The Informed Investor Is Cryptocurrency a Real Investment? | The Informed Investor 14
Episode 14: Does cryptocurrency like bitcoin have a positive expected return—and, if so, why?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. Transactions are recorded on a decentralized network called a blockchain.
Since 2010, when bitcoin started trading at a price of just pennies, the value of one coin has climbed past $100,000.
Some investors may think the value of bitcoin (or any of the numerous cryptocurrencies) will keep rising after they buy. But while that's possible, it's difficult to make a case for why.
When you invest in stocks, you expect the value of those stocks to rise in the long run. A company's growth prospects, its financial health, and its overall earnings influence its expected future cash flows, which is one key element driving the expected return of the company's stock.
When you invest in bonds, you are entitled to interest payments and the return of your capital upon maturity.
These can be sound reasons to expect a positive return.
But cryptocurrencies don't have the same characteristics or qualities as stocks or bonds.
An investor can speculate that crypto will increase in value, maybe because of the hype around it or possibly due to new developments in the industry or the underlying technology. But we believe speculation isn't the same thing as investing and often comes with additional risk.
To wit: Over the past decade, the price of bitcoin has fluctuated wildly. Since its first recorded market price in August 2010, bitcoin has experienced 10 declines exceeding 30% and five declines exceeding 70%. The broad stock market hasn't seen anything close.
Another reason some investors might want cryptocurrencies is for hedging inflation. But inflation hedges are supposed to track unexpected inflation, and the data does not support bitcoin or any cryptocurrency as an effective hedge.
That said, none of these concerns means investors should ignore crypto. The industry is evolving fast, and keeping a close watch on what's happening makes sense.
In Episode 14 of "The Informed Investor," Dimensional's Mark Gochnour, Head of Global Client Services, Kevin Green, PhD, Head of Investment Solutions Analytics, and Jake DeKinder, Head of Client Communications, go deep on the past, present, and future of cryptocurrencies.
LINKS FROM TODAY'S EPISODE:
The Informed Investor on YouTube https://www.youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90
Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/
Kevin Green on LinkedIn https://www.linkedin.com/in/kevin-green-505b15355/
Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/
Learn more at https://www.dimensional.com/
Dimensional does not trade in cryptocurrencies or their derivatives and therefore may have a conflict of interest in suggesting that it is unwise to do so. Any such statements are statements of opinion. This discussion is not intended, and should not be construed as, commodity trading advice.