Learn why cryptocurrency is a bad investment and currency: it fails all three investment criteria and is entirely too unstable to be a useful currency.


Cryptocurrency is Neither an Investment nor a Currency

Over the last few years, one of the questions I have received most often is: “should I invest in cryptocurrency?” My answer is no.

Cryptocurrency does not currently meet my criteria of an investment. It is a wildly speculative gamble and has no place in my portfolio.

Also, I know that it has “currency” in the name. But, cryptocurrency would be an economic disaster as a currency. I’ll show you why.

The rest of this article will cover a few things:

  • Give a working definition of cryptocurrency
  • Explain the criteria for a currency
  • Show why cryptocurrency is too unstable to be a currency
  • Explain my criteria for investments
  • Show why cryptocurrency does not belong in my portfolio

Let’s dive right in.



What is Cryptocurrency?

Trying to understand cryptocurrency can quickly become like getting stuck in quicksand. Just when you think you are making progress, you get dragged into an internet rabbit hole and get lost before you realize you have veered off track.

Before we decide what cryptocurrencies are good for, we need to define them. So here is the simplest definition I can muster. From Investopedia: “Cryptocurrency is a digital…currency.”

That’s it. Cryptocurrency is just a digital form of money.

Think of a dollar: it is a currency that can either be physical or digital. If you have a greenback in your wallet, you have a physical dollar.

But, if you have a dollar in a checking account, then you have a digital dollar. Your dollar is just a line of code in a database somewhere at your bank.

Cryptocurrency is essentially the same, except you cannot convert it directly to physical currency. To do that, you would have to convert it to another form of currency first. If you have bitcoin, you can sell it in exchange for dollars. Then, you can go to your bank and withdraw those dollars.

Following that line of thought, here are some other similarities and differences between cryptocurrency and traditional money:


Cryptocurrency Is Like Money

In order for something to be considered a currency, it must meet eight specific criteria: it must be divisible, portable, durable, acceptable, uniform, limited, fungible, and stable. Cryptocurrency meets almost all of them. It only fails one of the tests, but it fails that one spectacularly.

  • Cryptocurrency is divisible. You can divide a bitcoin into as many small pieces as you need for your transaction.
  • Cryptocurrency is portable. You store your digital bitcoin in a digital wallet and can access it anywhere.
  • Cryptocurrency is durable. As long as you don’t lose your password, you can store it forever.
  • Cryptocurrency is acceptable. The number of places you can trade crypto for goods and services increases every day.
  • Cryptocurrency is uniform. Every single bitcoin is the same.
  • Cryptocurrency is limited. There are only so many bitcoin in existence.
  • Cryptocurrency is fungible. No bitcoin (or part of a bitcoin) is any different than any other bitcoin.
  • Cryptocurrency is not stable. And, holy moly, it is not stable!

Cryptocurrency is not Stable

In order for a currency to be useful, it needs to maintain a fairly predictable and stable value.

All of the transactions that occur in the economy depend on the stability of the currency. You are comfortable working for a specific salary because you know what it is worth. The prices of the goods and services you buy wiggle around a bit, but for the most part you can determine the value of most things.

All of these relationships would break down, dramatically, if the currency was unstable.

Let’s use your salary as an example. Imagine that you accepted a job on Friday, January 8, 2021 with an annual salary of $41,500. The start date of your new job was three days later on Monday, January 11. When you arrive on Monday, your boss tells you that your salary is now $30,500.

You didn’t take a pay-cut. Instead, the value of the money you would receive by working dropped by 27% over the weekend.

That is exactly what happened to Bitcoin.

Performance of Bitcoin January 1, 2021 through January 12, 2021
Bitcoin Price History, 1/1/2021 – 1/12/2021. Source: CoinDesk.com

The Value of Cryptocurrency Often Changes Dramatically

Not only is cryptocurrency not stable. It is wildly unstable. There is absolutely no way the economy could function properly if the currency everyone used was swinging 20% to 30% over the weekend!

Cryptocurrency Fluctuations vs Inflation

The instability of bitcoin and the fluctuations in the value of a dollar are not even in the same universe.

Inflation makes the US dollar worth a little bit less every year. For the last decade, inflation in the US has been around 2% per year. That means that at the end of 2020, a dollar would only buy about 98% of what it would have been able to buy at the end of 2019.

Even if we ignore the wild ride the first half of January, 2021 was for bitcoin, the swings are dramatic.

Chart showing the price history of Bitcoin from January 1, 2018 through December 31, 2020
Bitcoin Price History, 1/1/2018 – 12/31/2020. Source: CoinDesk.com

During 2018, bitcoin fell from over $15,000 to about $3,000, losing nearly 80% of its value. There has never been a time in US history when inflation approached anything near 80%. Inflation at that level would have destroyed the economy.

Then, in 2019, bitcoin quadrupled from $3,000 to about $12,000. Can you imagine a situation where your employer would have to quadruple everyone’s salary inside one year? How could they possibly stay in business?

Then in 2020, bitcoin was an absolute rollercoater. Dropping as low as $5,000 in March, and ending the year at nearly $30,000.

So, after quadrupling everyone’s salary in 2019, your boss has to give everyone a 50% pay cut in the first three months of 2020. Then, in the last nine months of 2020, your boss will have to pay everyone six times their salary!

I hope you can see, this is ridiculous.

Bitcoin is absolutely not a currency. If it was, it would be the worst currency on the planet.


Criteria For Investments

So, we’ve established that cryptocurrency is not a good candidate to become a currency. But, is it a good investment?

Well, you can invest in just about anything. You can buy cryptocurrency, hold on to it, and if the value increases while you own it, you can sell it and make a profit. So, I suppose, technically, crypto could be considered an investment.

