Investments in Bitcoin, NFTs might not build wealth

Is Bitcoin a wise investment strategy?

Is Bitcoin a wise investment strategy?

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Financial news and social media content over the past few months have been filled with headlines, commentary and ideas for investing using products and strategies that are unnecessary for building financial security.

Disciplined saving — living below the means of your current income — and diversified long-term investments in global stocks and bonds can lead to wealth creation without having to participate in speculative ideas.

You might call some of the recent investment schemes the YOLO, FOMO market. Translating for the world outside of text messaging or social media acronyms, that’s You Only Live Once and Fear of Missing Out. Risky investments are being promoted by a new brand of investors hoping to lasso a rocket and reap benefits out of the wild ride.

If you practice prudent financial planning and investment management, you can still build financial security even if you don’t pursue any of these attention-getters.

Cryptocurrency — Led by the ballooning price of Bitcoin, there are over 4,000 different variations of cryptocurrency, few of which are used for actual financial transactions as currency. Bitcoin and other digital currencies are likely to continue expanding to more common use. Where they settle as a currency or as an investment is not yet clear. It is hard to prove or disprove value of something that doesn’t generate income or have any financial data available to evaluate what the asset should be worth. Tangentially, what is clear is bitcoin is at odds with the broader movement to sustainability focused investment preferences. The computer power required to produce one bitcoin has an equivalent carbon footprint as 700,000 Visa transactions according to Alex de Vries, an economist who created the Bitcoin Energy Consumption Index.

Nonfungible token (NFT) — These digital assets, like cryptocurrencies, use blockchain technology to assign unique identification codes that distinguish them from each other and confirm sole ownership. They cannot be traded or exchanged for an equivalent asset. Nonfungible tokens are being applied to works of art, internet content and other original works. Twitter founder Jack Dorsey recently sold an NFT of the first published tweet. It was purchased with a cryptocurrency for the equivalent of $2.9 million which Dorsey says he will donate.

Special purchase acquisition companies (SPACs) — These are companies in name and financing only. They have no commercial operations. Otherwise known as black-check companies, they are created to raise capital to purchase companies and transition them to public stock exchanges. While this entity structure has existed for years, they burst forward in 2020 when 200 SPACs raised about $64 billion to facilitate company purchases. Some might lead to good outcomes, but when pro athletes and faux celebrities jump into the fray to endorse or sponsor an investment, that likely a signal to avoid them.

Venture capital — When companies are looking for financial support to move beyond the concept or prototype phase, they often look to venture capital to provide early-stage investments. Venture capital is one form of private equity that allows a limited set of investors to participate in companies well before they are ready to become publicly traded. Most firms that receive venture capital do not survive long-term. However, it can be lucrative for venture capital investors if even one out of every 10 or more investments generates a return many times the initial investment.

Individual stocks — It might make for uplifting conversation to share your experience owning Tesla or some other recent high-flying stocks. However, individual stock returns are likely to disappoint before too long. New research from J.P. Morgan shows that 66 percent of individual U.S. stocks underperformed an alternative option of simply holding the broad market Russell 3000 Index from 1980 through 2020. Given the emergence of technology stocks over the timeframe of this research, you might expect the tech sector would offer better odds of out performance. In fact, they were worse. Over the four decades, 73 percent of tech stocks underperformed the index. Yes, there are some outstanding winners that generate huge returns, but will you invest enough in the winners to outweigh the stocks that underperform? It’s a challenging task in an extremely competitive market.

While none of these types of investments are necessary to build financial security, that doesn’t mean they should be entirely avoided. At the margins of your portfolio, not the core majority of your investment strategy, you might have a place for a speculative idea or two attempting to enhance your overall returns. Keep in mind, however, that fear of missing out can lead to risks that your finances might not have the capacity to support.

Gary Brooks is a certified financial planner and the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor.