Ever since I took my first economics course as a freshman in college, I fell in love with the field. As I continued my studies, both in the classroom and outside of it, my love for economics increased.
I am not sure why I am so fascinated by the subject, to be honest. It might be because I am reasonably good at it. It might be that after a mediocre high school career doing really well in the economics course I took in my first semester in college made me feel very good about myself. Maybe I attached those good feelings to the field of economics and I would feel the same way about another subject had I taken that subject instead.
The above is possible, but I think it's much more than that. Here are a few reasons why I love economics:
Studying economics has made me a more educated and intelligent person allows me to live a more informed life. I love this field of study and I believe anyone who takes the time and puts in the effort to study this social science which tries so hard to be a real science will fall in love with the subject as well.
I'm at the gym waiting for a buddy of mine to show up and workout with me. After a long day at work I didn't want to workout. I wanted to go home and rest or basically do anything but exercise. However, I made plans with my friend already and I didn't want to experience that feeling you get when you break a promise to yourself, so I somehow made it to the gym. Sitting here in the gym's lobby waiting for my friend to arrive I remembered a quote I heard before, although I am not sure who said it originally. I tried to search for the quote on Google but it seems that it is attributed to many individuals.
"The hardest part is showing up."
Now that I'm at the gym I don't feel this desire to leave. I've already broken the main part of my internal resistance to working out by just showing up to the gym. I know that I will have to have an intense workout session, but that's perfectly fine now that I'm already at the gym. It's hard to explain and it seems to not make a lot of sense because the difficult part is still ahead of me. I've only completed the easy preliminary task. However, that easy preliminary task seems to have been the most important part. If I just show up to the gym I'll likely work out. It's not likely that I'll show up and then just get up and leave. Maybe it's because getting up and leaving will mean a change of course and a change of plans. Maybe that's what the difficult part is: actually getting started. Once I'm already at the gym inertia is acting in my favor. To leave the gym now would require me to go against that inertia.
I'll keep this little insight in mind next time I have a difficult task to do that I don't want to do. Obviously the task has to be of a particular variety for the principle to be effective, but it is easier to think about just showing up than thinking about the entirety of the task in front of you.
This is a poem I wrote a few years ago:
Confusion on capitol hill,
Years of spending and now we see the bill.
Some politicians with great intentions,
Some inventors with great inventions.
Some thinkers with great plans,
But many with greedy hands. Health care, medicare.
Rising debts, unwise bets.
Little regulation, a consumerist nation.
In a hole and trying to climb out,
Except unsure about how to win this bout.
Efficiency and growth must be our focus,
Can't fix it with rhetoric, wishing, and hocus pocus.
Lower our nation's debt,
That would be a safe bet.
Increase confidence in where we're going,
And the employed crowd will start growing.
Economic thinking and analysis isn't easy,
And it may not be the most appeasing,
And debtor nations.
It must be done, however,
If we don't want to sink, whenever,
Difficult winds blow our way.
“Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”
I absolutely love this quote by the great general and great Roman emperor Marcus Aurelius. Often I have been worried in thinking about future events. I've asked myself "will I be able to perform or handle it?" Marcus Aurelius instructs us to not fear future events that seem daunting, difficult, or scary. He tells us that we'll be able to face the future the same way we are able to face the present. When we're in that scary situation, we'll do just fine because we are good and strong people. We'll do our best with the knowledge we have and the reason we posses as we do our best now. This quote should put you at ease when thinking about how you will handle that daunting future event.
Title: The Age of Miracles
Author: Karen Thompson Walker
Publication Date: 2012
I rarely read fiction books and I'm not quite sure why. It might be because I feel that I have a lot to learn and that I shouldn't spend time reading fiction books when there are still so many popular and educational non-fiction books that I have yet to read. It might be because I feel that fiction books are more for entertainment purposes, akin to watching a movie, while non-fiction books help you learn and grow. When I pick up the right fiction book, however, I realize how wrong the above statement is. The right fiction book can entrance, educate, inspire, and entertain all at once unlike anything else because the characters live both on the pages of the book and in your imagination. This is what I found in Karan Thompson Walker's debut novel The Age of Miracles.
