Public school teachers, church staff, not-for-profit hospital workers and other employees of nonprofits are eligible to sock away thousands of dollars each year in a 403(b) retirement plan at work.
Most people hate reviewing their estate plan, and I can’t say I blame them. From tax law and complex documents, to trusts and health care directives, the intricacies can be daunting. Plus, talking about life after death isn’t anyone’s favorite activity.
If you invested in the markets circa 1999, it is hard to observe the Bitcoin mania and not experience the feeling that you’ve seen this movie before and know how it will end — in losses and tears. The Internet was a great idea that convinced a lot of great minds to invest capital and energy into businesses that have transformed the world — Amazon, eBay, Cisco, PayPal … the list is very long (though, in fairness, the list of non-survivors is even longer — but they are not here to remind us of their nonexistence).
Rising stock prices of Internet companies also brought unscrupulous people out of the woodwork. In 1999, if a company added dot-com to its name it was an instant bet that its stock price would pop at least 20% (I am probably being too conservative) on this non-news. In a slightly later stage of the bubble, when Internet incubators were in vogue (after the astronomical surge of CMGI), thinly traded companies would announce that they were changing their business model — pizzerias would become “Internet incubators” and their stocks would surge a few hundred percent in a day. What does a pizzeria know about the Internet or incubating start-up companies? Nobody knew or cared. Management cashed out on suckers who bought the pop in the stock price.
I just got an email from a friend who forwarded a press release: Long Island Iced Tea Corp to Rebrand as “Long Blockchain Corp.” This is what used to be a small beverage company, a $2 stock that surged as much as almost 300% on Dec. 21, the day of the announcement. I have seen half a dozen stories like this over the last few weeks.
Bitcoin looks at lot like Beanie Babies
This coin/blockchain mania is not much different than the Beanie Baby mania of the late ’90s. Beanie Babies were released in a limited quantity (the key word), and thus the price kept going up. The Beanie Baby company kept making new, limited editions that sold for hundreds if not thousands of dollars (some were “collector’s items,” as though Vincent Van Gogh had graced them with his brush). Predictably, that fad ended just like thousands of others — it went from hot to cold. At some point someone realized that a $100 stuffed doll is not much different from the $2 one you can buy at a flea market.
The “coin” mania of today is not much different. I am not writing this just about Bitcoin — people are shelling out billions of dollars to own other coins, too. At least with a Beanie Baby they got a garage sale item for next year’s spring cleaning — what do you get when you buy 1,200 coins?
Also, the scarcity argument worked for Beanie Babies … until it did not. At some point the number of people who want to cash in their gains exceeds the number of new suckers who want to buy in. Supply exceeds demand, the price declines, and just as price increases spawned more price increases on the way up, price declines snowball into further price declines — this is how a bubble bursts.
I don’t know when this mania will end. In a month? A year? In the tech meltdown melodrama of 1999, billions of dollars were lost and some fraudsters went to jail (probably too few). I predict that this episode is not going to be much different.
‘Bitcoin 1.0’ leaves room for improvement
About Bitcoin. Arbiter Partners CEO Paul Isaac was a guest on Jim Grant’s podcast (which I recommended wholeheartedly). Paul made a very good point: Bitcoin as a technology is version 1.0. It is not very efficient, and it’s slow. Future blockchain innovations will be much faster and much more efficient. (Mining bitcoin consumes about the same amount of energy per year used by Bulgaria.) So, if you are attracted to Bitcoin because it’s a “currency,” know that it’s not even a good one. Future ones will be better. And maybe that is why we have 1,200 other ones competing for the title of Bitcoin 2.0
A bubble is usually a good thing taken too far (as I write this I still cannot grasp what is so great about Beanie Babies). The Internet was an incredible invention, and it has transformed global economy. But first it brought us a bubble of enormous proportions … which painfully burst. That is what bubbles do. This coin bubble is going to inflate, and then it will follow the script.
