It has been a few years since I’ve written about Bitcoin BTC and cryptocurrency, but lately a few folks have been asking me about investing in cryptocurrency for retirement. A caveat here that I tend to be a very conservative investor who follows the advice of my fellow Oklahoman Will Rogers: “I’m not as concerned about at the return on my principal, as I am about the return of my principal.” This of course is the financial version of primum non nocere, which physicians interpret as first do no harm.
Folks who have been financially fortunate in life tend to follow this formula, and thus are often bond investors for the primary reason that at least one gets their money back at the end of the bond’s term. These folks don’t need to go forward so much as they don’t need to go backwards. They don’t need the return; ergo, they don’t need the risk. Whether their interest coupons keep up with inflation, that’s a different story and constitutes an investment risk, but that risk is better than the potential for the loss of principal which can ensue when one casts their moneys onto the risk versus rewards spectrum.
Anyway, there are suggestions percolating their way up through Congress which would allow cryptocurrency investments directly into certain types of tax-advantaged retirement accounts, such as the ubiquitous 401(k) plans. To understand whether this is a good or bad idea, one must first consider what cryptocurrency is in terms of investments, and where it appears on the risk versus rewards spectrum.
The primary analysis that one goes through in purchasing any investment asset, whether real estate, gold coins, stock, bonds, or anything else that you can think of, is quite simple: One compares the current value of the asset against its current market cost to determine whether the asset is underpriced or overpriced. If the asset is underpriced, you buy; if the asset is overpriced, you pass (or sell if you are holding it).
The determination of the current value of an asset is determined two ways: First, one considers the fundamental value of the asset; second, one considers the anticipatory value of the asset. Some combination of these two things will result in the current value of the asset.
Fundamental value looks at the utility of the asset and society’s demand for it. For example, there is a demand for real estate to provide housing or commercial buildings. There is a demand for precious metals for manufacturing and jewelry. Stocks are representative of the products or services sold by the company, and, because they pay a dividend, may be measured by their price to earnings (P/E) ratios. Most asset classes have for a very long time been sorted out in how they may be valued.
When one looks at cryptocurrency, it is difficult to discern the fundamental value of that asset class. Although there is some limited utility to cryptocurrency as an alternative to cash, this seems to be more of a fad than something widely demanded by consumers. There is in fact almost nothing that a consumer can purchase with cryptocurrency that the same consumer could not instead purchase with cash. The fundamental societal demand for cryptocurrency is thus almost zero. Of course, cryptocurrency pays no dividend either, so there is no way to calculate one’s investment return other than upon the speculation that it might rise in the future, but we’ll get to that presently.
There is one potential society use of cryptocurrency which is as a store of value, i.e., a place where one can park money. For instance, a person living in a third-world country with an anarchic economy and draconian currency transfer laws may decide that it is better to keep their savings in cryptocurrency instead of the sketchy local bank. The problem here is, of course, that the wild swings in the value of cryptocurrency operates to substantially negate its utility as a vehicle to store value. For one who loses 50% of their wealth in one of the cryptocurrency crashes, that sketchy local bank starts to look pretty solid.
As mentioned, another factor that goes into valuing an asset is its potential for appreciation. Start-up companies are a good example of this: They have no fundamentals, they aren’t paying a dividend, and whether the company ever gets to the IPO stage so that investors can even cash out is a giant crapshoot. Yet, at least here potential investors can see what the company’s idea and business plan is, whether the company is real or simply another closet in Salt Lake City with a phone inside, and make their investment accordingly. Real estate development is a similar example of this, but real estate investors can look at the demand for development in nearby areas and come to some sort of determination whether the development will succeed or fail. The point being that with speculative investments, there is usually data of some sort that will allow investors to make an informed decision as to whether there will even be appreciation of the value of the asset, and, if so, the likely appreciation that will take place.
It is here that the determination of the future value of cryptocurrency fails utterly. One must understand that cryptocurrency is the purest form of speculation yet known to man, since the current and future value of cryptocurrency is tied solely and exclusively to whether the majority of investors think it will go up or will go down, which is to say that an investment in cryptocurrency is nothing more than wager that the majority of investors think that it will go up. This is also why cryptocurrency investors and pundits are so vocal: They have to convince others that cryptocurrency has value, when in fact it has no value at all other than what investors think it is. Without that vocal support, all cryptocurrencies would almost immediate deflate in value to near zero.
Note that this is beyond even gaming, since gambling has a result that is reached when the next card is turned over, the dice are thrown, the ball spins around the wheel, the cherries start spinning, etc. The odds in gambling have long been reduced in mathematical precision to where a gambler can know what might happen at any moment, or in the long run that the house advantage for a certain game is a certain percent. Cryptocurrency is beyond that: It is as if a group of gamblers set down at a table that has no game, and simply bet against each whether the bets will go up or down based upon their anticipation that the bets will go up or down. There simply is no purer form of speculation than that.
All this brings us back to the simple equation for determining the quality of an investment: Is it underpriced or overpriced. Let’s presume that one calculates the fundamental value of any cryptocurrency, including its utility to consumers and its function as a store of value, to be something in the neighborhood of $1 per unit, which frankly is being generous. If at a given moment, that cryptocurrency is trading in the neighborhood of $35,000 per unit, then on fundamental basis it is overpriced by $34,999 ⸺ horrifically overpriced.