I came across this novel when I was browsing Apple's iBooks Store on my iPad and saw The Age of Miracles as a new and recommended book in the summer of 2012. I quickly read the book's summary and was intrigued by the scientific aspects of the story and decided to read the book despite it being about a pre-teen girl, which not my usual choice of protagonist in the fiction books I read.
The book follows a California girl named Julia, who is 11 years old when it is discovered that the Earth has begun taking longer to complete a rotation. The phenomenon obviously comes as a shock to humanity and is not able to be explained despite efforts by governments and scientists to do so. As the days become longer and the nights longer also, the government of the United States announces the adoption of something called "clock time," where a day will still be 24 hours just like before the "slowing" even though the days get longer and longer. In “clock time” it might be dark outside at 12 p.m.
When I started reading the book I already knew that the world's rotation in Julia’s universe would slow down from the book's summary and I was very interested to see how this enormous change would affect people’s lives. The book mainly focuses on the life of our protagonist Julia, who lives in what seems to be an upper-middle class family in a relatively pleasant California suburb. After the government announces “clock time,” two groups of people emerge: those who are on clock time and the "real timers," who live their lives by the sun and ignore the artificial "clock time.”
Julia's life changes because of the Earth's changing spin, but I believe her life also changes because she is a young girl and at that age life can be difficult and quickly changing even if you have all you needs met and even if the Earth’s rotation is the same. Julia loses friends, makes new ones, has turmoil and difficulty within her family, and finds what seems to be young love. In thinking about her existence and about everything that has been happening to her, Julia says the following quote which I am intrigued by:
"There is such a thing as coincidence, the alignment of two or more things with no causal connection. Maybe everything that happened with me and my family had nothing to do with the slowing..."
What intrigued me about this quote is that it reminds me a lot about economics. I know that Walker probably wasn't thinking about economics at all when writing the above quote or her novel in general, but I was still excited to be able to relate it to economics. The quote is about coincidences and causal connections. Economists strive to understand how the world works and in doing so they attempt to find causal connections between events, but this is incredibly difficult in general and especially difficult in a field such as economics, where experimentation in the traditional sense is not possible. Sometimes economists foolishly believe there to be a causal connection when in fact there is a mere correlation and no evidence of a causal connection. It is in fact very difficult to determine causal connections. Does A cause B? Or does C cause both A and B? That's one simple example. The field of econometrics, which is like a combination of economics and calculus-based statistics deals with these type of questions. Part of what econometricians do is gather data and run what is called a regression analysis to determine correlations. People also mistake correlations with causal connections in their daily lives all the time. It can be useful to recognize the difference between correlation and causation so that one can live a life that is more informed.
I was slightly disappointed that the novel only briefly discussed how the Earth’s slowing rotation affected other people in other cities, other states, other countries, and people in other socio-economic positions. I was interested, in starting the book, to see the macro changes that would occur. Although the book does discuss this somewhat, I wish it did so a little more.
Additionally I would like to point out that I've read online that some of the scientific facts or conclusions in the book are not totally accurate. I think it might be important to note this possibility, but I don't think it's a major flaw of the book because the book is about how the life of a girl and the people she knows changes by the Earth’s slowing rotation. Even if the facts are a little bit off, the emotions and the psychological effects will likely not change much if at all. The physical effects described might be slightly different, but I doubt they would be so different that they would materially change the book's main thrust.
A broad range of people will enjoy this book, both for its simple and high quality writing and for its unique plot.
I learned about this video while I was an undergraduate pursuing my degree in economics. Learning economics and being a genuine economics nerd, I fell in love with the video and the concept. I remember thinking that it was amazing that someone or some group would make a video like this. I thought that the ideas presented were important, but that the subject matter was fairly narrow and that only a small audience would really appreciate this video. I was surprised, therefore, that the production quality of this video was so high.
I later found out that the video was made by a group called ECONSTORIES and that the host of my favorite podcast, Russ Roberts, was a big part of the making of this video. Russ Roberts has a weekly podcast called EconTalk that I listen to every week and highly recommend. You can learn more about this great podcast here.
The Keynes vs. Hayek rap video is a short music video with characters playing the roles of economists John Maynard Keynes and Friedrich Hayek. John Maynard Keynes is portrayed as a confident, self-assured, slightly wild, and popular man while Friedrich Hayek is portrayed as more cautious, attempting to obtain recognition, and a lot less popular. This parallels the real world as a lot of a people know of British economist John Maynard Keynes, while in my experience it seems that only economists and policy makers have some knowledge of the Austrian economist Friedrich Hayek.
