proposed numerous use cases for Bitcoin. You know, ways you can actually use it to do something besides speculate. Most of those haven't panned out. But you know what has? Its portability. If you have to flee the country, I don't know of any other asset that is quite so easy to take with you. No need to sew gold into the lining of your jacket. No need to rent a truck to haul off your art. Your business and home aren't coming with you, and assets in a retirement or brokerage account are relatively easy to find and seize. You can take your Bitcoin, though. While that benefit doesn't exist for the new Bitcoin spot ETFs, those do allow for convenient investing via a brokerage account or even many retirement accounts.
5 Reasons Not to Invest in Bitcoin
Naturally, there are plenty of reasons not to invest in Bitcoin. Despite all those cool benefits above, I don't invest in it. Why is that?
#1 Purely Speculative
Bitcoin is a purely speculative “investment.” It produces no earnings, dividends, rents, or interest. The only way to make money on it is to sell it to somebody else for more than you bought it. That makes it impossible to value in any sort of logical way while also putting you at serious risk for loss.
#2 Massive Volatility
No investment makes you money if you can't handle holding on to it when its value goes down. The more volatile the investment, the harder that becomes. Bitcoin seems to routinely fall by 80%. That's really hard for most investors (including me) to handle without selling low. Not everyone possesses diamond hands and an iron stomach. The day before this piece ran on the blog (less than a month after it was written), Bitcoin had dropped $58,751. That's a nearly 16% drop in only 21 days. Every time it craters, you have to ask yourself, “Is this it? Is this when it goes to zero? Will something else replace it?” Fear of loss is just as powerful as fear of missing out.
#3 Potential to Lose Keys
While it's not that hard to protect the keys to your Bitcoin, losing it seems to be a problem for many. Approximately 7.8 million (40%) of the 19.4 million Bitcoins that have been “extracted” have been lost already. They're just gone. That doesn't really happen with real estate, gold, stocks, etc. There are lots of scammers and fraudsters in this space as well. In 2022, $3.1 billion in cryptocurrency was stolen/hacked.
More information here:
What’s the Future of Cryptocurrency? These Fanatics Say It’s Pretty Darn Bright
A Moderate-Income Physician’s Approach to Alternative Investments
#4 Far Fewer Use Cases Than Expected
For its first five years or so, we were told that Bitcoin was a currency that we were going to use instead of dollars. That hasn't happened, and it likely won't. Maybe we'll routinely use a cryptocurrency someday, but it probably won't be Bitcoin. Aside from portability and undercutting Western Union in Africa, there really aren't any use cases for Bitcoin. Almost everyone buying it is doing so for speculative purposes. That's not a good sign.
#5 Bad Behavior Like FOMO
Investing in a massively volatile, speculative instrument like Bitcoin is bad for your investing behavior. It gives you the same dopamine rushes as gambling. It's the constant fear of loss vs. the constant fear of missing out. When it comes to long-term investing success, the investor matters more than the investment, and I fear that including Bitcoin in their portfolio makes a lot of investors worse at investing.
As mentioned at the top, I don't own any Bitcoin, but that's not because I'm blind to its benefits. I just see the downsides as outweighing them. In our recent annual WCI survey, most of you felt the same way.
If you don't feel the same way, I would caution you to limit your investment to a small percentage of your portfolio, such as 5% if you truly believe in a positive, long-term trajectory for it. In reality, 0%-10% is reasonable; 50% is not. That's just a huge bet. I occasionally see people who put 1% in it, and it makes me laugh. If you believe in it enough to invest at all, don't be a wimp. Put 5% in it. If you don't believe in it enough to put 5% in it, how do you think you're going to weather its massive downturns?
What do you think? Why is or is not Bitcoin in your portfolio? Are you more optimistic with Bitcoin's recent rise? Comment below!
