Settling A Bitcoin ‘Bet’

How did my 5 ETFs do versus the famous cryptocurrency during 2018?

It is the holiday season.  That means three things to me:

Good cheer
Family and friends
Settling a friendly non-financial wager with some friends about Bitcoin

During this week in 2017, I relayed in this column a discussion I had with my monthly dinner group, which was prompted by an enthusiastic discussion about the merits and flaws of investing in Bitcoin.  At the time, it was headline news.  As the chart from that article shows here, Bitcoin’s price had risen like rocket, from under $5,000 in October to nearly $16,000 as year-end approached.

How big was the Bitcoin frenzy at the time?  That article, I’d Rather Own These Than Bitcoin, was the most-read blog post I have ever had on, despite being published shortly before Christmas, the “slow season” for financial journalism.  As I said back then:

“…For the benefit of the few of us who hear “Bitcoin” and think dot-com bubble, Tickle Me Elmo, Nifty Fifty or Tulip Bulbs (look it up!), I present a list of 5 ETFs that I would rather own in 2018 than Bitcoin or any of its cousins.  I chose these from the list of 100 I track daily.”  

Here’s how things turned out.  While I am certainly not doing an “endzone dance” over the results of the 5 ETFs I chose a year ago, I will offer one investment tenet that is on display here.  Investing in what is popular can work for a while, but it often leads to big losses.  “Big” is defined differently for everyone, and I imagine that retired folks were not plugging 50% of their IRA accounts with cryptocurrencies.  But there is a difference between volatility that produces mediocre results over a limited, fixed time period like year-to-date, and catastrophic losses that burn the greedy and fearless.

And, just so you don’t think this is an isolated example involving Bitcoin, take a look at this chart:

Look closely.  That’s the Nasdaq Composite Index from the start of the Dot-Com Bubble burst until it ended.  It covers the period from March of 2000 through March of 2003.  The lesson here: even prominent segments of the investment markets can lose tremendous portions of their value after they run amok to the upside.  This is the case for stocks, indexes, and even some forms of bonds.

My holiday wish for you is that you approach each investment decision and your broader investment strategy with a critical eye, and a balanced approach.

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