Each economist describes his world-view and economic philosophy in the music video in simple and easy to understand ways. Being an economist I understood everything, but I feel that the video will not have the same effect on a non-economist. It's easy to understand, but it seems to me that a non-economist might not understand certain concepts and terms (eg. Keynes’s “animal spirits”). Keynes describes his top-down stimulus spending approach and how that approach can help reenergize the economy when there is a general glut. Hayek argues that such a top-down approach only leads to perverse incentives and ignores the importance of savings to changes in the economy and increases in productivity, which Hayek believes is the true path to prosperity. Hayek believes that the government intervention that Keynes argues for creates boom and bust cycles.
The video was created by ECONSTORIES, a media channel dedicated to exploring the world of economics with visual storytelling and entertainment. You can learn more about them and watch other very interesting and informative videos here.
"The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist."
Title: The Richest Man in Babylon
Author: George Samuel Clason
Publication Date: 1926
Genre: Financial Advice/Money Management/Wealth Building
The Richest Man in Babylon, written by George S. Clason is an interesting, relatively brief, and useful read that will educate those new to money management and wealth building and entertain those who already know a lot about building wealth.
Through a series of short stories and parables that take place in the once great city of Babylon, Clason teaches readers about saving, investing, and spending. The stories are short and engaging and help illustrate fundamental principles of money management and wealth building. Even though I already knew a lot about saving and investing and would consider myself a sophisticated reader when it comes to books on finance and money management, reading Clason's The Richest Man in Babylon reinforced some principles in my mind and got me even more excited about saving and building wealth. It feels like the main strength of the book, beyond the basic financial principles that is espouses, is to put the reader in the right mindset for saving. Among the various things taught in this book are The Seven Cures for a Lean Purse and the Five Laws of Gold:
7 Cures for a Lean Purse
Start thy purse to fattening. Begin saving a portion of your income instead of spending all that you earn. This might seem almost too simple, but there's magic in the boldness of beginning something. Soon you will see your purse and your savings grow and this will make you feel good.
Control thy expenditures. Controlling your spending is half the equation, because even if you earn a ton of money, if you spend it all you'll still be broke. Control your spending and live below your means.
Make thy gold multiply. Once you start saving and have some money put aside, make the money work hard and earn more. Invest your money wisely so that your savings grow.
Guard thy treasures from loss. A lot of opportunities for investment will come along, but not all of these opportunities are worth your time and your hard-earned money. Security is a vital part of investing, so make sure your principal is safe. Additionally, consult with experienced, intelligent, and wise individuals so that you may learn from them and be guided properly in your investing.
Make of thy dwelling a profitable investment. If you always pay rent you will have nothing to show for it at the end of your life. If you pay a mortgage you will have a house to show for it at the end of your life. So, "own thy own home."
Insure [Ensure] a future income. It is important to make sure that you have money in old age and that your family will be provided for in case of your demise. Saving diligently and purposefully for retirement and purchasing life insurance can help to protect yourself and your family.
Increase thy ability to earn. A person must set concrete goals and work hard to achieve them. These goals should be to both advance your position and to make yourself a more knowledgeable and wiser person. A person should also pay his or her debts, be compassionate, make a will, and take care of his or her family.
The Five Laws of Gold
1. Gold cometh gladly and in increasing quantity to any man who will put not less than one-tenth of his earnings to create an estate for his future and that of his family.
2. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
3. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
4. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
5. Gold flees the man who would force it to impossible earning or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment
These are just some of the many interesting things you will learn in The Richest Man in Babylon. Although the book proffers what many already agree with and understand, it provides excellent motivation to really move forward with wealth building and financial success.
The book is a quick read even though it is written in a somewhat artificially-archaic style in what seems to be an attempt by Clason to add some kind of ancient mystique to his work. It can be finished in less than a week and even less than a single day if one is so inclined. The book will likely earn a permanent place on your bookshelf and be a source of future inspiration when inspiration is needed. You'll also likely end up recommending the book in the future to someone who is starting out or who wants to learn about wealth building and financial success.
I recently sat down with a top-rated resume consultant in Los Angeles, CA with a Ph.D. in communications and many successful years of experience in resume consulting to look over my own resume and get some guidance on how to craft a resume that will stand out in 2014 and the next few years.
