What can you tell me about Bitcoin? It sounds like monopoly money. Is it real? Is it safe to use? How can I think about it as a Christian?
One of the biggest stories in financial markets in the last decade is the astronomic rise of Bitcoin and other cryptocurrencies. Some people think cryptocurrencies will revolutionize our world. Others think it’s a fraud.
We need some basic economics to understand what is at stake. Joe Carter has a fantastic explainer about the details, so I’ll focus on high-level ideas.
There Are No Dividends Here
Stick with me here—the return on any investment is found by adding the dividend yield (the value your investment produces) and the capital gain (the change in price from what you paid).
So if you buy a house, your dividend is either the rental income (if you rent it out) or the value you receive from having a place to stay. If you invest in a company, your dividend is your part of the profit that company earns. If you put your money in a savings account, your dividend is the (currently tiny) amount of interest your bank pays you.
Bitcoin and other cryptocurrencies produce no dividends. They will never provide a place to stay or earned income or even interest. That’s not a prediction; it’s just a fact. And unlike a stock, which may pay higher dividends in the future and thus justify a price increase, crypto will never pay dividends in the future. Future dividends cannot justify a price increase for crypto.
Bitcoin and other cryptocurrencies produce no dividends. They will never provide a place to stay or earned income or even interest. That’s not a prediction; it’s just a fact.
So why do people invest in crypto? Because they expect the price to rise.
We have a word in finance for an investment like this—a bubble. An asset that never pays a dividend but has a price that keeps rising is a bubble. An investor can believe Bitcoin is a bubble and rationally invest so long as she expects to sell out before the bubble pops. But that isn’t investing; that’s gambling, and it’s a zero-sum game.
Not an Asset. Maybe a Currency?
So as an asset, Bitcoin should have no value at all. But as a currency, it might. After all, you don’t get a dividend from holding money in your wallet. But you don’t “buy” money because you intend to hold it forever. The point of holding money is to “sell it” in the future—to use it to buy something, like a hot dog or living room furniture. The value of currency comes from people’s willingness to accept it as a means of payment.
But Bitcoin is a much less robust means of payment than other currencies. While there is a black-market demand for Bitcoin transactions because of anonymity, the current level of payments can’t explain the price. The number of Bitcoin transactions slowed down starting in 2012 and hasn’t increased at all since 2017. But the price has soared since then.
As a currency, Bitcoin is not as good as dollars or any other currency. There is no debate about that. The only explanation for investing in Bitcoin is that people expect the price to rise. An investor could believe that the transaction value will rise and one day Bitcoin will be a true currency, justifying the price increase today. I don’t think that belief is realistic.
As a currency, Bitcoin is not as good as dollars or any other currency.
All economists agree that a stable price is highly desirable for a currency. But the price of Bitcoin is incredibly volatile. The crypto sector knows it, which is why an alternative class of cryptocurrencies has emerged—stablecoins. Stablecoins are virtual currencies designed to have a fixed price, because a “currency” without a stable price won’t last as a currency.
That’s the whole problem with Bitcoin: it’s not a stablecoin. The price fluctuates tremendously. Becoming a real currency in the future would require the price to stop rising (become stable) one day, at which point Bitcoin would need to have the same liquidity value as other currencies. Bitcoin would have to displace global currencies like the dollar and the euro to have equivalent liquidity value. Most economists find that preposterous.
Just because Bitcoin is almost surely a bubble doesn’t mean you should go sell it short tomorrow. Bubbles can persist for a long time. John Maynard Keynes famously said, “The market can remain irrational longer than you can remain solvent,” and Sir Isaac Newton declared about the South Sea bubble that he could “calculate the motions of the heavenly stars, but not the madness of people.”
How should a Christian feel about Bitcoin? Well, how do you feel about gambling as an investment strategy? Investing in Bitcoin means betting on getting out before the bubble bursts. That’s a zero-sum game between you and other traders, in which your gains are their losses. You might make lots of money by investing in Bitcoin—many people have. But I think it is better to put your money elsewhere, even if that might mean leaving profits on the table.
How should a Christian feel about Bitcoin? Well, how do you feel about gambling as an investment strategy?
With real assets, you earn a return because you put money at risk and it is put to productive use. When you buy a stock or a corporate bond, on the other side of your investment is a business that uses your money to expand, to create new products, to employ workers—one hopes, to serve the common good. When a bank issues a mortgage, it makes a loan to a homeowner who borrows money to buy a house. The investor earns a return and the borrower benefits as well.
Christians should be excited to invest in ways that serve the common good, whether by using their retirement funds to align values and investments or by providing funding for a car wash to provide jobs or in any number of other ways. Investing creates and serves.
Given the choice between investing in a bubble that enables illicit black-market transactions, or investing in real assets that one hopes serve the common good—the choice should be obvious for Christians.