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Of late, I have been getting an increasing number of folks asking for my opinion on cryptocurrencies. Polar bears know more about astrophysics than I know about cryptocurrencies. They probably know more about cryptocurrencies, too. As luck would have it, the most recent person to ask about this is my pal Lucas. He reached out a couple of weeks ago and, after I suggested he’d get a more useful response from a polar bear, he began to share a bit about what he had learned and what he was doing. I know Lucas as the website manager who keeps jlcollinsnh. So I asked him to write this guest post.
I could tell he knew his cryptocurrency stuff. What I didn’t know was, could he write? 1017 USD on the recommendation of our lead developer at the web firm where I worked. At least, that’s what I wish I could tell you about the first time I heard about Bitcoin. The truth is the same as thousands of other techno geeks. I heard about Bitcoin in 2011, thought it was a cool idea that appealed to my libertarian tendencies and then promptly did nothing about it for 6 years.
You may have been hearing about Bitcoin a lot lately. If you haven’t you will soon. 10,000 per Bitcoin for the first time. New Crypto-Millionaires are being minted every day. Before we start, lets be crystal clear on this: This is the riskiest investment you will ever make.
Malware on your computer steals your coins. Am I qualified to give this investing advice? That said, I have spent several hundred hours studying this space and I’m happy to share what I have learned. I’ll also provide a bunch of links to better resources at the end, all written by people much more knowledgeable than I. Why cryptocurrencies are the future of money and the internet 3. Who should consider speculating on Bitcoin? Who should not invest in cryptocurrencies?
If this money you are considering betting means ANYTHING to you walk away now. If you have any debt, forget about it. Only slightly more so than credit default swaps, leveraged high frequency bot trading, and russian roulette. Will this keep you up at night? Is the IRS ok with this? Is the SEC ok with this? Warren Buffett said Bitcoin is a pyramid scheme.
He might be right, you should listen to him. Just because we are speculating on Cryptocurrency doesn’t mean we are not still jlcollinnhistas at heart. Those 3 companies have captured a huge percentage of the value created by the internet world and will continue to for years. A small investment then, if held until 2017, would have comfortably made you a multi-millionaire. You have a chance right now to buy an extremely early, out-sized, chunk of the future economy. To me, that is worth a small bet. Why this is a really stupid idea.
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The risk of course is that you went back in time and bought stock in Pets. We have absolutely no guarantee that is not exactly what we are doing here. There is no doubt in my mind, cryptocurrencies and blockchain technology are going to change the world as dramatically as the internet has but we have no idea which ones will win yet. If you really want to invest in cryptocurrencies please make this article your STARTING point. Do your own research, read about the underlying technologies and truly understand them. Make no mistake, if you jump in head first just to get in on the mania you WILL be the guy at the poker table who doesn’t know he is the one getting taken.
Think of Coinbase as the E-trade of Cryptocurrency. They will take your dollars and give you cryptocurrency. They are extremely user friendly but you do pay fees for that convenience. They are the most reputable exchange available to US citizens. You will need to take several identity verification steps before you can fund your account. ACH transfer for a more reasonable but still high 1. 10 sign-up bonus when you fund your account.
No Bitcoins are infinitely divisible, you can buy any fractional amount you want. I thought Bitcoin was totally decentralized, why do I have to trust Coinbase? It is, once your are IN the ecosystem you need never touch another bank or exchange again if you don’t want to. But before that, you have to find someone or some company willing to take your USD and give you Bitcoins in return.
What are Ethereum and Litecoin, and why didn’t you even mention those? I meant it when I said do your own research. Isn’t this plan counter to everything jlcollins has taught us about investing? Do I have to pay taxes on my gains? Learn about storing your own coins. A centralized exchange like Coinbase is just another third party that Bitcoin is supposed to do away with. Note: This space is moving so fast this chart was outdated the day it was published.
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2 to make the Blockchain possible. After you’ve groked those, this is the best article I’ve found so far that explains how Bitcoin works from first principles. If those make your head spin and your eyes glaze over, you might be a little early for your investing adventure in cryptocurrencies. It is the wild, wild west. As always, I’ll let VTSAX do the heavy lifting in keeping and building my wealth. But I might, just maybe, free up a few dollars and give this a shot. If I do, I’ll immediately treat that money as already lost.
Lucas has graciously agreed to field your cryptocurrency comments and questions. It will go to whomever writes the most interesting, insightful and entertaining comment on this post. Lucas is the judge and, reading his post, my bet is humor will help. Over the past couple of years several of my favorite bloggers have come out with T-Shirts.
Some are pretty cool and I own a couple myself. More and more I’ve been encouraged to create and offer a jlcollinsnh version. I’ve resisted mainly because I haven’t any compelling ideas for one and my blog doesn’t have an interesting name or logo that would lend itself to coming up with one. The Simple Path to Wealth jlcollinsnh. Do you have a cool idea for a jlcollinsnh. If it comes to pass, you’ll get one free. With great visuals you can track your net worth, asset allocation, and portfolio performance, including costs.
It is also a great tool for reaching short-term savings goals. We talk whenever can and for however long we please. My RW Review tells you how. Needle helps me sleep at night. While they no longer have an affiliate program, they are still a very cool company with a great product. And they are now a sponsor on this site.
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Please click on their ad at the top of the page for more info. These are affiliate links and should you chose to do business with them, this blog will earn a small commission. Next, I get an email from the grandmaster of simple investing with a subject line that seems like Bitcoin clickbait. All kidding aside, this is a great guest post and the only question I have is: will I be able to pay for the new jlcollinsnh t-shirts in Bitcoin? We’ll see if jlcollins weighs in here with his thoughts, but I’d be happy to help him set that up.
