Crypto: Currency or Commodity?

“Jim, is cryptocurrency such as Bitcoin an actual currency, or is it more like a commodity?”

This is a question I was asked over the holiday weekend while attending a friend’s barbecue, and it’s a very good one. I say that, because despite its existence for over 15 years, Bitcoin is still not very well understood.

Yes, investors have benefited from the digital currency (or is it a commodity?) for much of that decade and a half, but the debate still rages on whether there’s a future for Bitcoin and for the slew of other crypto assets, and what that future might be. Indeed, there is even a big question as to just how to classify the asset, hence that good question I fielded over the weekend.

The way I look at Bitcoin and other cryptocurrencies is that it’s an asset class (possibly a hybrid between a currency and a commodity), that offers tremendous upside to investors with a stable constitution that allows them to benefit from the upside in this innovative technology. I say “technology,” because at the heart of Bitcoin is the blockchain technology that it’s based on.

To understand this aspect of Bitcoin, we need to understand its origin. The digital asset was created by a shadowy and mysterious individual (possibly a group of individuals) known as Satoshi Nakamoto. The technology behind Bitcoin is super interesting, and I will write about that in future issues of The Deep Woods. For now, the goal of the early proponents of this technology saw it as a way of moving monetary policy out of the hands of governments and central banks and into an autonomously managed system.

This removal of currency from government is a dream state for a libertarian mind such as mine, and of course, I am far from the only one who sees this as a most laudable societal development. Again, I will write more about the freedom aspect of Bitcoin and its potential role in a more libertarian society in future issues of The Deep Woods and in other upcoming channels you will be hearing much more about very soon (hey, how’s that for a teaser!).

For now, know that Bitcoin is a technology designed to act as money and as a digital form of payment outside the control of any one person, group or entity. This removes the need for trusted “third-party” involvement (e.g., a mint or bank) in financial transactions.

Now, while you can buy goods and services with Bitcoin, the problem, practically speaking, is that the price of Bitcoin fluctuates much more like a commodity than a currency. That makes its purchasing of goods and services quite impractical.

The one aspect that you, as an investor, can take advantage of is precisely the commodity-like price volatility of cryptocurrencies.

Bitcoin price in U.S. dollars over the past five years.

The chart here shows Bitcoin in U.S. dollars over the past five years. As you can see, it’s been a volatile ride to say the least. And while the “crypto winter” of late-2021 through the end of 2022 was a big downer for those long the asset, if you would have owned it since its 2022 low, you would be holding a gain of about 270% through its current price point.

Still, the question remains: Is crypto a currency or a commodity?

The great Bruce Lee once said that when it comes to borrowing styles and techniques from various martial arts, the only thing that matters is whether it will help you win a fight. If it helps, then you should use it, as Bruce famously said.

When it comes to cryptocurrencies, I feel the same.

As an investor, you’re in a fight to grow your capital the best way possible. And if using Bitcoin or other cryptocurrencies (or related assets such as exchange-traded funds, related stocks and/or related put and call options) is a good way to do that, then you should definitely use it. That applies to cryptocurrencies — whether they’re currencies, commodities or a hybrid of both.

Hey, like Bruce says — if it helps you win a fight, then you should use it.

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Break My Heart Sweetly

There’s a scar on my soul

So let me down easy

Break my heart sweetly

Like you always do

I guess I can’t let go

’Til you wreck me completely

Break my heart sweetly

Drape me in blue

–John Moreland, “Break My Hearty Sweetly”

Life is… beautiful, harsh, revealing, caustic, gentle, abstract, absolute and finite. Pick your favorite adjective and it probably modifies the noun “life” quite well. One aspect of life I find more and more interesting as I get older is the nature of sadness and the scars on my soul I’ve collected in my journey. Sometimes I touch those scars and it makes me melancholy, and that doesn’t usually feel good. However, those scars are part of what makes me resilient, steadfast and resolute. And though life is beautiful, part of that beauty is allowing yourself to get your heart broken sweetly.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods