While I titled this article “Should Christians Buy Bitcoin?”, the fundamentals we’ll discuss will apply to other cryptocurrencies (Litecoin, Ethereum, Monero, etc.) as well as high risk/high return, volatile, and speculative investments in general.
Also, I realize there is a movement afoot that suspects cryptocurrencies are somehow part of the end-times “one world currency” or “mark of the beast”. I am not covering this theory as to a reason Christians should or shouldn’t buy Bitcoin, but focusing on the question of how a good Christian financial steward deals with high-risk and/or speculative investments.
Background
For those who haven’t read up on the recent news of Bitcoin, let’s give a brief overview to begin. Bitcoin is the largest of a slew of digital cryptocurrencies that have been created in the last several years. They exist purely in the digital realm, with no tangible “coin” that you can hold.
However, they do hold characteristics similar to other currencies, such as gold and silver. By design, there are limited amounts of any given cryptocurrency. This makes them a limited resource. In the case of Bitcoin, there will never be more than 21 Million created and in circulation.
All currency is just a medium of exchange that represents value of some other asset. The concept of currency itself goes back to ancient times and is affirmed in scripture. In Deuteronomy 14:24-26 we see the Israelites instructed to sell their tithe (10% of their increase) in exchange for Silver if the place they must go to give their tithe is too far away. Normally, they would bring their actual goods (grain, cattle, wine, etc.) for the tithe, but since it is difficult to transport these a long way, they were allowed to use currency (silver) for their tithe.
Just as Silver represents the value of something else and is in limited supply, making it easy to value, cryptocurrency is the same in the digital realm. Given the way the “blockchain” works, there is continual redundancy and security to ensure each cryptocurrency is only able to used once for a given transaction, making it secure and scalable.
When Bitcoin was first created in 2009, it was worth pennies for each unit (a single Bitcoin). Over time it started to gain ground, reaching over a thousand dollars through the 2014 timeframe before dropping back for a period. 2017 proved to be the year of Bitcoin, however, with rapid growth starting in the Summer and peaking (so far) with gains of over 50% in a single week in early-December (the time of this writing). It peaked at nearly $20k per Bitcoin before dropping back to around $15-16k as of 12/10/2017. Below is a chart of the performance since inception from Bitcoin.com.
This rapid growth has made some who invested a few thousand dollars early on into millionaires. Many have seen smaller returns and the Winklevoss Twins became the first Bitcoin Billionaires off of their initial $11M investments.
There are few examples of investments that have yielded such incredible returns in such a short period for so many. Much of the recent spike in growth is likely due to “FOMO” (Fear of Missing Out) causing everyone and their brother to buy in. Of course, this has fueled speculation that Bitcoin is just a bubble, as there is no inherent value behind it (like a company). It is only valuable as a currency.
Speculation
Given the volatility and speculative nature of cryptocurrencies, many have wise investors have advised again allocating any of your portfolio to this “scheme”. Rather, they say, stick with proven investments (index funds, real estate, etc.) that will grow slow and steady over time.
This “tortoise and hare” strategy has backing in Scripture. Proverbs 21:5 says “Steady plodding brings prosperity; hasty speculation brings poverty.”. Sounds pretty simple! Open and shut case that Christians shouldn’t invest in speculative, risky ventures, right?
Not so fast…
In the Parable of the Talents (Matthew 25:14-30) and the Parable of the Minas (Luke 19:11-27) we see common themes regarding Christian investing.
The Master (God) has given the servants (Christians) stewardship over some of His possessions and asked them to put it to work for Him. In both stories, some invested well and earned praise and reward. However, one did not and laid away the money in savings (no interest or return at all). This was the servant who was chastised and the little money he had was given to the servant who had invested best.
Here’s a few principles we can learn from these parables:
- Investment Requires Risk
If there wasn’t an element of risk with the investment options, the servant who buried his money wouldn’t have been so afraid to invest. He was afraid to lose the money so he chose to save it without yielding any return. The other servants were ok with taking some risk in whatever ventures they put the money to or else they wouldn’t have earned returns! - High Returns Require Greater Risk
It is a proven fact that higher risk yields greater returns. We can see this in something as simple as interest rates in lending. Someone with poor credit (higher risk) has to pay higher interest (higher return for lender). This is because some of the loans the lender makes won’t get paid back at all. There is risk of losing a lot on some, so others must make a higher return in order to compensate for that risk. The lenders average return is not the interest rate that all of these poor credit borrowers is paying because they must also factor in their losses on the defaulting loans as part of the equation.
Given the great returns the servants achieved for their master, they must have taken some risks! Perhaps they started new businesses, made high risk loans, or traded futures contracts on grain prices. Surely some of those failed, but the overall return was strong as they weren’t afraid to try. - Speculation for one may be Investment for Another
The Bible says in the Parable of the Talents that “each was given in accordance with his ability” (contrast the Parable of the Minas where each was given the same amount). Part of this ability was likely their skill in investing. Perhaps one of them was a skilled vintner (wine maker). Maybe he went out and bought the best plots of land he could find for vineyards in the choicest regions and then proceeded to interview and hire the best vineyard managers out there. Because he knew what to look for, his vineyards were incredibly successful!Now what if another servant, who was perhaps a great shepherd and knew all about selective breeding to get the best flocks, tried to do the same vineyard strategy? He didn’t know much about wine so if he went out and bought vineyards his chances of success would be much less! What was a wise investment for the vintner would be speculation for the shepherd.
