Are you still invested in Bitcoin despite the cryptocurrency’s ongoing slump? If so, I do hope you didn’t buy around the all-time peak of nearly $20,000.
The price has actually blipped up a little in the first few days of January, apparently in response to escalating tensions between the US and Iran. But it’s dropped back a little as the threat of all-out war thankfully seems to be receding. At approximately $7,900 at the time of writing, it’s way down on that late 2017 high, and recent days really have shown Bitcoin’s short-term volatility.
Hedge?
If I owned any cryptocurrencies now (though I never have), I’d dump them in an instant. But not because I have any inkling of where the price is likely to go in the next few weeks or months, as nobody really has.
Analytics firm SFOX has released a report that shows Bitcoin experienced a low correlation with more traditional investment assets like stocks and gold in the second half of 2019, but I see no surprise there — I mean, why would it?
Some crypto enthusiasts have been suggesting that makes it a good hedge investment, but sorry, what? If you’re worried about the volatility of your stocks portfolio, buy something far more volatile and unpredictable as a defence? That’s absurd. Followers of this ethereal nonsense seem desperate to find apparently rational reasons (reasons that use proper investing terminology like “hedge”) to justify it.
So what do I think you should do with your money instead? I could just say I’d invest it in stocks instead and leave it at that, but instead I’d like to mention a conversation I had recently about this very subject.
Gamble
“You say you can’t tell where the Bitcoin price is going to go next week,” said the friend I was talking to, then asking “but how can you tell which shares are going to rise and fall next week instead?“
To me, that demonstrated a fundamental misunderstanding of investing in shares. This person saw both shares and Bitcoin as exactly the same kind of gamble on short-term pricing, and unfortunately a huge number of people in the UK seem to share that dangerous misapprehension.
The obvious answer is that I have no idea which shares are going to rise and which are going to fall next week, or next month, or over any short-term timescale. But the key differentiation between shares and crypto is that, the longer the timescale, the greater my confidence in the upward movement of shares.
Confidence
That confidence is founded on two things. One is the historic record, with the UK stock market having beaten all other forms of investment for more than a century, and there’s a rationality behind it. Look at the vastly richer lifestyles we enjoy today than 100 years ago — that’s all down to the wealth generated by our free market companies.
The other is that shares do not represent a number on a chart, they represent the part ownership of real business, making real profits, and often paying real dividends. Would you prefer to gamble your money away, or use it to buy a share of all that future wealth instead?