Peter Lynch, the legendary manager of Fidelity Magellan Fund, in a speech made at the National Press Club in 1994, said that if you can’t explain to a 10-year-old in two minutes or less why you own a stock, you shouldn’t own it.1
Now, a quarter century later, we see people with increasingly short attention spans using gamified apps on their phones to speculate on (not invest in) things like cryptocurrencies. Can they explain what they own and why they own it to a 10-year-old in less than two minutes? Of course not. They’re just making bets.
Let’s be clear. We’re not morally opposed to betting or speculation. It’s fun. It’s entertaining. There’s an outside chance of a big payoff. Want to speculate? Fine. It’s your money. Just don’t delude yourself about it being investing.
Investing involves an ownership interest where there’s an expected return in the form of dividends, a rising stock price, rental income, interest earned, or increased property values. That’s pretty easy to explain to a 10-year-old in less than two minutes.
Cryptocurrencies such as Bitcoin and several thousand others like it, have no such supporting rationale. They don’t produce anything. They don’t earn anything. They don’t pay out anything. They’re not even “coins” in the way we think of dimes, quarters, silver dollars, or even Krugerrands. The widely mis-used image of a coin in crypto-world suggests the idea of it being “something like.” It’s like when someone tells you “it tastes kinda like chicken.”
Far from it. Cryptocurrencies are actually just clumps of computer code that might look something like this:
That’s
it. No physical “coin” exists in a vault, safe, or Fort Knox. Each “coin” is a
unique line of code, equivalent to the serial number on a dollar bill. It doesn’t
even have a picture of Satoshi Nakamoto on it.2 These days you can
buy your very own line of code for about $61,000 $64,000 $60,400.
This is not financial advice.
Why would anyone buy something like that? Let’s be brutally honest. There are no dividends to be received, rents to be collected, or interest to be earned. What’s going on?
What’s going on is that cryptocurrency trading is the current version of the classic game of the Greater Fool Theory. This is the game where people buy something they’re pretty sure they’ll be able to sell to someone else- a greater fool- at a higher price sooner rather than later. It’s an appealing fiction. Nothing attracts greater fools like rising prices. I expect to see a CabbagePatchCoin soon. The tongue-in-cheek Dogecoin joke comes close.3
If you’re feeling like we think this is not worth your time, trust your instincts. But you decide. We’re moving on.
Blockchain
Blockchain is the database protocol that enables decentralized management, anonymity, authentication, forgery resistance, record-keeping, and verified exchange of cryptocurrencies among mutually suspicious individuals. Hey. Now we’re talking.
Blockchain has much wider applications than in just supporting crypto-world. You may have noticed there are a lot of mutually suspicious individuals walking around. Blockchain is already being used in contracts, medicine, finance, real estate, insurance, and supply chain management. No one talks about it because, well, it’s geeky comp sci business-y stuff.
No one owns blockchain. Like no one owns the ‘https’ in your browser. Like no one owns a language like English, Spanish, or Chinese. But anyone can use any of them. Companies already exist and are being formed that specialize in creating and deploying blockchain applications.
Summary
Cryptocurrencies are a high-risk, speculative game. ‘Nuf said. If that’s not your game, they needn’t be taking up shelf space among your financial holdings. That said, we also know that things that have never happened before, happen all the time. How often have we heard “unprecedented?” So, we’ll keep an open mind.
Blockchain is about building decentralized databases. And guess what. If you’re a holder of a total stock market index fund, the S&P 500, or an international stock index fund, you already have an ownership stake. That’s because companies like Amazon, PayPal, Visa, AMD, and all the major banks are already using blockchain.
This is great news for folks of any age who just want to save and invest for future goals. You don’t need to do anything except save aggressively and invest in low cost, broadly-diversified global index funds. That can be explained to a 10-year-old in less than two minutes.
You’re not 10. We have more than two minutes. We’re here. All-in.
James Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
References:
1 Peter Lynch on Making Money in the US Stock Market
3 Dogecoin
