Why You Don’t “Need” to Invest in Bitcoin

2018-01-10T09:40:29+00:00

The demand curve is one of the more fundamental concepts of economics. It illustrates the relationship between the price of a product and the demand for that product. In most cases, demand curves are “downward-sloping” because price and demand typically move in opposite directions. That’s because there is usually an inverse relationship between price and demand. That means that when one rises, the other falls. This is known as the law of demand.

Why You Don't Need to Invest in Bitcoin

In general, the law of demand says that consumers will buy more of something when the price is lower and they’ll buy less when it’s more expensive.

There are, however, some things that have upward-sloping demand curves. In theory, this shouldn’t happen. Nevertheless, there are real world examples that we can point to.

Take Bitcoin, for example. (I’ll focus on Bitcoin in this article, but you can apply the logic presented here to other cryptocurrencies as well.)

Few people wanted Bitcoin a few years ago when it was cheap. Now that the price of Bitcoin has skyrocketed there’s an insatiable demand for the cryptocurrency.



The Upward-Sloping Demand Curve

Normally, people get excited about lower prices. If I went to the grocery store and saw that Blue Diamond Honey Roasted Cinnamon Almonds were half off, I’d stock up. On the other hand, if the price had doubled I wouldn’t buy any at all.

When it comes to products that we consume, lower prices tend to elicit excitement. Higher prices are a turn off.

Oddly enough, our mentality is quite the opposite when it comes to financial assets. When we see higher prices and we get excited. As prices plummet, however, we often become disheartened and disinterested.

Thus, the upward-sloping demand curve.

An upward-sloping demand curve may be counterintuitive, but it isn’t entirely irrational. Think of it this way: if you believe that markets trend, then you might expect that high prices would be followed by even higher prices. If things go well, you can buy high and sell higher.

But the thing is, chasing returns is rarely a great idea. The chart below shows Bitcoin’s rapid ascent over the past few months.

Why You Don't Need to Invest in Bitcoin

It would be tempting to look at this chart and assume, based on previous returns, that Bitcoin returns will continue at this staggering rate. The temptation is completely understandable. It’s hard not to get excited by the limitless potential for growth.

But let’s not forget that there’s a reason why the SEC requires funds to tell investors that a fund’s past performance does not necessarily predict future results.

Yeah, Bitcoin isn’t a mutual fund, nor is it regulated by the SEC (edit: or maybe ICOs will be regulated by the SEC). But the same logic applies. The future remains unknown.

Basing investment decisions solely on past performance is like driving down the highway with your eyes glued to your rear-view mirror. You may as well be blindfolded.

That isn’t to say that people can’t make a fortune with cryptocurrencies. They already have. But there’s no telling whether people who invest today will end up coming out ahead.

The Bitcoin Stampede: To Join, or Not to Join

I can’t say whether “investing” in cryptocurrencies is the right move or not. That’s a decision each individual investor must make for himself or herself.

I can see why one person might be fascinated by Bitcoin’s potential to transform the financial industry and therefore invest aggressively. I can also understand why someone might view cryptocurrencies with a high degree of skepticism and opt to stay on the sidelines.

But here’s what I can say: If you have a financial plan in place, then it doesn’t matter whether you invest in Bitcoin.

Note: In the interest of full disclosure, I should mention that I hold a modest position in a couple of the more prominent cryptocurrencies. I won’t delve too deep into my rationale at this time other than to say that I want to expose my portfolio to the cryptocurrency market. It’s also worth noting that my investment (read: gamble) is only a sliver of my overall portfolio and I’m prepared to live with whatever the results may be. That’s because my financial future is not dependent upon the fortunes of the cryptocurrency marketplace.

You Don’t Need to Invest in Bitcoin

One thing that I think has gotten lost in the ongoing “should you invest in crypto” debate is the importance of having a plan for building wealth.

Go ahead, invest in Bitcoin. Or avoid it like the plague. Whether you invest or not really shouldn’t matter.

What matters is that you have a plan for achieving your financial goals.

I get the sense that there are a lot of people looking to Bitcoin as a wealth-building shortcut. Some of those shortcut-seekers are individuals looking to compensate for the years of compounding in their 20s that they missed out on. Others are folks who simply lack the discipline to implement and follow a long-term financial strategy and want a quick fix.