Next we look at the potential speculative value of the cryptocurrency, but the hard truth is that nobody can possibly know what this will be since nobody can anticipate whether the majority of investors will think it is going to go up or going to go down. One might as well consult their OUIJA board as attempt to adopt any scientific method of figuring this out. So, being a conservative and non-speculative investors, I would assign this value as something akin to the price of a lottery ticket, i.e., 1¢ and that only because there is no smaller unit of currency. But, of course, there are a lot more cryptocurrency investors out there who can push the values higher, and so let’s arbitrarily raise this to $1 for the speculative value.
So there you have it: The value of any cryptocurrency unit is thus arbitrarily set at $1 in fundamental value and $1 in potential speculative value, for a total of $2, and probably a lot less for newly-established cryptocurrencies that nobody has gotten behind yet, or where there are many units outstanding. Thus, in deciding whether to invest in a major cryptocurrency, one should compare the current market price against $2 ⸺ if the price is less than $2 then one should buy, and if the price is less than $2 then one should pass. This, or something like it, should be the standard for one trying to reasonably invest in cryptocurrency.
This is not to say that if one has the appetite and the financial strength to speculate in cryptocurrency should not do it, but they must recognize as described above that they are involved in the purest of speculation. Many financial advisors will tell their clients something to the effect that they should conservatively invest something like 90% of their assets, but then use the remaining 10% to “swing for the fence”. Whether that is a sound strategy, I will leave to others, but it presumes that one could lose the 10% and not feel undue financial pain. Put another way, if one would not be comfortable taking that 10% and putting it all on red on the roulette wheel, then they should not be investing in cryptocurrency because the potential outcome is actually about the same: On a single spin, and ignoring for now the slight house advantage, there is about a 50% of winning and 50% chance of losing ⸺ those are the like odds in cryptocurrency as well.
Some might think that a more safe investment is to invest in the companies that are making money off cryptocurrency, without actually investing in it. Others might think that it is better to invest in funds that are themselves investing in cryptocurrency, so as to spread the risks. But there is a fly in this ointment, being that if cryptocurrency ultimately ends up being nothing but the latest investment mania and goes to zero (or near zero), then everything associated with it can go down as well. Is that a real risk? Well, yeah. Just within the last two generations, we’ve seen folks who invested in stocks lose practically everything (although a few companies such as survived and thrived), and then of course there was the debacle involving collateralized debt obligations (CDOs) that were behind the worldwide 2008 crash. For that matter, one can even go back to the great Tulip bulb mania (1634-37), and other financial manias before and since.
The hard truth is this: Things that derive their value only because they are the investment flavor-of-the-day can lose their value when they finally fall into disfavor with investors. Or, think of it this way: If all cryptocurrency were to disappear tomorrow, who exactly would miss it? There being no underlying societal demand for cryptocurrency, there is nothing that provides a price baseline below which it will not fall. All cryptocurrencies could go to zero tomorrow and stay there, because fundamentally there is no demand for it. Moreover, some other form of attractive investment may pop up to take its place, i.e., the next investment beanie babies.
Another problem is that as a relatively new form of investment, cryptocurrencies and cryptocurrency companies are either not regulated or are lightly regulated. This should not be a surprise, since one of the very purposes of cryptocurrency is to create a form of money that is outside of government interference, and thus regulation. Whether one thinks that government regulation is a good or bad thing, the truth is that government regulation helps to prevent the worst frauds from occurring, such as the numerous Ponzi schemes involving cryptocurrency which have been regularly making the news. While government regulation is far from perfect ⸺ after all, Bernie Madoff ran the biggest Ponzi scheme in history as a regulated financial investment firm which had nothing to do with cryptocurrency ⸺ there is at least a deterrent and reporting aspect that makes it more difficult for would-be Ponzi schemers to run their gig. That is far better than the current situation involving cryptocurrency, where there is basically nothing that would catch an ongoing Ponzi scheme, thus leaving criminal investigators to come in only after the fact when it is very difficult to find enough remaining assets to provide any meaningful restitution for victims.
All this brings us around to whether cryptocurrency should be a part of tax-advantaged retirement portfolios, which are meant to be a mechanism to encourage retirement savings for those who are not independently wealthy. The answer, if it isn’t obvious already, is in the negative for the very reason that cryptocurrency investments are inherently speculative and should be money that one is ready and willing to lose, instead of the nest egg that they are socking away for their retirement. There is a cruel financial truth inherent in all this, that even goes beyond cryptocurrency: The folks who need to speculate for retirement, really can’t afford to do so.
One more reason not to invest in crypto, or for that matter any speculative investment in retirement accounts: Just as you would not be taxed on your investment gains if you made any, you also do not get to harvest your losses within tax qualified accounts.
The upshot is that if you have a financial advisor who is suggesting that perhaps a part of your retirement account should be in cryptocurrency, then you probably need a new financial advisor — one who knows what they are doing even if their investment strategies are boring, instead of just being “new and different” to try to attract business.
Again, for folks who have the money to lose, there is nothing wrong with making these purely speculative bets in the chance that the other investors decide that the price will go up, and thus the price goes up. It is suggested, however, that perhaps the better bet is to simply take the amount one is willing to wager, take that to a casino, and let it ride on either red or black on the roulette table.
Because if you win, at least you know the casino will pay off, and if you lose, then depending on how much you lost, you’ll probably at least get comped at the buffet and maybe even get a couple of tickets to the show. Or, as one unknown wag once famously noted:
At least with tulip bulbs, you get a pretty flower.


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