With Bitcoin (and other “cryptocurrencies”) in the news on a daily basis, we wanted to provide our quick thoughts on whether or not it belongs in your portfolio.

In May we detailed our process for evaluating an asset class.  In that post we describe our criteria, starting with:

…Does the asset class represent an “investment” or a “speculation?”  People often conflate the terms, but an “investment,” by definition, is expected to produce a future stream of income, while a “speculation” is a zero-sum bet between the buyer and the seller on the future price of an asset.  The most relevant investments are stocks (which typically pay dividends), bonds (interest), and real estate (rent).  Speculations include gold, commodities, currencies, fine art, and countless other assets that produce no income.  Our portfolios include only true investments.

Bitcoin fails this test.

Like traditional currencies, Bitcoin produces no income.  People are buying it solely because they believe that the price will rise in the future.  But it is important to remember that, for every buyer, there is a seller who believes the price will go down.  It is a zero-sum game, and we would therefore describe both players as speculators, not investors.

Might the price go up?  Of course.  Maybe even a lot.  It might also go down a lot.  We won’t attempt to guess what the outcome will be.  But in the long run, there is no fundamental reason to expect that its price will be any higher (or lower) than today.  In economic terms, Bitcoin’s expected return is zero, and therefore it has no place in our long-term portfolios.

We know better than to try to identify bubbles or predict when they will burst.  But just for fun, here are some recent headlines that suggest that the Bitcoin market might be, as they say, a bit frothy…

People are taking out mortgages to buy Bitcoin

Teenage bitcoin millionaire can see the cryptocurrency’s value shooting as high as $1 million

More people are looking to buy Bitcoin with their credit cards

Paris Hilton, Floyd Mayweather, and The Game all say the future of finance is crypto tokens

This is not a commentary on the future viability of cryptocurrencies in general or Bitcoin in particular.  Nor is it an analysis of the cybersecurity or regulatory risks associated with cryptocurrencies.  And it certainly is not an indictment of the underlying blockchain technology that may very well prove to be revolutionary.  Our crystal ball is entirely cloudy on those issues, and we would be skeptical of anyone who suggests that theirs is not.

What we are qualified to comment on is the construction of investment portfolios that tilt the odds in our favor over the long-term.  We will leave the zero-sum speculation to others.