Although opinions vary, it is not considered best practice to include your LinkedIn information on a professional resume. I was told by the consultant that putting your LinkedIn URL or other similar types of URLs on your resume make it seem like the resume is a little pointless. He said "what's the point of giving your resume if you're just saying 'take a look at my LinkedIn profile for my complete profile, this resume is just a brief sonopsis.'" The consultant stated sarcastically that if you're going to put your LinkedIn profile, "...you might as well not have anything except a blank sheet with just your LinkedIn profile, which will save the resume reader some time."
Of course the resume is a brief sonopsis and your LinkedIn profile will likely be much more in-depth, but you don't want the person reading your resume to think that he or she has to go online and go to LinkedIn to really get to know you. They should be able to get a feel for you based on your resume and not have to do more research. Your resume should stand out. Your resume should be enough for them to make a decision about whehter or not they want to get to know you better. That's hard to do, but that's the point of a resume.
The conversation surprised me because I though I was smart and savvy by including my LinkedIn information on my resume. I have since taken off my LinkedIn URL and I believe my resume, revised and crafted to express what I want it to, is better for it. I am, however, open to putting the LinkedIn URL back and making any other changes if I feel they are appropriate or if circumstances change.
Do you have your LinkedIn URL on your resume? If so, why do you think that's a good idea?
The Economics of Seinfeld
I was never a fan of the hit show Seinfeld, but after finding this interesting website I realize that it's a pretty funny and interesting show. I absolutley love this website and what it tries to accomplish. The website uses short clips from the famous "show about nothing" to demonstrate all sorts of economic principles from arbitrage to zero-sum games.
You've probably heard about the GDP in the news in general and in financial new specifically, escpeically during the economic turmoil of the past decade and the Great Recession. After reading this article you'll have a general understanding of what this often-used, often-misunderstood, and often-misused measure of the macroeconomy is.
GDP stands for Gross Domestic Product.
Gross = Total
Domestic = Within the borders of a particular country
Product= What is produced (which can be measured in various ways and is often hard to measure)
So, GDP, or the Gross Domestic Product, is the dollar value of the goods and services produced within a country's borders during a particular period of time, that time period being one year for the obvious reasons of convenience and comparability.
Calculating the GDP is very difficult, but for our purposes we shouldn't complicate things. To calculate the Gross Domestic Product we just need to add up the dollar value of all of the goods and services produced within a country's borders during the period of one year. That total value represents "what was produced" in the year and knowing "what was produced" helps us have a better understanding of how the economy is doing.
That total value of goods and services produced within a country's borders within a year, the GDP, can be compared with the GDP of previous years. Comparing the GDP with previous years allows us to see how we things are changing and if they are improving or getting worse. Was last year better than the year before? Better than 10 years ago? We can compare GDP measures for each year to find out.
Let's dig a little deeper now that we know what the Gross Domestric Product attempts to measure. We know GDP is the total value of all the goods and services produced within a country's borders, but economists have broken down the Gross Domestic Product into 4 components that generally make up the entire economy. These compotents are: Consumption (C), Investment (I), Government (G), and Net Exports (X - M).
Now you have a relatively basic understanding of what the Gross Domestic Product (GDP) is. Although it has flaws and is just one of many measures of the economy, the relative simplicity and the all-encompassing nature of this measure make it useful and attractive.
Check out future articles on the GDP for a further understanding.
The conventional wisdom is that diversification is an integral part of successful investing. Although the idea of diversification has been around for centuries (and is mentioned in both the Bible and the Talmud), the modern idea of financial diversification can be attributed to the work of Nobel prize-winning economist Harry Markowitz and his Modern Portfolio Theory. We won't get technical here and we by no means will cover anything in depth, but it's a good idea to realize that too much diversification will prevent a portfolio from achieving great returns.
For most people who are not in the game to get amazing returns (who are in it to protect and grow their money at a reasonable pace), broad diversification is a great idea and will likely protect them. For those individuals who are in the game to make spectacular returns (and who should be able to tolerate more risk), diversification beyond a certain point makes them worse off. I'm not sure exactly where that point is. Some people say ten investments or stocks and some say a little more or a little less. Warren Buffett has stated that six is a good rule of thumb.
