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Like many other curious investors, I was tempted to buy bitcoin but thankfully didn't, now that it's plummeted. How do you decide when something is a good investment?
Burdened About Bitcoin
Bitcoin has been a hot topic in the news for some time! It's a controversial investment and investors have all had very different experiences and opinions.
I want to give you three recommendations that are intended to help you and all investors in general.
Rule #1. Never invest money in something you don't understand.
The Biblical principle to follow is Proverbs 27:23 - Be sure you know the condition of your flocks, give careful attention to your herds. In other words, if you invested in sheep, you better know how to keep them alive, multiply them and market their wool. If not, don't invest in sheep.
Bitcoin is a digital currency that is limited in supply but, unlike gold, has no other real use except as money - which at the present is very limited. The assumption that it would become a currency of choice initially caused the demand for Bitcoin to soar among speculators and the reason for the surge in price. It has also gained the attention of criminals because of the lack of regulation around it.
Robert Shiller and Warren Buffett have voiced their warnings about cryptocurrencies because they're unsound investments characterized by extreme and quick volatility. Shiller told CNBC earlier this month, Bitcoin "has no value at all unless there is some common consensus that it has value." That's why Shiller said Bitcoin "might totally collapse and be forgotten."
Stefan Hofrichter, head of global economics and strategy at Allianz Global Investors, recently said Bitcoin's price drop is not surprising. "Bitcoin has no intrinsic value: it is a claim on nobody – unlike sovereign bonds, equities or paper money – and doesn't generate any income." He joins others who doubt the value of digital currency. Economist Nouriel Roubini called it the "biggest bubble in human history." Bill Harris, former PayPal CEO, calls Bitcoin a scam.
However, as recently as January, when Bitcoin had crashed to less than half of the December 2017 value, some were still optimistic, with claims the price could reach $100,000 by the end of 2018.
On April 2, The U.S. Securities and Exchange Commission said it will not approve any cryptocurrency exchange-traded funds for listing on a major U.S. exchange until fund operators can convince the commission that investors will be protected. On that date, The Bitcoin Investment Trust (GBTC) was down 52.6 percent in 2018. Other countries are clamping down.
According to Philip Booth, professor of Public Policy and Ethics, St. Mary's University, UK, "speculation designed simply to make more money can lead to the temptation to sin and to market abuse. We should be wary of chasing speculative bubbles which have no clear economic rationale." This applies to more than Bitcoin.
Prices soared when people bought it assuming they could sell it for more money in the future. Speculative bubbles arise when people believe that demand will increase and prices will continue to rise. And the root of that is greed.
Rule #2. Don't invest money you cannot afford to lose.
Savings is money that is protected and preserved so it is available in an emergency. Conversely, investments are funds intentionally placed at risk in hopes of higher returns. The higher the risk, the higher the potential reward. Bitcoin offered a potentially high return but at a very high risk.
Of course, you don't want to lose money. But wise investors sometimes have to cut their losses and move on. Our attitude must be one of dependency upon Christ to prevent us from making foolish decisions to avoid loses.
Proverbs 30:8-9 is a helpful guide: Remove far from me falsehood and lying; give me neither poverty nor riches; feed me with the food that is needful for me, lest I be full and deny you and say, 'Who is the Lord?' or lest I be poor and steal and profane the name of my God.
Rule #3. Think long term to give your investments a proper evaluation.
Like a living plant, investments need time to grow. We need to be patient for a long period to determine if we have made a good investment or bad investment. A friend recently shared with me a long list of all the stocks that he once owned but sold too soon! He followed the crowds of buying when the stocks were "hot" and selling when the stock turned "cold." This has cost him the loss of tremendous returns on his investments had he stayed in for the long haul.
Warren Buffett reported that his company, Berkshire Hathaway, has lost 50% of its market value three different periods, but always bounced back stronger! Now that is true patience.
Remember what Solomon taught us about investing, Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. (Proverbs 13:11 ESV)
So be patient. Trust the Lord. Do you sell now? I can't tell you whether to stay or get out.
It is possible that cryptocurrencies will eventually benefit the global economy overall by driving down the cost of business and increasing productivity. I am watching and waiting to see what happens with Bitcoin and learning as much as I can. I believe cryptocurrency may become widely used but I'm not sure bitcoin will be it. Remember, I only give biblical advice, not investment advice. You, ultimately, must determine what the Bible is speaking to you.
We have more helpful resources on what the Bible says about all aspects of your finances. The online MoneyLife Personal Finance course consists of 10 Life Lessons that will walk you through everything from debt, to saving, to investing, and leaving a Kingdom legacy. Learn more about how to feel confident in your finances here.