Should You Buy Bitcoin?
“Every informed person needs to know about bitcoin, because it might be one of the world’s most important developments” (Leon Louw)
Last month the price of bitcoin rose above $50 000 for the first time.
Just over five years ago, in December 2015, one bitcoin was priced at $400. Anyone who had bought the cryptocurrency then and sold it at last month’s highs, would therefore have made more than 125 times their money.
But getting there would have been quite a ride.
Think back to December 2017, when the bitcoin price went over $20 000. It had started the year at around $1 000. By the end of 2019, however, it was under $3 500 again.
It’s about sentiment
This history is important, because it is a reminder that cryptocurrencies have never been a one-way bet. Price movements can be very quick, and extremely large.
That is because there is really one thing driving the price: sentiment.
While ‘experts’ can come up with plenty of reasons why bitcoin is going up at such a rate, there is really no way of working out what the cryptocurrency is actually worth. No matter what you think about the cryptocurrency’s benefits or how useful the technology is, there is no economic or financial model that can be used to calculate its value.
Comparisons with gold
Bear in mind that bitcoin doesn’t produce any income. There are no cash flows that can be valued.
It’s true that the same applies for gold. And, also like gold, there are a finite number of bitcoins in the world.
That is why the two are sometimes compared. But there is a significant difference between an ounce of gold that you can see and touch and appreciate as something that is beautiful, rare and precious, and a bitcoin, that exists only in digital form.
People have recognised for centuries that gold has value precisely because that value is visible to everybody. Bitcoin does not have that same advantage.
Regulatory warnings
What that means, very crudely, is that one bitcoin is worth whatever someone else is willing to pay you for it. And since this is so subjective, the price can swing as wildly as it does.
That doesn’t mean that bitcoin has no value. It may well. A lot of smart people think that it does. But, at the same time, it also might not.
In the UK last month, the Financial Conduct Authority (FCA) warned investors that:
“Investing in crypto assets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money.”
Now our own Financial Sector Conduct Authority (FSCA) has issued similar warnings – read “FSCA issues warning on crypto assets” on Moneyweb.
Be aware also that crypto currencies are not presently regulated as a financial product and that accordingly you do not enjoy the protections offered by legislation such as FAIS (The Financial Advisory and Intermediary Services Act).
Being taken more seriously
What is interesting about the recent increase in the bitcoin price is that there is a lot more interest from mainstream investors. Some large asset managers have been adding it to their portfolios. Big banks have been talking about how it could offer investors the same kinds of protection as gold does.
However, that doesn’t necessarily mean that bitcoin’s price is now sustainable. It is still quite possible that at some point these investors will decide that bitcoin isn’t actually as useful as they thought it was. It is still possible that the real value of bitcoin is, as the FCA warns, nothing.
For now, though, cryptocurrencies are being treated a little more seriously. So, should you own some?
Just a little…
There are some knowledgeable investors who think it may be worth it. But even the most positive of them won’t suggest jumping all-in.
One example is Ric Edelman, who has been named as the top financial adviser in the US three times by Barron’s. He is very positive on bitcoin and thinks that there is a “tremendous opportunity” to make large returns.
But even he warns people not to go overboard:
“There still remain massive risks: technological risks, regulatory risks. Governments could get very upset with all of this. We don’t know where it’s going to go, so we want to keep our heads about us, not over-invest, and not subject ourselves to portfolio risks that would harm our personal finances.”
How much does he suggest an investor puts into bitcoin? No more than 1% or 2% of their portfolios. That’s bound to be much too conservative for some investors, whilst others won’t want to touch bitcoin at all.
As everyone’s situation (and tolerance for risk) will be different, discuss with your financial advisor whether an investment in bitcoin makes sense as part of your portfolio.
Provided by Vaal Triangle Insurance
© DotNews. All Rights Reserved.