Whatever the number, the important thing to understand is that if a portfolio has too many stocks an amazing performance by a single stock gets diluted. If a stock goes up 10x (a ten bagger as Peter Lynch would call it) and it represents only 1% of your portfolio, your portfolio only goes up by 10%. The stock went up 1000% but your portfolio only went up 10%. If you want to make spectacular returns, energy must be focused on picking great businesses to invest in and discipline must be exercised to not overcrowd your portfolio.
Additionally, a part of diversification involves investing in different sectors (eg. energy, healthcare, financials, etc.). However, why would one need to invest in one hundred businesses in every sector? Wouldn't it seem wiser to invest in the best businesses in each sector?
Again, this isn't meant for individuals who dabble in the stock market, who can't tolerate the risk that comes with investing for spectacular returns, or who don't have either the time or the inclination to research businesses in an in-depth way. However, if you want to make great investing returns don't over-diversify and do your best to stay focused and disciplined on high-quality investments.
It's key to not that this entire discussion only applied to advanced and experienced investors - novice investors or investors with a moderate level of knowledge and experience should not attempt to pick individual stocks. Novice investors and moderately-experienced investors will be best served by sticking to good mutual funds and ETFs.
Check out the video below to hear a few words form world-renowned investor Warren Buffett on the topic of diversification:
Have you heard the common refrain that Apple products, specifically Apple computers (Macs) are overpriced? We won't take a stance as to whether or not Macs are good computers or whether or not they are overpriced. We'll just look at the question from the perspective of an economist and try to see that the question itself isn't properly formed.
Overpriced compared to what?
Usually, when people say that Macs are overpriced they mean that they are overpriced to comparable PCs running Microsoft's Windows operating system. Usually, people who make this comment point out that the same specs can be obtained on a Windows PC for less money. They also point out the fact that an entry-level Windows PC costs just a few hundred dollars (usually a laptop), but the cheapest Mac currently is the $500 Mac Mini, which doesn't come with a display, mouse, or keyboard. To get a Mac laptop (a MacBook Air or MacBook Pro) at least $900 has to be spent, the cost of a higher-end Windows laptop.
From an economist's perspective, the statement is correct in that more power can be had for less money in the Windows world. However, a wise economist would also point out that Macs are very different things than Windows PCs. They have a different operating system, build quality, customer support, and brand recognition. When someone purchases a Mac, they might be spending more money because they want one or all of these differentiators.
Potential Differentiator 1: Operating System (Mac OS X)
Although specs on a Mac cost more, many would argue that Mac OS X is a more efficient operating system that takes better advantage of Mac hardware because both the hardware and software are built by the same company.
Potential Differentiator 2: Build Quality
Macs are well-known to have a high build quality. It might just be that Apple customers like the look and feel of Macs and are willing to pay for it in the same way that the owner of a luxury vehicle is willing to pay extra for the look and feel of his or her car. The look and feel may not account for one hundred percent of the price difference, but it might account for some.
Potential Differentiator 3: Customer Support
Apple's customer support, specifically their Genius Bar, is well-known to provide excellent customer service and support that doesn't seem to have a rival on the Windows side. Attempts on the Windows side to provide something similar generally don't turn out very well (eg. Best Buy's Geek Squad). You can just bring in your Apple product to one of their many stores and you will be quickly helped by a knowledgeable associate. This may seem pointless to someone who is a computer expert. Why would someone pay more for a product so that if it breaks later you can have someone take a look at it in a convenient way? However, it isn't pointless to a less tech-savvy or a very busy person who commands higher wages and is willing to pay more to save time and mental stress. A person making $500 per hour (obviously an exaggerated example) should be more than willing to pay extra for things that will save him or her time and preserve his or her energy. It's just worth it for them.
Potential Differentiator 4: Brand Recognition
Finally, many people might purchase Apple products because of the Apple brand. In the same way that some people purchase a Mercedes Benz in part because of the brand and the prestige that is associated with it, a person might purchase a Mac because they want to be associated with the Apple brand. It might seem pointless to some, but in a wealthy society brand recognition, branding in general, and how you feel about what you purchase is very important. Everyone wants to feel good about what they buy and people are willing to pay for that feeling.
There might be more reasons as to why Apple products generally seem to cost more, but the above four generally explain why so many people are willing to pay more for products that are similar in many ways. The reason they are willing to pay more is because although they may be similar in terms of specs, they are different in other important and often intangible ways.