Bringing the above back to Bitcoin, we can learn a few things.
First, just because an investment is risky doesn’t immediately disqualify, but qualifies, it! However, it must have potential returns that are proportionate to that risk. If we take a high-risk investment that doesn’t have the potential for high returns, we’re not being good stewards.
Second, investing in Bitcoin may be speculation for one and not for another. Most of the people who bought Bitcoin in the last week have no idea what the underlying technology is, what technical indicators show, or what the valuation models predict. They haven’t read up on the tulip mania and are jumping in purely on hopes that it will keep climbing like it has. These are speculators, not investors.
Contrast this with someone who has studied all of the above points and is making a conscious and deliberate investment. True that no one knows the future for sure, but they have limited their risk since they’ve thoroughly researched the investment. This is wise stewardship and should apply to everything we allocate our money to.
If we don’t know everything ourselves, we should have experts help us. This was largely what the Master was doing in the parables. Likely he wasn’t a better investor in each respective investment than all of his servants. He gave them according to their ability so they could work in that function. I use this strategy by using a fee only Financial Advisor that helps me allocate my portfolio to various investments. He does this full-time and I don’t. Listening to him is much wiser than me trying to become an expert in everything I invest in.
Diversification
The second point to consider with speculative, high-risk investments is diversification.
Ecclesiastes 11:2 says “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”. What the writer is saying here is that we shouldn’t have “all our eggs in one basket”. It is wise to split up your investments since our ROI isn’t guaranteed.
Any good investment portfolio manages risk by diversifying to different assets. Some allocations may be deliberately counter to one another, meaning that one is expected to go up if another goes down…of course, this means one will always be losing if the other is winning, but it ensures there is protection in either direction. This lowers overall return, but does so while reducing risk even more so. The key to investing isn’t just getting the best return, but getting the best return for a given risk.
So how do we apply this to Bitcoin and other cryptocurrencies?
If you are looking to “get rich quick” and throw 80% of your net worth in to a high-risk investment, you aren’t investing…but gambling. This is foolish and should not be done by a Christian steward. Even if you are successful, you have likely skipped over the character development to handle wealth that God builds over time and will not be successful managing your quickly gotten wealth.
However, it is wise to have some high-risk, high-return assets in your portfolio.
I personally decided to allocate about 1% of my net-worth to a mix of cryptocurrency this past Summer and have seen good very good returns. Because of the rapid growth, this investment now accounts for about 5% of my overall net worth (the rest is a mix of cash, stocks, bonds, real estate, alternative investments, metals, etc.). If crypto continues to grow, I will likely sell some and reallocate it so I don’t get more than 5-7% of my overall net worth in this volatile investment. The rapid 500% returns on my 1% helps offset other investments that are lower return and lower risk. They provide a stable base to allow more speculative ventures. However, if I had lost (or lose!) some or all of the 1%, it won’t have a devastating effect on my portfolio or overall returns.
For someone who is more skilled in crypto, this allocation may be higher (due to their knowledge/ability lowering the risk). However, I would still be hesitant to recommend anyone go over 10-20% total portfolio value due to the inherent unproven nature of this new asset class.
Conversely, someone who has very little understanding of cryptocurrency or needs a lower overall risk profile (nearing retirement, has little savings, etc.), 5-7% may be too much. 1-3% of their portfolio is likely more responsible in this type of investment.
Taking this to the extreme, I’d even say it isn’t inherently wrong for a Christian to buy a lottery ticket! Now I know this is controversial, but I want to reinforce my point above. The lottery is a ridiculously high-risk, high-return investment. Your chances of winning a big jackpot might be one in 300+ Million. However, the potential return is also there! You might win $200M on a $2 “investment”!
So how does this play out? If a Christian were to be making $100k a year and investing 15% ($15k) in long term investments, but decided that half of that ($7k) was going to be used to buy Powerball tickets, they’d be very foolish and a poor steward! However, if they decided to allocate $2 a week ($104 a year, or 0.0066667% of their portfolio, to lotto tickets, it wouldn’t be wrong. The impact on their overall return would be negligible, but there is also an opportunity for them to see an incredible return, greatly increasing their overall portfolio’s return in ways it never could otherwise. This is the extreme, but demonstrates the point well.
Conclusion
Investing in high-risk, volatile, and even speculative investments like Bitcoin isn’t fundamentally wrong for Christians. However, it must be done with the above factors in mind. Only do so if you have a level of understanding that limits the speculative nature of the investment and only allocate a portion of your portfolio that is appropriate for your risk profile. Apply this to all of your investments decisions and you’ll be well on your way to becoming a “10 talent servant”!
Blessings,
Ira