But, there is absolutely no room in my portfolio for cryptocurrency.

In order for an investment to be included in my portfolio, it has to meet three criteria. Cryptocurrency meets zero of these criteria.

  • An investment pays you for owning it
  • An investment creates value
  • And, an investment predictably responds to market conditions

An investment pays you for owning it

When I invest, my goal is to get paid for having money. I am either buying ownership in a company, or lending a company money.

When I buy ownership of a company, I receive a portion of the profits.

When I lend a company money, I receive interest payments.

Cryptocurrencies do not pay interest or dividends.

An investment creates value

I only invest in things that create value. For example, when I invest in Apple, I become an owner of an organization with tens of thousands of employees who go to work every single day and try to add value.

All of those employees are working toward the same goal: make Apple profitable. And, when they are successful I get paid a percentage of that profit because I’m an owner.

Of course, I don’t invest in individual stocks. But, I do have shares in an S&P 500 Index fund. Which means, I am an owner in the 500 largest companies in the US. According to Business Insider, 17% of the US workforce is employed by the companies that make up the S&P 500, which is about 24 million employees.

Therefore, in just one of my investments, I have 24 million employees who are working hard every day to provide me a profit. That is incredible! And, that doesn’t even count my Mid-Cap, Small-Cap, or International Stocks, or my High-Yield or Investment-Grade bonds.

Or, I could just buy cryptocurrency. A few lines of code that don’t do anything. Cryptocurrencies do not create value.

An investment predictably responds to market conditions

As we already established, cryptocurrency fails this test in a spectacular fashion.

All of my investments are predictable. Stocks generally go up in good times and down in bad. The bonds that I hold generally move in the opposite direction as stocks, and have much smaller fluctuations.

If you read my article about how my investments performed in 2020, you know that my portfolio decreased by about 15% in a month as the COVID-19 Pandemic slammed stocks. In one of the biggest and fastest stock slumps in US history, my portfolio only decreased 15%…

On the other hand, bitcoin can swing nearly 30% in one weekend. I am absolutely not interested in bringing that kind of volatility into my investing strategy.

I do not gamble with my investment money. If you want to gamble, you can go to Vegas. Or you can buy crypto.

Cryptocurrency is a Wild Speculative Bet

So, if cryptocurrency is not an actual currency or a good investment, what is it good for?

As a Money Coach, I cannot think of a single reason to include Cryptocurrency in your plan to eliminate debt and build wealth.

However, I know that cryptocurrency has a very specific allure. People think it is fun and exciting to see the value of their account swing up and down. So, if you must dabble in cryptocurrency, treat it like a trip to Vegas.

Only put as much money in cryptocurrency as you would be willing to gamble in Vegas.

If you think it would be fun to throw $100 at the blackjack table, then go ahead and throw $100 at crypto. But, remember, every day that you don’t cash out, it is the same as reinvesting.

For example, let’s say you bought $1,000 worth of bitcoin in late 2018. At the end of 2020, that bitcoin would have been worth about $10,000. At this point, you have $10,000 at risk, not just your original $1,000.

If you wouldn’t be willing to put $10,000 in to cryptocurrency at the current price, then you shouldn’t have $10,000 in cryptocurrency.


The Biggest Risk of Cryptocurrency: Feeling Like You Have Done Something

In an earlier article about gimmick investments, I wrote about this exact issue. At the time, I was writing about Acorns and Stash, which are companies that allow you to make “micro-investments.”

One problem with micro-investments is that they lead to micro-wealth. But, a bigger problem is the risk that you will get a false sense of accomplishment, which can lead to complacency. And, complacency can lead to missed opportunity.

By investing even a small amount of money in cryptocurrency, you may feel like you’ve accomplished something. But, cryptocurrency cannot help you achieve your goals, so you haven’t really done anything.

The proof that you haven’t done anything comes from the answer to these two questions:

  • How much cryptocurrency do you need to have to retire comfortably?
  • How much do you need in investments to retire comfortably?

I could not even imagine how to start answering the first question. Bitcoin has shown that it likes to drop by 80% sometimes. So, I have no idea how much you would need!

But, the second question is easy. You need 20 to 25 times your annual spending needs. You should be able to easily generate a 4% to 5% income stream from real investments, and be able to retire comfortably without ever touching the principal.

Because cryptocurrency is too volatile to predict, you really cannot count any of it as part of your retirement plan. So, by buying crypto you haven’t really done anything.

That’s why I don’t think I would include cryptocurrency holdings in a calculation of a person’s net worth. The reason is that it wouldn’t really add anything useful.

Bitcoin can drop 30% over the weekend. It sometimes loses 80% of its value. So, who cares how much you have now? It could evaporate before you finish reading this article.

Final Thoughts

There has been a lot of media buzz around cryptocurrency in the last few years. It is an exciting new development in the world of finance, and it will likely have a significant impact on personal and corporate finance going forward.

However, just because the word “currency” is in the name, doesn’t mean bitcoin is a valid currency. Cryptocurrencies are wildly volatile, which disqualifies them from being a reasonable currency.

When it comes to investing, success comes down to having a strategy. My strategy relies on all of my investments meeting exactly three criteria. Every investment I own pays me for owning it. All of my investments create value. And, every part of my portfolio responds predictably to market conditions.

Cryptocurrency does not meet any of my criteria for what makes a good investment. And, therefore it has absolutely no place in my portfolio.

For now, cryptocurrency is simply a wild speculative bet. If you like to gamble, then maybe some bitcoin could be fun for you. But, I don’t gamble, so it is not for me. If you do decide to buy crypto, be very careful not to get complacent. You haven’t actually done anything that you can rely on to help you achieve your goals.

What to Read Next

For more information, check out these articles that offer more detail about these topics. Enjoy!


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