Now that the year is coming to an end many are reviewing their portfolios, and the usual articles are hitting print about best and worst investments of 2014. It’s only fitting that since bitcoins clearly took the top spot last year with a price gain of over 6,000% from $13 to $830 it is not statistically surprising that it will most likely go down as the worst investment of 2014. It currently sits at a 60% loss as several publications like Quartz and TheGuardian have pointed out.
Is it fair however to judge investments this way. Yes a Bitcoin defender can go into a rant about how over the last 2 years bitcoins are still up about 2,500% or that it’s easy to cherry pick your dates and it’s just a coincidence that year’s end market a turning point in Bitcoin that last 2 years. After all we can just as easily pick the last 4 months and say that if those in Russia had moved their money to bitcoin in mid August before their currency problems started, they would only be down 30% in value instead of the 50% it is today. There is this drive in most people to make changes going into the New Year, and even though there are cycles in every asset class, sometimes understanding the underlying potential of the asset can lead to choices not based on a calendar.
Contrary to popular belief of calling Bitcoin a Currency or a commodity or property, it is in fact a brand new asset class and as something that very few people truly understand, it has advantages and disadvantages over anything else that can be held in a portfolio. Bitcoin is an asset that is not correlated to anything out in the market place and is perhaps the best option for someone looking to hedge political risk. Looking from a United States perspective, there might not be a critical need to worry about that, but the rest of the world is not as stable and as any investor knows, unimaginable events do happen. Who would have thought at any point the last 3 years that oil would fall to $50 a barrel?
Let's ignore the views that Bitcoin is considered by some to be the next great technological achievement that can replace the backbone of the Internet, financial services, the stock market and perhaps much more. At the moment its primary use is ‘private’ currency and the world has not seen a private currency governments can’t stop in a really long time. In a practical sense the people of Belarus are learning what it’s like to suddenly be in a situation where your economic problems are the result of neighboring nations as the government is creating capital controls that include a 30% tax on currency exchanges and a 2-year restriction on Forex trades. While Belarus is certainly a small country with almost no relevance to the global economy, so was Cyprus and that caused all kinds of worry throughout Europe. In the end, the developed world is economically connected and any financial problems in a Eurozone nation have high probability to affect all developed nations including the United States.
While back in the day options like precious metals were the go to safe heavens, that concept is starting to fade. Today Gold is even more unusable when times are good than Bitcoin as more and more merchants begin to accept them for goods and services. And if times get really bad it would be almost impossible to move that safe haven to another country in today’s world of metal detectors and scanners assuming of course you are in possession of the asset and it is not held through an ETF.
Of course no asset comes without its risks and there are plenty to consider when looking at Bitcoin. With only a 6-year history and 2 years in the spotlight, it might be as speculative of an investment as they come. The wild price swings are still to be expected as Bitcoin remains the closest asset there is trading in a free market and clearly subject to large players attempting to manipulate prices. The big question that would need to be answered is regulation and at the moment the trend has been for countries to crack down on Bitcoin in places where Governments limit peoples freedoms.
There is plenty more that can be said about concerns of adding bitcoins to your investment strategy, but in today’s day and age, when information travels instantly across the world, there is only one asset that can do the same. For those looking to put together a balanced portfolio it should definitely be on your radar even under the possibility of it being your worst performer of the year. This is most likely to happen when most other assets do well.