Cryptocurrency

A handful of folks I know are really interested in buying cryptocurrencies like Bitcoin or Ethereum. I suggest that you steer away from it. At least, if you buy some, I'd suggest that you think of it as an unproductive asset instead of an investment.

An investment has the capacity to produce additional value. Bonds return interest, stocks represent growing businesses, and land can be rented out or developed.

Cryptocurrency, on the other hand, only has as much value as people ascribe to it. It's useful to think of it as a commodity, like wheat, gold, or oil—that's how the US tax code treats it, in fact.

When you “invest” in cryptocurrency, you're speculating that other people will value it more highly later on. They might, or they might not, but that speculation isn't grounded in any concrete real-world growth. Call me a grouchy old man, but I'm a bit suspicious of that.

All that said, it's certainly possible to make money by actively trading cryptocurrency. This activity isn't new, and isn't fundamentally about cryptocurrency; it's just currency arbitrage. Currency arbitrage is a real, time-consuming job, but I'm not sure I'd call it “investing.” A arbitrager is invested in Bitcoin in about the same way that a barista is invested in coffee—it's an asset they actively deal in and manipulate to produce value.

Play Money”

That said, if you find all this cryptocurrency stuff terribly enticing, consider earmarking a fraction of your portfolio (5%, say, at the most) as “play money.” Use that fraction to buy stock in Elon Musk and chase ICOs and practice your blackjack system.

It's probably not the optimal thing to do with your money, but there's some psychological benefit to it. If gambling with 5% of your portfolio helps you leave the other 95% alone, you'll probably end up just fine.

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