This same methodology can be applied to other products and even to other things in life. Things aren't always black and white and things that seem similar can be different in important ways. Even if those differences are small, they might mean a lot to some people and those people might be ready and willing to pay a premium for things that are important to them.
Finally, it's important to point out that any society in which people will pay more of their hard-earned money to buy a product because "they feel better about it" or because "it makes them feel better" or because "they like the brand" is a rich society compared with the rest of the world and humanity's history. Only in a very rich society can these types of products exist, can this type of intangible product differentiation exist, and can many people afford to pay premiums for very intangible things.
If you're here then you probably already know something about the digital currency called Bitcoin which has grown in popularity over the last few years. Therefore, we won't discuss what they are, how they are obtained, or how they are mined. We will be attempting to answer a simple question: Should you invest in Bitcoin?
More precisely, the question should be: Should you PURCHASE Bitcoin? This is because Bitcoins can be either purchased or obtained through mining. I won't be discussing Bitcoin mining here because I have only done minimal research on the topic and your success depends greatly on how you approach the endeavor.
So, should you buy some Bitcoin? Should you spend your US Dollars (or whatever form of currency you use) to purchase this new and unregulated digital currency? In my opinion, the current answer has to be a weak no. Let's go over the main reasons why this is so and then we'll go over why you might want to purchase Bitcoin.
Currency is Generally Not a Good Investment for Most Investors
For the vast majority of investors, investing in currency or currency trading is a fool's game. There is a lot of risk and uncertainty and there are always people who are playing the same game but are more informed than you. What makes you think that you will be better able to predict the movements of the Yen or the Euro than another currency trader with more education, a faster computer, and better software? That's what you have to do to succeed in currency trading because the only way you make money in currency trading is when you make the right "bet." Bitcoin is just another type of currency. It's not government-issued or government-regulated, but it is a currency nonetheless. The same principle of currency investing that applies to the plethora of government-issued and government-backed currencies apply to this new digital currency called Bitcoin.
I did say you were making a "bet" when currency trading. You might say, "don't you make a bet on any investment, be it a stock, a bond, real estate, etc.?" The answer to that question is a resounding yes. However, when you purchase some investments, it's a different type of bet you're making.
As we discussed in our article on investing in precious metals, if your gold coin goes up in value it only goes up because of the forces of supply and demand. If my share of Tesla Motors goes up in value, it may be for the same reasons of supply and demand, but it also might be because the underlying value of the company increased. That's an important difference.
It's the same thing with currency. If the value of the Euro goes up, it's only because of the forces of supply and demand. Maybe more people want to hold Euros (eg. interest rates in the Eurozone increase) or the supply of Euros decreases (eg. The ECB decides to print fewer Euros). There can be many other events and factors that affect the supply of and demand for Euros. Either way, there is no underlying value to Euros besides the paper they are printed on. They are worth what we say they are worth. This is profoundly different than the underlying value of a company like General Electric, which makes all kinds of things that people want to buy. If you own a share of General Electric, you own a share of all of its business and you own a share of an income-generating organization.
Getting back to the main point of this subsection, currency trading is just like making a bet on what the future value of a currency will be. If you buy Bitcoins with US Dollars you hope that sometime in the future the Bitcoins will be worth more than they are today. You hope that your Bitcoins will be able to buy more dollars than a number of dollars you used to buy the Bitcoins.
Note: We're ignoring inflation above for simplicity purposes
Bitcoin Don't Generate Income
This was briefly addressed above. Bitcoins are just a "thing." You hope that "thing" will be will be worth more in the future. That's the nature of your Bitcoin investment.
I would contrast this with the nature of many other types of investments. If you purchase stocks, you are hoping that the underlying value of the company (based many factors) improves. If you purchase bonds, you are effectively making a loan to a government or a company and you are hoping that you are repaid an amount greater than your original investment adjusted for inflation. If you purchase real estate, you are hoping that the price of your real estate goes up. That real estate price is dependent on supply and demand for real estate in the community, but it's also dependent on the rental income your real estate can generate and the improvements you make to the property. In the above three examples, the investments are tied to some kind of cash flow: corporate profits or dividends, interest payments, or rent payments.
