The 2017 Bitcoin return was +1,318% not including any transaction fees. At midnight UTC after 12/31/2016 bitcoin traded at 998.33 a coin and one year later traded at 14,156.4 a coin.
2017 Bitcoin Return: Cryptocurrency is Not an Investment
Bitcoin is a digital currency built on top of a public, digital ledger known as a blockchain. Bitcoin is ‘mined‘ by miners incorporating recent transactions into a collection called a block while searching for a nonce. A target nonce, or number used once, is added to the current block where the block is hashed with a result less than a specific target (read: a hash with leading zeros).
If a suitable nonce is found, the miner distributes it for others to verify. The crypto bit in cryptocurrency comes from the usage of cryptographic hash functions. These functions are one-way or non-reversible – that is, they are easy to verify, but believed “impossible” (read: would take an improbably long time) to invert. SHA-256, in particular, backs the proof of work system in bitcoin and allows miners to verify a nonce.
The proof of work system and the history represented by the blockchain are what, in theory, back digital currency with value. However, the practical value of bitcoin comes from market participant agreement on the current trading price. As long as bitcoin can be exchanged for goods and necessities – or another thing that can – it has a value. Often we use its exchange rate with the dollar as a useful abstraction to help readers understand that current value.
Here are the dollar price returns on bitcoin in 2017:
| Price Return | Open | Close | Gain |
| Jan 1, 2017 Start (Midnight UTC) | 998.33 | 14156.4 | 1318.01% |
Bitcoin is Speculation, Not Investment
A 1,318% gain in a single year is an off-the-chart return for any asset class. Recall that an investment in the S&P 500 returned around 21.14% in 2017. Stated another way, one dollar in the S&P 500 would have grown to $1.21 by the end of the year while a dollar in bitcoin would have grown to $14.18.
Even though you can ‘invest’ your money in bitcoin, it’s much closer to speculation than traditional investment (don’t let this article’s category fool you). Whether or not you have confidence in the value of the digital currency ecosystem or the underling mechanisms (such as the blockchain), digital currencies are extremely volatile. They are not appropriate for holding in a traditional asset allocation and by the traditional understanding of an “investment”.
That warning aside, you can speculate in bitcoin with money you can afford to lose. Many bitcoin holders (or HODLers, as they prefer to be called) are young and have the time to make up for any speculative losses. Before allocating any of your portfolio to any digital currency, consider your own capacity to recover and whether or not you’ll need the money.
As we went to press, bitcoin’s current performance illustrates how quickly fortunes can change. Bitcoin is down over 30% in 30 days, penalizing latecomers to the currency. While still up thousands of percentage points in a relatively short time-frame (just a few years), you can’t buy in the past – you can only get in during the present. Need an investment idea? Here’s a vote for index funds.
Source on the 2017 Bitcoin Return Calculations
We used historical bitcoin price data from CoinMarketCap to compute the returns and create the graph for this article. S&P 500 returns are sourced from S&P Dow Jones Indices.
We don’t currently have any tools or calculators on site which serve digital currency communities. Watch this space though, that’s probably going to change.
2017 Bitcoin Return: Near Unbelievable
Just like your fantasy football league (which also isn’t an investment), speculation doesn’t have to mean ‘avoid entirely‘. There is an undeniable psychological thrill from holding extremely volatile assets such as bitcoin and other digital currencies.
If you enjoy the volatility and can lose the money you allocate? Do your due diligence and have some fun – but know there’s no one to blame but yourself if the price settles at $0.00.
To a lesser degree, that also applies to stocks and other assets traditionally assumed to be investments instead of speculations. Of course, traditional currencies do sometimes fail, stocks go to zero, and bonds don’t pay out or lose to inflation. However, extreme volatility in digital currencies implies those scenarios are more likely.
To summarize: always be careful with your money; you’re the best steward of your own money and judge of risk tolerance. Be particularly careful before speculating in bitcoin or other “alternate” coins (alt-coins).
What do you see bitcoin doing in 2018? Want to predict a return?
How do you define investment vs speculation?
