Are cryptocurrencies an investment? This is a question more and more people are asking as Bitcoin, Ethereum and even Dogecoin continue to dominate headlines. Prices have surged, fallen, and surged again – drawing in millions of new buyers hoping to make a profit. However, just because something can go up in value doesn’t make it an investment.
Recent research suggests that as many Britons have put money into cryptocurrencies as into index funds – long-term, diversified investments backed by decades of real-world returns.
So what’s really going on here?
In this article, I’ll explain why I don’t consider cryptocurrencies to be true investments, how they differ from productive assets like the stock market, and why that distinction matters if you’re trying to build long-term wealth.
Are cryptocurrencies an investment?
Cryptocurrencies are not investments in the traditional sense, and here’s why:
Crypto is not a productive asset. Yes, some cryptocurrencies (like Bitcoin) have exploded in popularity and price over the past 10 years, but they have a fundamental problem. Unlike other assets, where you are actually buying into something real (like a car, piece of art or – in the case of equities – a slice of a real business with real people trying to make really good products), you are not buying into a productive, income-generating asset with crypto.
The value of cryptocurrencies is based only on what someone else is willing to pay for them in the future – not on income, earnings, or productive output (all of which the stock market offers). Put it this way… you wouldn’t “invest” in the US dollar, euro or pound sterling in the hope that they would go up in value vs all other currencies. There’s no guarantee with crypto either.
Some people speculate that cryptocurrencies will become the new “golden currency” of global transactions. But there’s absolutely no evidence for this – currencies such as the US dollar and pound sterling have been around for hundreds of years and have been far more stable. Governments simply cannot start investing in a currency which is as volatile as crypto – they provide no financial stability that is the basis of any strong economy.
Cryptocurrencies are inherently volatile, and their prices are driven by speculation – not by intrinsic business fundamentals which drive the stock market. There are no such fundamentals with crypto. There is no large economy to underpin the security of these currencies, no real, tangible assets they are linked to, and no national banking reserve to provide financial stability. So, cryptocurrencies fall out of favour with national banking systems, and it seems unlikely they’ll ever “replace” traditional currencies.
Because there are no fundamentals to underpin the security of cryptocurrencies, their price is determined purely by market sentiment – the value the market puts on them at any one point. And market sentiment is chaotic and impossible to predict. You can see that from the volatility in the above graphs (vs a stable currency, the British pound).
Imagine if the stock markets were this volatile – such volatility would put most people off investing. You can’t – and shouldn’t – speculate on the price of cryptocurrencies. It’s a loser’s game. The only people who consistently make money are the brokers.
The stock market
For comparison (and also to ground us in reality), let’s look back at the global stock market:
John Bogle, the founder of Vanguard, noted that earnings per share of companies in the S&P500 have grown by 5% per year, on average. This (along with dividend yield and some market speculation) are the reasons for the market growth. Because companies have, on average, made higher earnings over time, and also pay out some of their profits as dividends to investors, people are willing to pay more for shares in those companies. This underpins the relentless rise in the global stock market we see in the above graph. Who wouldn’t want a slice of this pie?
Cryptocurrencies are speculative assets. Unlike stocks or property, they do not produce income or earnings, and their value is driven by market sentiment rather than underlying fundamentals.
So, buy cryptocurrencies all you like – but note that I’ll be staying well clear of them. They are incredibly volatile and driven purely by market speculation, plus you do not own any real, tangible assets. For these reasons, cryptocurrencies are not the solution to building long-term wealth. The stock market, however, is.
Some other posts you may find interesting:
- How Many People Invest in the UK?
- The Best Paycheque Routine to Save, Invest and Build Wealth
- How to build wealth in the UK
- Don’t Dance with the Stock Market
- How to get rich as an employee
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