Upon return from my trip, I’ve generated lots of interest and speculation about what I would do. After leaving for a one year sabbatical, I called my boss and told her I wasn’t coming back. I knew exactly what I wanted to do at this point. Interesting enough, many people manifested their interest in working with me (or having me work for them… nah! Not going to happen anymore!).
One project offer was particularly fascinating. It concerned cryptocurrency. The world most known cryptocurrency is the Bitcoin, but you should know that there are now over a thousand of them. You can go check them out at Coin Market Cap… I didn’t believe it myself.
Because I respect the people who introduced me to this project, I will not discuss what it was here. However, I am going to tell you why I decided to completely ignore Bitcoins and all the other currencies.
By all means, I’m not an expert in cryptocurrency. If you are, feel free to jump in the comment section and tell us more about your experience.
What is Bitcoin? What is Cryptocurrency?
If I had to explain it to my 12 years old, I would say that cryptocurrency is virtual money. It’s like any other type of money, but it’s not printed. You cannot hold cryptocurrency in your hand, you can only hold it in a “virtual bank account”. The Bitcoin is the icon of cryptocurrency; it’s the most popular, the most recognized and the most valuable cryptocurrency.
An interesting particularity about the Bitcoin is that there is a finite amount of them. We often hear people accusing governments to print money when they need to, well this can’t happen with Bitcoins.
The second major difference between cryptocurrencies and “classic currencies” is the fact that the former is being created by individuals, not governments. However, as the trend gets trendy, we are now talking about companies making their own currency.
What’s the real purpose of all this?
I don’t know… The purists will tell you it is a way to free you from the terrible capitalist world we live in. By using cryptocurrencies, you make the world a safer place (sic). You contribute to free the population from controlling big brothers. Yeah… this is a story you could tell yourself.
In fact, cryptocurrencies help people move money from one place to another without getting spied on. Therefore, you can easily avoid paying taxes or purchase illegal stuff with this currency and it will never appear in any bank account. At one point in time, Governments will be able to put enough pressures on “virtual Bitcoin bankers” to share their books, but we are not there yet.
What I really see is a great way for individuals (and companies) to create their own money and trade on their own terms. In fact, it is probably the worst part of capitalism at its full power. There are no controls over the currency whatsoever and it is being traded on a free market, leaving plenty room for speculations. This is how new currencies are being created every week or months and how people are putting so much money into it right now.
How can you have some? What’s the whole “mining” thing?
The original way to have Bitcoins is to “mine them”. Again, I’ll try to explain it as you were 12 years old. Not because you are dumb, but because I also had to spend some time to understand it myself. The best way to make sure you understand something is to be able to make it clear for a 12 years old.
In order to have a Bitcoin, you must use powerful software on your computer that will run complex math problems. This requires a super cool computer with lots of power (dad is paying the electricity, remember?). Once you complete your mining task, you will be rewarded some Bitcoins (or whatever currencies you are mining). It’s important to highlight the fact you need a very super cool computer to do so. Like Hulk in a computer.
Some people may think those complex math problems are being solved to find a cure for cancer, look out for Aliens or work on any other altruistic project to make the world a better place. Sorry pal, you are not saving the world by mining Bitcoins and the right answer is very boring. In fact, “mining” is simply making sure that all transactions with the cryptocurrency that you work on make sense. Since there is no banking system monitoring the money, someone, or something, has to do it. Cryptocurrencies are being monitored by their powerful software. Therefore, each time you turn on your CPU and mine, you are simply validating a bunch of transactions that has happened with the currency.
From my research, if you want to make serious money out of the mining industry, you would need to put a solid million dollars into your computer gear. Tough luck.
The best way for mortals to own cryptocurrencies is to buy it on the market with your “real money”. You can convert your real money with a virtual broker and buy Bitcoins. This “new money” is now easily transferable in many ways. You now have Mastercard (and I think Visa is coming too) letting you spend money from your Bitcoin account.
In the “real world” making all these transactions to get a hold of Bitcoins and pay with them for “real stuff” wouldn’t make sense. Can you imagine you work your computer’s life to get some loonies that you transfer on your card to make purchase on Amazon in USD? You would get eaten alive with conversion fees. But with Cryptocurrencies, the magic is that you do all this for a Bitcoin thats worth $4,000 today, but will worth $10,000 in 3 months. Therefore, you don’t care about the fees anymore. The currency is just skyrocketing higher every quarter.
What’s the weakness?
When you think about it, cryptocurrencies exist only for those who trade it. As any currency, its real value is based on confidence. A Bitcoin worth $4,000 today because someone else is ready to buy it from you at this price. But at this point, it’s like trading baseball cards. I remember there was a huge fever around those cards when I was young. I was into hockey players cards, at the time Gretzky was about to retire and Lemieux was just the best player alive. Today, I still own those cards and they are lying somewhere in my basement… and it’s worthless for most of it.
Why I ignore Bitcoins
I guess investors who put their money in Dot Coms showing lots of pageviews are the same thinking they can make a quick but by investing in cryptocurrencies. It is being sold as the “new money” the same as Dot Coms were sold as the “new economy”. The rest is history.
There isn’t real value behind cryptocurrencies. The reason why a new currency is being created every month is because there are lots of people ready to spend real money into this project. However, it will only continue to go up like this as long as someone else is ready to put more money into it. Any new cryptocurrencies on the market is pretty much like another Dot Com IPO:
Source: Coin Marketcap
If you could put a Bitcoin on your table and watch it go, you would see that nothing would happen for decades. A currency doesn’t create any economic value. It doesn’t employ people, it doesn’t sell anything, it doesn’t pay taxes. A currency is only as good as what others are willing to give you.
I rather stick to dividend growth investing
I’m sure tons of people made or will be making money with cryptocurrencies. Many people also made a fortune out of the techno bubble. But I’m also certain it will end-up in the same trash corner. While some investors are making 1000% profit, I’m feeling content with my 2%-5% dividend yield I’m getting. My portfolio is going up by about 10% each year, but I know this is real money.
Dividends that are being paid and that are increasing each year will not fail me. Real companies making real revenues and real profits will not fail me. In order to not be deceived by market speculations, I’ve created my 7 dividend growth investing principles and I stick to them. Following my investment strategy makes me sleep at night. I know where my money is invested and I know that I will be making money each year. Not because the market will jump in value, but because the company I invested in will reward my patience with compounding quarterly payments. No Bitcoins can do that for me.
Readers, have you invested in Bitcoins or other cryptocurrencies? Where do you think it fits in a portfolio?