Ah, Bitcoin. Where anyone can make their fortune. Where millennials will turn in crisis instead of gold. Where potentially a lot of people will lose a lot of money, maybe very, very quickly.
I was out with my brother this week and over a meal of Vietnamese orange glazed duck we got to talking about Bitcoin, among other things. He told me that whilst he doesn’t own any, he was thinking about buying a small amount. I got excited. I noticed later that twitter was on fire with birdsong about Bitcoin. I wondered about whether the rumours of Bitcoin surging 20 fold in the next year or so could be true. I watched a movie on Netflix about Bitcoin (it was fun). I researched places to buy bitcoin in Australia (5% trade commissions anyone?) and at that point I realised I was getting swept up into the craze and I decided I won’t be buying Bitcoin.
If you’ve made money off bitcoin that’s wonderful. If you’re a currency trader and you’ve made a killing – even better. I on the other-hand have not even a skerrick of knowledge about trading currencies, trading stocks, trading socks nor trading tulips. And that’s why I’m staying well away from Bitcoin – but my god has it surged in price.
Why Bitcoin is not an investment.
Bitcoin doesn’t produce cash flows and it can’t be valued. Like gold, it can be a store of value and maybe even for some, it buys something psychological – with gold this is often ‘monetary safety during a crisis’. With Bitcoin I think it might also be buying thrill or a hedge on FOMO. But to buy Bitcoin seems to me like speculation. There’s nothing wrong with speculating, but lets call it what it is – an expectation someone will buy Bitcoins at a greater price in the future. Unlike a business in which we can purchase part ownership and expect our share of earnings or dividends to increase over time, hence lifting the business value, Bitcoin is never going to generate a Bitcent through anything other than price changes (not value). I’m a fan of Aswath Damodoran and broadly agree with his take on Bitcoin (read blog for a more detailed discussion!).
Dangers of Bitcoin
I believe one of the greatest dangers facing Bitcoin is regulation. I think cryptocurrency will be around in 100 years and I think it’s an excellent idea, as is Blockchain*. I’m not convinced other private enterprise or Government won’t create their own cryptocurrency that is regulated to a point where competitors suddenly struggle to hold market share. The sooner Crypto is used by countries or terrorists to buy/sell weapons or used in large illegal transactions, the sooner Governments will regulate. The massive amount of money to be made in Crypto is another factor that will fuel Government and private enterprise desire to join the party.
*Blockchain is coming to the ASX as a replacement for CHESS – the potential is pretty awesome.
Back to Bitcoin and apparently a ton of coins were lost sometime in the past few years. Wikiepdia has an entry on Bitcoin exchange Mt. Gox indicating nearly 1 mln Bitcoin also went missing – maybe fraud, theft or mismanagement. Finally, a full forty percent of Bitcoin is owned by less than 1000 people. It just seems that there are a ton of risks to owning Crypto at the moment. For a conservative value investor like myself this scares the bejeezus out of me!
If you’re investing in Bitcoin then genuinely I wish you all the luck in the world. I also hope you get the chance to research it thoroughly and are comfortable with the risks. It’s going to be a fascinating period ahead watching Bitcoin’s trajectory unfold.
What do you think of Bitcoin? Have you made any money off Crypto? Do you still own any?