Several years ago, when bitcoin went through its most recent bubble, we wrote a blog about how bitcoin was a speculative bubble. What is bitcoin? Is it really a store of value?  

Bitcoin Basics

The theory behind bitcoin is that it was created by computers that have downloaded the bitcoin source code, verifying transactions. Bitcoin transactions occur 24 hours a day, 7 days a week and are made by those with the source code (known as “miners”) or through custodians such as Coinbase, Gemini, and others. Miners get paid in bitcoin for their services.  

Bitcoin production (from mining) is capped at 21 million coins and expected to end by 2140. As of December 2023, there were over 19.5 million bitcoins in existence. Each bitcoin can further be broken down into 100 million parts, known as “satoshis” or “sats” in honor of the pseudonym of bitcoin’s creator (who is anonymous and disappeared shortly after its creation). 

Your bitcoin is held in a digital “wallet,” either connected to the cloud (a “hot wallet”) or on a separate USB drive that is not connected to the internet (“cold storage”). 

Store of Value

Bitcoin’s advocates claim that it is a store of value that is decentralized and deflationary. The theory is that no one entity, country, or person controls it. Bitcoin is supposedly deflationary because it is not backed by a government or pegged to a currency; therefore, it can act as a hedge against inflation versus any government that is manipulating its currency. This may be an advantage in certain countries with very high inflation rates, but even in those countries, the adoption of bitcoin has been low. To date, there has been no protection from inflation with bitcoin. As inflation rose after the pandemic, the price of bitcoin fell. Those buying bitcoin as an inflation hedge would have been sorely disappointed. The recent run-up had more to do with the prospect of the approval of a bitcoin exchange-traded fund (ETF) than it being an inflation hedge.  

The price of bitcoin is heavily dependent on new users purchasing it rather than on its value or future utility. As a comparison, the price of a share of stock is derived from the expected future cash flows of the underlying business. There is no cash flow from bitcoin. 

In the end, the only reason to invest is whether it will improve your long-term expected return. An investment in stocks is a claim on companies’ future cash flows, which is why stocks have larger expected returns than do most other investments. Bitcoin’s price is based on supply and demand, not utility or future cash flows. It is the definition of a speculative asset and does not belong in the average retirement investor’s portfolio. 

Potential for 100% Loss

An individual crypto coin with no intrinsic value always has the risk of 100% loss. The investment world is littered with hot trends that lost significant value or became worthless, including Dutch tulips and Beanie Babies. 

Tax Consequences

Bitcoin is now seen by some as an investment; therefore, it is subject to long- and short-term capital gains. Interestingly, because the SEC has not classified it as a security, the wash sale rules do not apply. However, everyone should know that if they sell any bitcoin, they will be subject to capital gains taxes on the transaction (or conversely, be able to deduct losses as capital gains losses).  

Bitcoin is supposedly tax-efficient, as it doesn’t throw off any income. You know what else is tax-efficient? Owning tulips and Beanie Babies. Very tax-efficient, but not a great investment. 

Illicit Activity

Unfortunately, the features of bitcoin that make it easy to send around the world also make it an ideal currency for illicit activity. There have been news stories about how organized crime or ransomware uses bitcoin for payment. In 2023, the SEC took enforcement actions against some large crypto exchanges, including Coinbase, Binance, Kraken, Celsius, and Genesis and Gemini, on the heels of the 2022 enforcement action regarding the collapse of FTX 

Financial Planning Risks 

There are currently some major financial planning risks associated with bitcoin. The largest of these is the lack of ability to name a beneficiary on an account, or even title an account jointly.  

At Milestone, we discourage single-stock risk, and owning bitcoin is substantially more volatile and riskier than any stock. In addition, the entire category of digital assets has only been around for 14 years. We would be worried if a client who was well positioned for retirement started putting a material amount of their net worth into a speculative asset, possibly blowing up their retirement dreams. 

Risks of Owning Bitcoin

One way to invest in bitcoin is through a bitcoin exchange. However, exchanges can and have been hacked – this risk cannot be eliminated (Not Your Keys, Not Your Coins). The security measures needed to protect your bitcoin investment require an excellent understanding of technology and cybersecurity and are therefore not appropriate for most investors. Most investors have no business owning bitcoin outright due to their lack of understanding of these risks. If you lose your key to your bitcoin wallet, your coins are lost forever. There are many examples of people who have lost all their bitcoin due to lost user credentials. 

Additional risks of owning bitcoin include opportunity cost and extreme price fluctuations.  

Are These Problems Solved by Introducing Bitcoin ETFs?  

On January 11, the first bitcoin ETFs began trading in the US. When you buy or sell a bitcoin ETF, like other ETFs, you are not buying or selling the underlying holding (bitcoin). The ETF issues more shares based on the volume to adjust the price and then uses those proceeds to buy more bitcoin. However, all the same bitcoin risks outlined above apply to the ETF. It is possible for an ETF to lose access to its bitcoin. It is likely that the price of bitcoin will continue to be extremely volatile, leading to performance swings that approach 80% declines in your investment. 

It is interesting to note that Vanguard won’t allow its users to buy any of the new bitcoin ETFs because it doesn’t view crypto as appropriate for an investor’s portfolio. In addition, as of February 22, a significant portion of the inflow into the new bitcoin ETF is from an outflow from GBTC, a closed-end fund that has a very high expense ratio, leaving a net inflow of less than $4 billion, which is pocket change for the stock market. There really isn’t that much demand for the bitcoin ETF today from new investors. In its statement on the approval of bitcoin ETFs, the SEC stated it did not approve or endorse bitcoin. 

Is Bitcoin a Legitimate Asset Class?

Some people would have you believe that bitcoin is currently the best-performing asset class in history. That is partly because it ran up from a price of essentially zero dollars to $64,000 in 2021, then down to under $17,000 in 2022 (a loss of 73%), and now back up to over $50,000 (as of February 22). The exact past performance numbers are irrelevant, because past performance does not predict future results and it is unlikely bitcoin’s returns will be as high as in the past. When something loses over 70% in value, it starts the next year at a very low value, so a return to previous price levels will look like “outperformance.”  

As we keep repeating, bitcoin has no future expected cash flow and is therefore as speculative as Beanie Babies, tulips, and other static items. Its entire premise is based on the service it can provide. When competition is developed for that service, the price of bitcoin will likely crater.  

An asset class is a group of investments with similar financial characteristics. While bitcoin may be here to stay, we don’t feel it is a new asset class. Bitcoin doesn’t have any financial characteristics beyond a price based on speculation.  


Digital assets are likely here to stay, with bitcoin leading the way. Some people feel that investing in bitcoin will generate large returns over the long term, but that would primarily be due to its price, not its value. Bitcoin remains a highly speculative investment that is not appropriate for most investors. Chasing high returns and speculative investments has been around for generations. It is always important to remember to focus on your long-term goals and make sure your investments can support them.  

To read more: 

Does [fill in the blank] Belong in My Portfolio? | Dimensional 

Mining the Bitcoin ETF Buzz | Dimensional 

Bitcoin: Digital Currency or Speculative Bubble? | Milestone Financial Planning 

If you are wondering whether your investment portfolio is well positioned for your goals, or if you need assistance with your retirement planning in general, please reach out to our team.   

Disclaimer: This is not to be considered investment, tax, or financial advice. Please review your personal situation with your tax and/or financial advisor. Milestone Financial Planning, LLC, (Milestone), a fee-only financial planning firm and registered investment advisor in Bedford, NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our client’s interests first.  If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.  Advisory services are only offered to clients or prospective clients where Milestone and its representatives are properly licensed or exempt from licensure.

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