Blockchain is here to stay. The more I learn about it, and I’ll confess it’s still extremely difficult to understand, the more I’m convinced it’s going to be around a long time, likely forever. That’s probably a very good thing. But there are two bets I’m still against; here’s what they are and why:
You’ve probably by now heard of Non-Fungible Tokens, also known as NFTs. If not, here’s is a good explanation of what there are, and here is a somewhat humorous but useful explanation. I’ll leave the definitions and explanations to those more qualified to do so. And, since I’m thinking about doing a post in the near future just on NFTs, I won’t spend too much time talking about them here. But I do want to point out a few things related to why I wouldn’t put any money into them right now.
NFTs, like all blockchain technology, involve the use of huge amounts of energy. Beyond the effects this is potentially having on the environment, the more financially-relevant consideration is that energy costs money. Lots of energy costs lots of money. This cost is typically passed on to buyers and sellers of NFTs via a “gas fee”. I recently read an example of someone who purchased an NFT for $1.20, and on top of that paid $60 in gas fees! You don’t need an MBA from Harvard to see that a 4900% markup is going eat into potential profitability on such a transaction, um, rather gigantically.
The other thing that bothers me about NFTs is that it doesn’t seem to be clear what you get when you buy one, or what you give up when you sell one. Artists, especially musicians, have been selling NFTs based on their work, but depending on what you read and who you believe, the buyer either gets complete rights to the work attached to the NFT, or no rights whatsoever. Sounds like the courts might be a bit busy deciding these things in the very near future.
I do however believe there is a bright future for NFT technology, and I think once the issues get sorted out, they could become a very useful and valuable part of the economy. And while it can be profitable to get on the ground floor of things with a lot of potential, I’m just not seeing any decent opportunities at the moment. I’m sitting on the NFT sidelines at the moment, but I’m going to monitor them somewhat closely.
The other blockchain issue I wanted to talk about today is, of course, my old friend Bitcoin. Many of you aren’t going to want to hear this, and some will no doubt disagree, but I still do not see any long term value in putting any money into Bitcoin, for reasons I will explain.
I’ve already written posts about my dislike of Bitcoin as a bet (it comes nowhere near my criteria for calling it an investment, which will be the subject of another upcoming post). What compelled me to look at it again is the news that more and more otherwise reputable and even famous investment firms are allocating a portion of their clients’ portfolios to Bitcoin, a practice I consider a violation of their fiduciary duty as well as a potentially disastrous situation for firm and client. I’ll explain more about this in another blog post very soon.
While Bitcoin has a growing number of passionate supporters and hypesters, it also has a few enemies of varying degrees of power. One group that hates Bitcoin in general are environmentalists. I won’t assess the merits of their argument as this is a financial blog, but environmentalists assert Bitcoin is terrible for the global environment because of the energy it consumes and how that energy is generated. Regardless of who supports this argument or not, environmental groups don’t really have the power to get in Bitcoin’s way too much. But…
The other group that greatly dislikes Bitcoin has a tremendous amount of power, and that group is: governments. Governments tend not to like things they can’t monitor, regulate, and control, and so far they have been unable/unwilling to do these things with regards to Bitcoin. Transactions certainly can’t be monitored, which means Bitcoin is outside the ability of tax agencies and criminal investigators to know if and when it’s being used for something illegal.
Politically it’s been a bit difficult for many governments at various levels to try to impose too many restrictions on Bitcoin. But that looks like it might be changing. India is moving toward making Bitcoin illegal, and other countries are likely to follow, especially as they develop their own digital currency that can be tracked and monitored. Increasing tax revenues and making it more difficult to hide the financing of criminal activity are huge incentives for governments to do away with Bitcoin. I’m surprised it hasn’t happened yet, and won’t be surprised if it happens soon.
I’ll continue this discussion in a few days when I present my views on how Bitcoin and related blockchain technology should be analyzed from a financial perspective as well as why it certainly doesn’t belong in an investment portfolio. But, I’ll say this now as well as in my upcoming blog post: I’m not saying don’t buy Bitcoin! If you decide to buy some, don’t do it with your investment money or in an investment account. More to follow soon.
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