Crypto is probably a bad investment!
April 25, 2022
If you remember my April Fools Day post from a few weeks ago, I poked fun at the proliferation of new crypto coins. Most of them are scams. But what about the mainstream crypto coins, like Bitcoin, Ethereum, etc.? Are they a good investment? What’s not to like about a 100%+ annualized return in some of the crypto coins between their inception and their 2021 peak?
Well, those returns are “water under the bridge”. What matters to me today is the outlook for the crypto world going forward. In today’s post, I like to go through some of the reasons why I believe going forward, crypto looks like a sub-par investment. I currently don’t invest in crypto and I don’t think that anything more than a few % of the portfolio seems prudent. Let’s take a look…
Just to be sure, cryptocurrencies had an amazing run!
To pay respect where respect is due, let’s just get the obvious out of the way: cryptocurrencies had very impressive returns. I downloaded the crypto return series I could quickly retrieve from the web: the S&P Cryptocurrency LargeCap Index and three individual coins: Bitcoin, Ethereum, and Litecoin, with the data coming from the St. Louis Fed “FRED” database. In the chart below is the cumulative (nominal) return since 2017. (Note that the S&P Crypto index only starts on 2/28/2017). The cryptocurrencies had spectacular returns. Ethereum with 360x, Bitcoin at about 41x, Litecoin at 24x, and the Large-Cap crypto index with 20x (though with a slightly later starting date of 2/28/2017). I had to display the y-axis in logs because otherwise, you wouldn’t even notice the S&P 500 stock index and the 10-year benchmark bond index (Source: www.spglobal.com). The S&P 500 merely doubled in value (and that’s not even CPI-adjusted), and the 10-year Treasury Benchmark bond index is essentially flat over the 5+ years.