Bitcoin is exciting as a speculating opportunity, but to me it is even more exciting as a decentralized, world-wide currency that allows everyone to participate in a financial system not controlled by a single central government. Heck, you can have the shirt off my back for a Bitcoin. Bitcoin sounds like fun to me. You can accept Bitcoin with a Stripe account. When I saw this post pop up, I thought it was a joke.
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I’d need to do about 400 more hours of research myself before considering investing. I hope my snake oil sales of Bitcoin haven’t tarnished the impeccable index investing reputation of Mr. Think you should consider couple important points about Bitcoin. The most important is that a currency is generally tied to some form of value based on productivity.
In the case of bitcoin it produces nothing. In the words of Benjamin Graham there are two types participants in the stock market: speculators and investors. In regards to IRS they have set precedent tax treatment for Bitcoin. They are treating bitcoin trades, sales, exchanges for products etc under capital gain rules. That is a capital gain short term or long term is applied to each sale based on your acquiring cost against the transaction of selling or exchanging the bitcoin for a product or service. At this point it is absolutely speculating and I tried my best to make that clear in the article.
My point being: Gold doesn’t produce anything either, but it has been used as a useful store of value for thousands of years. Bitcoin has all of the attributes of gold plus several additional ones that make it significantly better. You can store it in your brain and send it across the world instantly. What is more exciting to me though, is that there are cryptocurrencies that actually DO produce value. I don’t have room in this comment to get into the nuts and bolts, but for anyone interested in that idea please read about Ethereum. I have heard about the IRS ruling, but I fully expect the SEC to weigh in soon, or the IRS to change their minds, or Congress to pass some law.
Long story short: Too soon to call in my opinion. PLEASE talk to a tax professional people. Lucas your comment to gold is very accurate. This concept of productivity is missed by many people trying to understand investing. You could take all the gold that’s ever been mined, and it would fill a cube 68 feet in each direction.
I think there is a good Warren Buffet quote on the difference between speculating and investing as it relates to gold. For me: Investing is something that is expected to produce new value. Speculating is just hoping that someone is willing to pay you more tomorrow than you paid for it today. In that way Bitcoin is no different than speculating on Gold, and I’d take the farmland and Exxon all day. Gold is just the shiny metal humanity latched on to as a store of value and a currency that has several useful properties that make it good for such a function.
BUT, I think we all agree that humanity needs a currency. We also know the USD lives on a precipitous knife edge after the removal of the gold standard, whatever the fed is doing, Wall Street insanity, etc. What makes Bitcoin so fascinating is that it could potentially function as both. USD that could make it the world reserve currency AND world reserve store of value. While that doesn’t give it any more inherent value or value production ability than gold or paper money, it would still make Bitcoin valuable. I second Michael’s part on the IRS tax precedent.
It is possible that the IRS will change their minds in the future, of course. As Lucas’s article stated, the IRS has indeed expressed an interest in going after bitcoin profits. I suggest consulting your tax expert. Also, I meant to say great job on the article Lucas. Clearly explaining positives while stressing that it should only be done with monopoly money. My wife and I use the same expression for it, and understand that it is money that we are completely comfortable never ever ever seeing again in exchange for the slim chance of being in on the ground floor of something potentially huge.
Thanks for the kind words Dave. Much as it pains me, I am afraid you are probably right when it comes to the IRS. IRS ruling is really frustrating and I am naively hoping it may change in the future. I have no intention of selling or spending any of my cryptocurrency for years, so I’m kicking the can down the road and hoping the regulatory landscape will evolve before I have to deal with it.
But if not, of course I’ll pay my long term Cap gains tax and still be happy for the opportunity. It is clearly a currency and not a traditional asset. I’m forever a student, kicking over rocks, on this financial independence journey we’re all on. I’m not currently prepared to invest enough research in the tech to invest in Bitcoin. I like the path graphic idea for the T-Shirt. And when I don’t have one, I find someone smarter who does!
Ahhhh I too couldn’t believe my eyes when I saw the title of this post pop up in my email haha. But as Lucas and JLCollins have stressed, I will not mess with this until I am deep into FIRE, with extra money to gamble with. I think of this blog, I think of the parable you wrote about early on about the monk and the minister. If you could learn to cater to the king you wouldn’t have to live on rice and beans.
If you could learn to live on rice and beans you wouldn’t have to cater to the king. And of course promote your website or The Simple Path to Wealth somewhere underneath the image. VTSAX myself and fully on the Simple Path to Wealth. Nice introductory post on bitcoin Lucas! Even though I have no interest in investing in cryptocurrencies, it has peaked my interest the last few years. Actually a few months ago I saw a pretty good documentary called Banking on Bitcoin. Thank you for the kind words.
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I have seen the movie and I agree the movie would be a great follow up! For anyone interesting the Banking on Bitcoin documentary is available on Netflix and probably rentable other places. To your point that the movie leaves Bitcoin hanging on a sour note: It does. However, people in the crypocurrency space often talk about the time warp phenomenon.
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You know how everything moves faster on the internet? Well in crypto right now, it’s like that times 10! A month in crypto is like 2 years in the real world. So much has happened since the events in the movie it feels like ancient history. That movie was released in 2016, a lot of it was filmed in 2015. Very interesting reading, but beyond my expertise. Too bad they are not in the Gov’t to fix it before it FAILS.
I really enjoy all the comments and answers to questions. This is a very timely post on bitcoins. But I must side with Jack Bogle: Avoid bitcoins like the plague. Investing in the lottery is about as good, especially since I know the winning numbers.
I just haven’t played them yet. I suppose buying a ticket would help. I hope this doesn’t sound negative at all because I highly value your insights and spread the word using your resources. Pretty much, for the most part, what Lucas says in his post.