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Is Crypto A Currency Or A Commodity? (Hint: Doesn’t Matter!)

Crypto has become huge.

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I remember when I was a resident about 5 years ago and an attending asked me in the OR, “What is the deal with Bitcoin?”

My answer: “I have no idea.” Most of the reason that I had no clue was because I had no clue about anything finance-related.

Today, people still ask me, “What’s the deal with crypto?” (Please channel your Jerry Seinfeld “What’s the deal with airline peanuts” voice…)

My answer still: “I absolutely have no idea.”

The reason for my answer today is a bit different. I certainly don’t consider myself a financial expert. But I do know a bit. And I truly believe I have the sound principles of personal finance down. I will get myself to financial freedom and you can get yourself there too using the same strategies.

None of my strategies involve crypto

I have exactly 0% of my portfolio in crypto.

crypto

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I don’t expect that to change anytime soon or at all. It’s just not in my financial plan. The risk is not worth the potential reward for me. And let me explain this point a little bit…

With my financial strategy, my investments just keep winning. They may not win as much as others, but they win. It’s the equivalent of hitting singles in baseball. Investments like crypto are like trying to hit home runs. You may hit one but you’re also going to strike out a lot.

I’ll take the strategy that keep bringing me W’s.

The case against

I’ve yet to hear someone give me a coherent reason as to why investing in crypto is better than investing in assets like stocks, bonds, real estate, businesses, etc.

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One person argued with me that El Salvador made Bitcoin its official currency. So that makes it a great investment. What?? When has following the financial doings of El Salvador been the path to wealth building?!

Ok, but really…

Some proponents have told me that “crypto is here to stay.” I still don’t see that as a great reason. Lots of “investments” have been around for a long time. Doesn’t make them good investments.

Others point to the fact that they bought Bitcoin 5 years ago and have made a ton of money on it. To that I say, “Congrats! You placed a bet and won.” But that doesn’t make me any more likely to win my bet. In fact, if I’m late to the party, my chances are probably a lot less in fact.

But the biggest case against is that I really don’t know what crypto is and don’t really believe anyone else does…

Why I still don’t have any idea about crypto

Well, for one, I don’t even really know what crypto is. Honestly.

I mean I get that it is a digital “currency” created through block chain technology that renders it decentralized. But, I don’t know or understand what purpose it actually serves.

Is it a currency?

This would seem like the obvious choice for what it is and what purpose it serves. It is a thing that can be exchanged for goods and/or services. That functions very much like a currency. Heck, it is most often called crypto currency.

In fact, this is one of the biggest argument of crypto detractors. That crypto is used to fund illegal activities etc. I don’t really care about that. People have been using the American dollar to fund illegal activities for some time now. And I don’t see anyone calling for the end of the American dollar…

But, where the currency characteristics start to fall apart for crypto is that it isn’t accepted as currency for the large majority of items and services in the market. That’s just the truth. Proponents like to point out all the places where it is accepted. But that is still not the case for the vast majority of goods.

Is it a commodity?

The other problem with considering crypto as a currency is that one of the most vigorous arguments that I get from its proponents is that it is a commodity. Even its biggest fans can’t agree on what it is!

It acts like a commodity in that it is a vehicle to store money that is not currency. That’s what a commodity is. It hedges against the volatility of currency due to inflation, deflation, etc. That’s why people now talk about putting money into gold or silver or whatever else.

But wait, can a commodity be a currency if it is a vehicle to store money that is not active currency? Whoa…I just made my brain hurt.

Bottom line: I don’t know whether crypto is a currency or a commodity?

If you know the answer, please let us know in the comments below. Seriously, I’d love to hear your take!

Why it doesn’t matter what crypto is

Here’s why it makes no difference at all what crypto is…whether it is a currency or commodity…

I don’t invest in currencies or commodities and don’t think you should either!

Both are notoriously fickle and volatile. Moreover, whichever entity it actually is, crypto hasn’t been around very long from an investment standpoint. So we know about the short term volatility but not so much about long term trends. Even 10 years is a short investment window. For example, I would hesitate to even invest a 100% stock index fund portfolio if you need the money in 10 years. Forget about investing it in something as risk as Ethereum.

Now, if you want to allocates 1-5% of your portfolio to crypto or another currency or commodity, go for it. But not more than that…

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Susceptibility to deep risk

Dr. William Bernstein talks about shallow and deep investing risk. Shallow risk really doesn’t matter to our investment strategies and include things like short term volatility.

But deep risks, those are the serious risks to our investments. And these deep risks are: inflation, deflation, devastation, and confiscation.

Inflation, deflation, and devastation (think Germany after WWII) are not what I am worried about with crypto.

But I do worry about confiscation to a decent degree. Confiscation is the government coming in and confiscating your money. Well, crypto is decentralized so this shouldn’t actually be a risk, right?

I say that it is. And it is in the sense that the government can come in a regulate crypto to death. To me, its popularity is its fatal flaw. Once regulation comes in and the government is involved, its value will largely become lost.

Speculation…yes. But a real risk in my opinion.

The path for doctors to wealth is simple

Create a savings rate of 20% or greater. Invest that margin in low cost broadly diversified index funds. Add a sprinkle of real estate if you would like. It’s that simple.

Please don’t make it more complicated! Don’t rely on an investment plan that requires a crystal ball to be successful.

Don’t take on more risk than you need. Let investing be boring. It should be boring. Your life is exciting. Ignore your investments while they make money as you enjoy your life!

Learn more here!

What do you think? Do you like crypto? Don’t like it? Why or why not? Do you know what it is? If so, please tell me!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

    1 thought on “Is Crypto A Currency Or A Commodity? (Hint: Doesn’t Matter!)”

    1. I asked my patient, an economics professor what he thought about Crypto. He replied that he didn’t understand it and he didn’t anticipate that it would succeed over the long run. I decided to quit thinking about it.

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