Anything can go to 0 (US dollar, S&P 500, bonds, etc). Given a long enough time frame, all countries blew it at one point. Gold is the only thing that has lasted thousands of years, no?
I struggle this myself. I’m not sure there is a real difference between investment vs speculation, just historical risk differences. Bitcoin doesn’t have much of a history, but I don’t think it makes it not an investment.
One thing that I find interesting about Bitcoin and cryptocurrencies are forks. Some think you’re just buying a coin, but since it can fork, it’s more akin to buying a business, IMO. Neither analogy is perfect though, this is a new beast the world has never seen.
I hate using volatility measures with a firey passion, but at least with cryptocurrencies, you can use the court definition for porn of “I know it when I see it.” Stocks and bonds (or other investments) generally represent a real asset. If someone came in and forcefully took over a company, I the owner (through stock) would have a legal case showing that I am rightfully entitled to the cash flow of that company. If I own bonds, and the company doesn’t pay, I can sue to reclaim that loss by seizing assets the same way a bank would foreclose on your house.
With cryptocurrencies, the value is almost strictly derived from what the next greater fool is willing to pay. Not saying stocks, bonds and real estate are immune to the greater fool pricing model (aka a bubble), but that is up to the investor to determine before purchasing the asset. In theory, BTC does have a real price, or “book value” if you will –
(equivalent to the cost of power to mine one), just that the actual price has become detached from that fundamental number. Once price/book doesn’t matter for a stock anymore, that is where I call it a bubble, and therefore a speculation, not an investment.
All that makes sense, although I’m not fully on board with the book value bit yet (although it’s useful for valuation for sure). I think of, say, traditional cash – there is no book value for green pieces of paper, but there are armed forces standing behind them and ‘full faith and credit’. Ditto for gold – tons of federal reserve banks hold gold under the assumption that it will stand up if the value of a currency goes south. That extends to stocks and bonds, since we have particular rights conferred on us through ownership. Not so (yet?) for digital currencies, although it remains to be seen if technology can supplant what traditionally gained value through law and politics (and military…).
Yeah, volatility measures are weird and always an approximation (guess the same goes outside of finance too – when we call people volatile we base it on past behavior). Historical volatility is easy enough to measure, but requires a big old “past performance does not guarantee future result” label on it. Implied volatility is better because at least money is on the line.
I think it’s got to be a sliding scale depending on the person: safe…investment…speculation (… maybe gamble). I personally wouldn’t limit the evidence in making a call to just the historical evidence, although I would weight that heavily – a short history weighs against safety in my mind. Not that investments necessarily need to be safe, just that they are safer than some other things. Maybe it’s worth a post?
Perhaps another decade or two of bitcoin trading, more widespread investment, a ‘legal’/legislative embrace and all that jazz pushes it towards the investment category from where it is now. Of course, those are the things you’re speculating on if you hold – that bitcoin will be fully embraced and become a more stable asset than it is today. If you are on the right side of history you’ll also be rewarded for that call.
Either way, interesting to ponder; hope my framework is useful. How about you, where do you draw the line? If not digital currencies, what assets do you consider a speculation today?
I think it’s the investor’s knowledge, not the asset itself that makes it speculative vs an investment. If I buy bitcoin because I want to make money but don’t know anything about it, I’m speculating.
To me, Investing is mainly about information asymmetry. Sometimes you have information that makes it clear that an asset like Bitcoin will likely increase in value. I don’t really care about the history or stability, oil is of similar “stability” yet people typically consider oil an investment.
A Penny stock or even a sport gamble can be non-speculative if you have more information than everyone else.
Information asymmetry is indeed a great way of making money. Leveraging what you know better than mutual fund investment managers is a time tested tradition, and has made a lot of people (namely Peter Lynch) very wealthy indeed.
The two key questions you have to ask yourself when you invest based on some information asymmetry is “what if I’m wrong?” And “what are the objective chances that I’m wrong?”. That second one tends to be a hard one to answer, so it presents some uncertainty. As always [inert Warren Buffet quote about money you have and need], but past that, you only need two or three really brilliant ideas in your life to end up on the far side of the [insert dollar value to be set for life] mark.