I fear people will lose their shirts
Why am I spilling digital ink on Bitcoin and other coins? I know how this movie will end, and this knowledge brings a weight of responsibility. People will be hurt by this mania, and many of them will not be able to afford their losses. A friend told me a story about a person who ordinarily would not quality for a $150,000 mortgage borrowing that amount to buy Bitcoin. I have a feeling this is not an isolated story. I saw many people destroy their wealth during the dot-com bubble (though at first their wealth tripled or quadrupled), and this time is unlikely to be any different.
If the fear of missing out is too strong, treat “investing” in Bitcoin like you do gambling. Gambling (especially playing the slot machines) is not a rational endeavor if you look at it only from a financial perspective. The odds are clearly against you. If you play long enough, you’re destined to lose.
I can’t tell you the number of phone calls I’ve fielded about bitcoin in recent months. The shocking rise of cryptocurrencies this past year triggered a wave of media attention on this new form of money as an investment. Even my kids have asked me about it, and are investing themselves.
For early adopters of cryptocurrency, 2017 was a good year: The price of bitcoin rose about 1,500%. Litecoin, another cryptocurrency, recently jumped 73% in less than 24 hours right around the time bitcoin futures became available for the first time, in mid-December.
Of course, the market is changing so rapidly that this article is in danger of becoming outdated by the time you read this!
But if you’re considering bitcoin or another cryptocurrency as a possible investment, I suggest you tread carefully. In this article, I’ll answer some common questions that I’m hearing about bitcoin, and I’ll offer a few insights into my perspective about cryptocurrency as both an innovation and an investment.
What is bitcoin?
In my opinion, many of the people who are buying into the bitcoin rush know very little about it, or about blockchain and cryptocurrencies in general. That means they haven’t thought through some of the risks and realities of this kind of investment.
Bitcoin is a cryptocurrency, which means that it’s a digital version of cash that relies on cryptography to protect and verify transactions — and to control the creation of more bitcoin. This system is built in something called blockchain, which is basically a new way of creating and maintaining a ledger of transactions. (I won’t get into the creation, or “mining,” of bitcoin here, but it’s part of the system.)
Every time bitcoin is created or traded, it’s recorded on the blockchain, which is verified and shared across a network of participants instead of by a single institution, like a bank. Blockchain is special because it’s transparent, while remaining difficult to modify. It also runs forever, meaning there’s a record of every single transaction ever made.
For a simple comparison, think of an online message board: Everyone’s messages are automatically added and recorded where every other reader can see them. All the messages from the very beginning of the thread are logged and displayed for all to see. However, in a message board you can usually delete or edit your message later on — you can’t do that with blockchain.
What’s it worth?
A November 2017 CNBC headline asserted, “It’s Official: Bitcoin is Bigger Than Disney.” In other words, the total dollar value of all the bitcoin out there is greater than the value of a large and recognizable company with assets that you can put a dollar value on.
But an economic argument for what a “reasonable” price is hasn’t been so easy to come by.
Bitcoin isn’t like a Disney: It doesn’t have assets you can sell, and it doesn’t have bonds that provide income, which you can buy. It also has limited use as a currency. Bitcoin doesn’t have a history as a reliable or broadly accepted store of value, like the dollar, and its “exchange rate,” or price, has rocketed up thanks to market demand — but not by the economic value of bitcoin itself.
Add to this the reality that about 40% of all bitcoin is held by just 1,000 people.
That makes bitcoin extremely sensitive to the whims of that very small group — and their actions aren’t regulated by securities authorities because bitcoin isn’t a security. Cryptocurrencies in general aren’t regulated, and it’s not clear they could be effectively regulated in the future. The government is not involved yet, and it may or may not get involved in the future — and it’s tough to know how it could affect prices and demand in the future.
So why all the hype?
Is bitcoin worth something? Probably.
Blockchain is pretty widely considered a significant improvement on transaction recording, and the real-world potential for digital currency could certainly be there. The way I look at it is that blockchain is the arms dealer in the war between cryptocurrencies. No matter which one wins — or even if none of them does — in my opinion it looks like blockchain will be here to stay.
I’ve been around long enough to know the lasting impact that a new technology can have on financial markets and the world as a whole. (Do you remember the first “personal computers”? I sure do.)
