I get asked if I “invest” in cryptocurrencies probably once a week. You may have noticed the quotations. Invest. Hmm, a word that gets thrown around so much, yet is so little understood. Is it even possible to invest in cryptocurrencies? I have to say nothing makes me cringe more than hearing someone say the words “I invest In crypto.” It brings out the inner Larry David in me. According to Benjamin Graham, author of Security Analysis and The Intelligent Investor, “an investment operation is one in which promises both safety of principle and adequate return, all else is speculative.” Frankly, cryptocurrencies don’t pass the test. Not even close. You may be thinking, all investing is speculative & everything is a gamble! Look at the stock market casino! The real estate boom and bust cycles. Or oil collapsing to less than zero in April 2020 then rising to over 110 a barrel currently. The list goes on and on throughout history. How are cryptocurrencies any different?

The difference is the cash flows of productive assets vs the lack of cash flows from non productive assets. The real test if you’ve made an investment or are simply speculating is if you’d be happy owning the asset if you never got a quote on it again. With a productive asset, you know your purchase price, you know what the asset is producing and as long as it produces a satisfactory return on invested capital, who cares what the market price is? More on this later.

I don’t like cryptocurrencies because I’m a business numbers nerd who likes to live in fairytale land and play make believe. That’s kind of a weird statement but it’s the best way I can describe my thoughts on the matter. First a little history on a stupid ass speculation I made in 2010. I spent $17,350.00 on 6 ounces of gold coins and 200 ounces of silver. Man did I feel like a genius. For about 6 months. Because it just kept going up. And then it went down. And down some more. I ended up taking a loss of $3,548.00 3 years later. Licking my wounds and doing an analysis of my what happened, I realized that I HATED owning it. It bored me. Didn’t do shit, no annual reports to read, didn’t produce anything and all I could do was stare at the damn price. When it went down in price, was it somehow more attractive now? I found myself asking. Who the hell knows. It has zero intrinsic value & no cash flows to analyze. Every quarter I’d visit my safety deposit box at the bank, take out those lumps of metal, fondle them a bit and then put them back, and proceed to stare at the price some more. I felt vulnerable. And I realized that owning assets where all I can do is stare at the price held no damn interest for me personally.

Now back to my make believe world. I promise this all ties together eventually. If I could create my perfect life, I imagine I’m a multi millionaire who owns several highly successful businesses and real estate. I don’t work. I spend my time doing whatever I damn well please. I don’t run my businesses day to day either. Who wants to do that? Not me. I have managers who do that. So what do I do? I sit in my office and read. My business and property managers send me quarterly and annual reports on how things are going and all the juicy business figures a business nerd could ask for. What menu items are selling best, units sold, vacancy rates, cap rates, gross profit margins, store traffic, cost of goods, balance sheets, cash flows and so on. Because I’m a nerd and understand accounting at a very basic level, I can thankfully understand what these reports are telling me. After all, accounting is the language of business. Best of all, all the excess cash flow that these companies don’t need reinvested to maintain operations and grow can be distributed to me. Then I can sit in my office and figure out where to allocate that capital to build my gap some more! Ahh this seems like a paradise to me. A guy can dream.

Needless to say, I’m not a multimillionaire. But by definition I am a millionaire. And I can’t afford whole companies but I can buy little pieces of businesses via stock. Taken together with the investment real estate I own, the above example is not to far off. THIS is what I enjoy. Full disclosure, i’m the kind of nerd who listens to annual meetings on my ride in to work on Spotify, has annual report release dates marked on my calendar and keeps track of business figures like a 9 year old keeps track of sports stats. Suffice it to say I’m weird. But at least I know what I enjoy. I feel good things happen when you honest to god enjoy what you are doing.

But my perfect world made up scenario will never happen with cryptocurrencies, artwork, gold, or any other non productive asset. All you can do with these assets is look at the price and then hope to god someone will come along and pay you more for it later. The only certainty they offer is they will never produce anything. How boring. Imagine for a second I bought an apartment complex for $5 million dollars. I can determine through some analysis that all units are way under market rent, that I can bring costs down & that I can refinance to lower my financing cost. I realize that for my $5 million I can reasonably expect a net operating income of $500k.

Also, I know the property is in a great location, I can make improvements to it and increase rents over time. Would I really care what someone quoted me for it in two years on the market value of it? Possibly. But I can also simply look at the profit and loss statement to make me feel warm and fuzzy about my initial $5m investment and the return I’m getting. I’m looking to the asset itself to produce the return not what someone is willing to pay me for it. This is where I like to be. This is my happy place. Doesn’t mean I’m right. And it doesn’t mean speculators haven’t made a fortune on cryptocurrencies. But I know what I like and what I don’t. If you don’t enjoy what you own, why own it?

I do recognize that some cryptocurrencies offer some type of yield or staking as they call it. I could write a whole dissertation about this, but I will just say I don’t understand where that cash comes from or if I trust it. It’s not like I can read a regulated financial statement and see exactly where it comes from and If it’s sustainable. So I’ll just stay in my make believe paradise full of business figures and cash flow statements and pretend I’m Warren Buffett.

For those I haven’t pissed off and or put to sleep, I realize that crypto likely has a place in the future. Which of the hundreds of coins will prevail I have no clue. I think it’s a fascinating technology that will likely only keep progressing. But I don’t think I’d be happy and enjoy owning it. It doesn’t excite the inner nerd in me at all. It’s no fun. So that’s my answer.