It seems like all our friends are “investing” in Bitcoin, Ethereum, or the new crypto-currency of the day. I have heard more talk of Coinbase in the last 6 months than Berkshire Hathaway among my peers. Well, we hate to burst your bubble, but we believe cryptocurrency is one of the worst “investments” a millennial can make (note: we aren’t discussing blockchain or how the technology can revolutionize the world, just the pointlessness of purchasing cryptocurrency).
So, why do we think purchasing cryptocurrency is about as useless as trying to make money by gambling on the KY Derby? Our thoughts are summed up perfectly by two of our favorite people, Mr. Money Mustache and Warren Buffett.
As Mr. Money Mustache points out:
“We’ll start with the answer: No, you should not invest in Bitcoin. The reason is that it’s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.
These are all things that people have bought in the past, and driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.
When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity. You’re playing a psychological, win-lose battle against other humans with money as the only objective. Even if you win some money through dumb luck, you have lost some time and life energy, which means you have lost.”
Not a fan or never heard of Mr. Money Mustache? Well, you’ve probably heard of Warren Buffett, who should be one of everybody’s heroes when it comes to investing:
“A long-time value investor, Buffett compares cryptocurrency to gold, which he sees as a nonproductive asset. ‘It’s essentially not going to deliver anything other than supposed scarcity because you can only mine so many,’ Buffett said at the Berkshire Hathaway annual shareholder meeting on Saturday. ‘So what? What does it produce itself?'”
Additionally, Buffett points out that if you had $10,000 to invest in 1942, you would have $51 million if you invested in the S&P 500, but only $400,000 if you invested in gold. While we won’t know for sure how cryptocurrencies will fair in relation to gold, I would bet everything I have that investing in the S&P 500 will outperform cryptocurrency long-term (and as a millennial investor, you should only care about the long-term).
Also, I won’t bore you with the details, but the IRS treats cryptocurrency as a security (stock), and not a foreign currency, which means every time you trade one cryptocurrency with another, it is a taxable event. Which also means if you have a gain and trade it before a year, you will have to pay taxes at your ordinary tax rate (which is not good and defeats one of the biggest tax breaks you can have – the long-term capital gains tax rate).
So, in summary, cryptocurrency is not a Drunken Money approved investment for millennials hoping to plan for an early retirement. It is an “investment” that is built on speculation and hope, and has no underlying value (it is not a company that makes money for you), and it could result in awful tax consequences if you aren’t careful.
Be a smart investor and choose investments that actually produce value (such as a company that pays dividends), and let your investments grow so you can enjoy an early retirement.
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