With investments in currency, there is no income and there is no cash flow. You will sit with that currency until you are ready to sell.That's why investors who aren't overly cocky about their abilities and who have a medium-term or long-term approach prefer to invest in equities, bonds, and real estate rather than currency. Bitcoins are just another type of currency and they have all of the same drawbacks when it comes to investing that any traditional government-issued or government-backed currency would have.
Bitcoin Will Add Major Uncertainty (Volatility) to a Portfolio
I believe the final reason why you should be very cautious in deciding whether to purchase Bitcoin is that there is a lot of uncertainty and most Bitcoin purchasers seem to have less information about what they are purchasing than a traditional investor in equities would have.
Before you purchase a stock you research the company. You look at their financials and their management. If you are a smart investor you look at the actual company itself. You might walk into a store, look at their product, and really think about what this company makes. You then make a decision based on this information about whether investing is a worthwhile risk.
With Bitcoin, you are investing in a digital currency. There's not store to walk into. You know that the supply is increasing (for now) and that the difficulty of creating new Bitcoin (mining) is correlated with the number of people attempting to create them (attempting to mine for them). You know that you need relatively powerful computers to mine Bitcoin. You hear the news stories about people making money by purchasing or mining Bitcoin. But, how much do people really know? To me, it seems like many people are engaging in classic speculation.
There's no way to know whether Bitcoin will collapse tomorrow or whether it will increase in value by ten thousand times. There's even no way to know if people will accept it in the stores you shop at. There's no way to know what the government will say about Bitcoin. There's no way to know if a competing digital currency that is better in every way will come out tomorrow and Bitcoin will become completely worthless.
Given the above, you still might want to consider adding some Bitcoin to your portfolio
Although I don't believe it's a good investment today, Bitcoin might become something you might want to purchase in the future, even if just for using it as a means of exchange. Bitcoin might or might not last, but it's likely that some kind of virtual currency (be it Bitcoin or another virtual currency that does or doesn't exist yet) will become widely used. Throughout history, currencies change and there's no guarantee that the US Dollar (or any other currency that's widely used) will remain popular. It might just be the case that virtual currency will be attractive and used as a possible means of exchange. It might just be that virtual currency will be like money in the future.
Therefore, we can't completely say that you should never hold Bitcoin or virtual currency. However, if we do hold it, we should hold it because it is a useful and efficient means of exchange, not because we are deluded enough to think that holding currency in general or virtual currency specifically is a wise investment compared to the plethora of other investment options available to investors novice or expert.
UPDATE: Click here for an a new article written in light of new information and study
Gold and silver might be good ways to diversify your portfolio and guard against risk and uncertainty (strategic portfolio risk management and mitigation), but you are mistaking if you make precious metals a very significant part of your portfolio in most cases.
As ultra-successful investor Warren Buffett has stated and as any good investor knows, gold and silver (and pretty much every such precious metal and commodity) are not productive assets - they just sit there and look pretty. Unlike a successful business, they don't make more money, as illustrated by the below example.
If you had $1000 to invest today and you purchased silver bullion with the entire sum, the value of your initial $1000 investment in 10 years would depend solely on the supply and demand for silver. That's it. If you invested that money into buying a share of a successful and profitable business, however, the value of your $1000 investment in 10 years would depend on a lot more than the supply and demand for a share of that business. It would depend on that of course, but it would also depend on the business's management, the innovation that occurred within the business, how effectively the business model and the business's plans were carried out, etc. Over those 10 years, your silver would just be sitting there but the business would be working hard to sell products or services, grow, and become more efficient. It may turn out that the investment in the business was a bad idea, but that wouldn't be because of the nature of the investment. It might be because of other factors such as a recession, depression, poor management, an act of God, etc. If your investment in the silver bullion turned out to be extremely profitable, however, it would only be because of the speculative nature of investing. You would have guessed correctly that market forces would cause an increase in the price of silver. Over those ten years, you silver bullion would have been sitting there, but the business will have been hard at work creating value and serving its customers.
Investing in precious metals and commodities is not a bad idea by any measure, it is just important that you do not place your hard-earned money into an investment or speculative venture without fully understanding what you are doing. It isn't wise, for example, to have 100% of your portfolio in precious metals.
Below is a quote by Warren Buffet that should more eloquently and more effectively illustrate the above lesson:
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledge technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).