Why Most Bitcoin Investments Don't Make Sense

Back when I was studying international finance abroad, I took a pretty hard look at the investment options available to bitcoiners. What I found was that there were very few true bitcoin investments, as most opportunities subject the investor to volatility of the exchange rate.

Guatemalan Shawls, credit: samsaricwanderings

The problem with BTC investments is that the capital equipment or goods are almost always tied, if not completely denominated in USD; the business has to pay for almost all goods and most services in USD or another fiat currency. Even those that accept BTC for payment usually peg those BTC prices to a static USD/fiat price (using BitPay, for example).

Let me attempt to illustrate the issue using some more traditional situations:

Imagine that there is a woman, named Mayra, in rural Guatemala making woven shawls at home. She sells them to travelers for the local currency, quetzal. She gets the threads from a cotton farmer that lives in the next village over. Juan also pays for all of his supplies in quetzal and charges Mayra in quetzal.

It all looks self-contained until the USD/GTQ price skyrockets. Suddenly, Juan is paying double his fuel costs to bring his goods to Mayra. He is forced to raise his price, and Mayra is forced to start charging more for her shawls.

One of the biggest lessons in the financial crisis was that the correlation of seemingly unrelated securities. Most things are interconnected and the more complex a system (read: supply chain) is, the deeper this runs. There are very few bitcoin systems that are so simple that they don't mix fiat in their performance and pricing. The only two that immediately come to mind are gambling and escrow services.

Why does the correlation with fiat matter? Because when you invest in something that needs to denominate costs and/or returns in USD, you are at least partially "buying out" of your BTC position. If a company that seeks BTC investment (but makes and sells products in USD) turns a 10% profit before repatriating those profits to BTC and, at the same time, BTC/USD goes up 10%, it's going to be a wash and they will have trouble paying you a return on that.

The search for the "correct" investment opportunity in BTC is still ethereal. I'll be looking into several of the high risk/high reward systems. I might come back here and post about a grand experiment in which I diversify among 10-20 of these and see if the scams are outweighed by the real returns. Look for that in a couple months (I'm still working on buying up a decent BTC position, as per my previous post).