But I’ve also been around long enough to know that when you hear words like “new world order” it doesn’t always end well. There are unforeseen risks and even known weaknesses in the system. Just in December, a South Korean bitcoin exchange called Nicehash went out of business after hackers made off with an undisclosed amount of the currency, while earlier in the month $70 million was stolen from the Nicehash exchange.
Exchanges can make promises about making investors whole, but this is an unregulated market — there are no guarantees.
In other words, I think it’s important to understand that “new world order” doesn’t always mean “smooth sailing.” Back in 1999, people were laughing at Warren Buffett for not recognizing the world had changed in the dot-com era. Some of the companies founded in those days did end up changing the world (such as Amazon), but a lot of good people also lost their life savings in the hype (remember the doomed Pets.com and its sock puppet?).
What if I really want in?
For those who are determined to be part of the bitcoin rush, I have three pieces of advice.
First, do your homework. Understand the product and learn everything you can about how it’s being used, where the potential lies, and what could impact its price — for better or worse.
Second, don’t invest money you’re not prepared to lose. My typical advice is to cap these types of investments at 5% of investable assets, but even that might be too much, depending on your specific financial situation, personal financial needs and overall asset allocation. If you don’t know what you can lose without impacting your overall financial goals, check in with your adviser.
Finally, prepare for any outcome. In my opinion, this is a “zero or hero” investment: It might work brilliantly, or it might amount to nothing. In these types of situations, where price is driven by demand and where there are few fundamentals to work from, you need to brace for volatility and the potential for heavy losses.
Whatever you do, always do your homework
Cryptocurrency may very well stick around and be a successful innovation, just like the tech sector was. The question is which cryptocurrencies will stand the test of time and go on to be successful — and at what price.
This is notoriously hard to predict. For example, few could have foreseen that MySpace would be eclipsed by Facebook, or that Amazon would grow from online bookseller to retail juggernaut.
In other words, I don’t know what’s going to happen in bitcoin, but what I see right now is a lot of uninformed investors piling in — and very few reasoned arguments for where bitcoin “should” be in terms of value. In my opinion this is a problematic situation to walk into.
My reasoning is simple: I think that when we stop acting like informed investors — or even informed traders — and start believing that something will be the winning lotto ticket, we’re likely to get in trouble.
Are people making a lot of money on bitcoin right now, at least on paper? It sure seems that way. But I’m concerned about all the people who could be left holding the bag when and if the bitcoin rush turns.
Like Warren Buffett, in this case I’d rather miss out on the upside than risk experiencing the downside. You can call it being a dinosaur if you want: I just call it being prudent.
It’s not unusual for people to start a new year plotting out all they want to achieve in the coming months, whether that involves a new exercise regimen, a career switch or checking a few more items off their bucket lists. But the beginning of the year also can be a great time to work on your investment portfolio and financial plan.
Inflation will be 2.1% in 2018, about the same as in 2017, but the composition will be different. Energy prices rose 8% this year as rising crude oil prices spurred gasoline and fuel oil prices, and electricity and natural gas prices trended up. Look for less energy-price inflation in 2018, while other categories pick up the slack.
Even if you invest across the globe, chances are you don’t hold many Chinese stocks. China-based firms account for 23% of assets in the average emerging-markets stock mutual fund and just 3.5% of the average global stock fund. But although China may be a fringe player in your portfolio, it’s squarely in the center of the global economy. The World Bank estimates that China will drive 35% of the world’s economic growth from the start of 2017 through 2019—nearly twice as much as the U.S., which comes in second, at 18%.
You’re proud of the nest egg you’ve built in your IRA and 401(k), but are you prepared for the tax bill that will come with it when the time for required minimum distributions arrives? Here are four ways to ease that pain. Read more
China’s stocks have turned around. From the start of 2010 through 2016, SPDR S&P China (symbol GXC), a popular exchange-traded fund, returned an annual average of a little more than 2%. So far in 2017, the fund has returned 42.7%, about three times as much as the U.S. market. (Prices and returns are as of September 29.) Read more
As Congress finally gets serious about tax reform, you need to know where you stand now, so you can understand how changes will affect your pocketbook.