No doubt, Bitcoin and other cryptocurrencies present an exciting financial opportunity no matter what financial position you’re in. Like I said, I’m intrigued by the possibilities too! But the real danger lies in situations where it’s viewed as a quick-fix that might make up for a failure to start saving and investing soon enough.

Invest in cryptocurrencies because the investment fits into a broader financial plan. Don’t invest in cryptocurrencies because Bitcoin is your financial plan.

In other words, if you’re going to invest in Bitcoin do it not because you think you need to, but because you don’t need to.



Why It’s Okay to “Miss Out” On Bitcoin

Like I said, I have a small stake in cryptocurrencies. Not a life-changing amount. So there’s a chance that I’m missing out on something big. But I don’t think I’ll regret it.

In my case, my goal is to achieve financial independence and pay for future expenses like retirement. I have a plan in place to achieve those goals. To succeed, I don’t need to win the lottery or place a risky wager on Bitcoin roulette.

My path to building wealth is simple and straightforward. It may be a boring investing existence, but that’s okay. It will take me where I need to go.

Let’s Talk About It

What role does Bitcoin play in achieving your financial goals? Have you implemented financial strategy to achieve those goals?

WHAT'S YOUR PLAN FOR FINANCIAL FREEDOM?
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About the Author:

Cato
Hi, I'm Cato! I'm an attorney with a passion for fantasy baseball, burritos, and investing! I also paid off over $86k in student loan debt in under four years while aggressively investing for my future. Subscribe if you want to learn more about mastering your finances so you can live the life you want!

6 Comments

  1. SMM January 11, 2018 at 1:15 pm - Reply

    Bitcoin doesn’t have a role for me at all since I have such a small stake. I’m considering it a very high risk and speculative investment. Also, I’ve dipped my toes in it a little to kind of force myself to learn more about the technology and how it can impact commerce and society as a whole in the future.

    • Cato
      Cato January 11, 2018 at 1:41 pm - Reply

      Entering the market as a way to learn more is an interesting approach. I suppose I did the same thing several years ago with Robinhood. I made a small contribution to my account and considered it a small price to pay for an education in the stock market and individual stocks. (Plus, it didn’t hurt that I received some free shares through their promotion — https://robinhood.com/referral/rhondaa6/?_branch_match_id=421061972804261563). Anyway, I think your approach is a great way to learn about cryptocurrencies while riding the ride!

  2. The Spreadsheet Dad January 16, 2018 at 10:41 pm - Reply

    Great article Cato!
    I think for the general public crypto currencies should be approached with great caution and should only be included as a high risk item in a well diversified portfolio.

    • Cato
      Cato January 17, 2018 at 8:38 am - Reply

      So true! And the last 48 hours have shown just how volatile cryptocurrencies can be!

  3. MrDoublingDollars January 18, 2018 at 5:08 pm - Reply

    I have invested in a few blockchain companies as I believe that they offer a good opportunity.

    As far as cryptocurrencies go, I only have one – STEEM. I really believe in steemit.com as it is not just some run of the mill crap cryptocurrency. You earn STEEM by getting upvotes on your post. It is a blockchain social network.

    Because of that, there are a lot of people creating things on it. There is a steemit YouTube called D.Tube and it also have live streaming. If people like your video or livestream you earn the cryptocurrency.

    There is also steemit versions of Instagram and Twitter that all pay for the content people make.

    I have been on there for 18 months and have accumulated $60,000 USD worth of STEEM (It was over $90K before the crash a few days ago).

    There is a lot going on as developments don’t have to wait on a central authority. Decentralized rewards for those that make content – that is why I only hold STEEM.

    And Bitcoin? I fully believe that it should be worth less than 10% of the current price. There are much better cryptos out there.

    • Cato
      Cato January 19, 2018 at 2:01 pm - Reply

      Very interesting. A few months ago, I read your post about making money on steemit.com. It definitely seems like a unique concept and the results you’ve achieved lend credence to the notion that the model can be lucrative. I’m still trying to wrap my head around how STEEM, Bitcoin, and other cryptocurrencies have a value as currencies. But as you point out, at least with STEEM it is used to reward creation of quality content. I have a far harder time understanding how the cryptocurrencies that are exchanged with blockchain technology have value in and of themselves. Anyway, thanks for chiming in! I’ll definitely give STEEM a closer look 🙂

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