I made a bet that there's an even worse investment than Bitcoin

I’m a longtime critic of Bitcoin as a store of value, and I wasn’t at all surprised to see the price of Bitcoin crater in 2014. From a high of over $1,000 at the end of 2013, the value of the digital coin has fallen to less than $250 today, and is probably going to keep on falling.

Recently, however, at lunch with a controversial 27-year-old financier, I realized that these things are relative. Bitcoin might be an idiotic investment, but it’s not as bad as penny stocks.

Thus was a bet born.

My lunch companion was Josh Sason, the subject of an excoriating Bloomberg profile earlier this month. Sason shares my skepticism about Bitcoin, but he is a big proponent of penny stocks. And so we arrived at our wager: I asked him to pick any over-the-counter stock he liked. If it outperforms the price of Bitcoin over the next year, then he wins; if Bitcoin does better, then I win.

Sason chose a stock called Intercloud Systems, which trades on an obscure market known as Nasdaq CM. It began trading at the beginning of 2013, at just over $25 per share; today, it trades hands for just $2.19, which means that you need 112 shares of ICLD to buy a single bitcoin.

So here’s the bet: on March 24, 2016, if you need more than 112 shares of ICLD to buy a single bitcoin, then I win; if you need fewer than 112 shares, Josh wins. Loser buys lunch.

Of course, the bet is silly: the future direction of both BTC and ICLD is mostly random. But the serious point is that not only is investing in penny stocks a bad idea, it’s a predictably bad idea. People do it because they’re greedy, and because they think they can get high returns in a short amount of time. But like all get-rich-quick schemes, penny stocks fail much more often than they succeed.

Sometimes, when you buy a penny stock, you’ll be buying it from Josh Sason. When that happens, Josh Sason, who has much more information than you do, will probably be making money. And you won’t. But even when you’re not buying from someone like Sason, it’s incredibly unlikely that the person on the other side of your penny-stock trade is going to be less informed than you are. Which means that you’re incredibly likely to be the dumb money.

A large part of the reason for the run-up in Bitcoin prices was speculation: people buying Bitcoin because they thought they could make a fast buck by buying low and selling high. Thankfully, a lot of that behavior seems to have been wrung out of the Bitcoin market by now. But it’s still a huge driver of the penny-stock market. Which, weirdly, probably makes Bitcoin, at this point, a safer store of value than penny stocks.