Bitcoin: sound investment or blockchain reaction?
The cryptocurrency frenzy seems to brush aside an old investing rule: know what you’re getting into.
One of Warren Buffett’s most famous pieces of investing advice is devilishly simple. Before you put your money into that company you had your eye on, take out a note pad, preferably yellow, and write down the reasons for investing in it. I wonder how many Bitcoin holders have conducted this exercise. I know I didn’t.
What about you? Did you buy Bitcoin because you had an unshakeable confidence in blockchain technology? Maybe, instead of Bitcoin, you opted for an “altcoin”, like say, Polkadot, and on your pad wrote, “I’m investing in Polkadot because of the heterogeneous multi-chain interchange and translation architecture which enables customised side-chains to connect with public blockchains”. Or like mine, did your pad simply read, “I’m investing in [insert crypto] because, well, everyone else is.”
When I bought Bitcoin in December 2017 it was priced at about $25,000 and climbing. But no sooner had I pressed “buy” on my crypto app than it crashed. People laughed; so did I. After all, I’d had a nagging feeling that all it would take to plummet was for another mug like me to buy in. Funnily enough, I still have my 0.0352 portion of a Bitcoin. Fear not, I held on, if you can call it that, not out of courage, but because the only way was up, right?
Many share that optimism, judging by the record Bitcoin hit this week. At the time of writing it was more than US$51,750 ($66,440); and TradingView, a network of traders and investors, reports that Bitcoin was the most popular asset among Australians on the platform in January this year. Between July 2020 and January 2021, the volume of unique searches for cryptocurrencies on TradingView grew from 17,044 to 39,477—a rise of 132 per cent.
To return to the Buffett advice, among the ironies of cryptocurrency is that any discussion of it typically stalls when it comes to explaining it. Let’s face it, the name doesn’t immediately suggest “public ledger”—the roundabout definition that is usually floated. To that end, a colleague this week offered a useful comparison, which expands on the ledger analogy, but sets it more specifically in the context of the prison system, which is much more fun and thus understandable. It goes like this:
“Prisoners need a proxy for currency as they are not allowed to possess cash. So how do they ‘pay’ for laundry service, hygiene products, protection, a haircut, a book, chocolate or even alcohol? The medium of exchange must be durable, uniform and have a wide acceptance. That is how instant noodles and canned fish became prison currency. But cigarettes are top of the pecking order.
“Notebooks are kept. Prisoner X will note down how many cigarettes he owes Prisoner Y, and Prisoner Y will make note of what Prisoner X owes him. That book documents all the transactions. To prevent fake entries, a third individual is selected as a witness. He signs the entry made in the books of Prisoner X and Prisoner Y. Cigarettes or instant noodles or canned fish are Bitcoin. Notebooks are ledgers. The similar format in the notebooks is blockchain.”
To that definition we should probably add the thoughts of crypto bear Nouriel Roubini, who this week produced one of his better lines when he said the “Flintstones had a better monetary system than Bitcoin.” “Fundamentally, Bitcoin is not a currency,” the economics professor known as “Dr Doom” told Bloomberg. “It’s not a unit of account, it’s not a scalable means of payment, and it’s not a stable store of value. Calling them cryptocurrencies is a misnomer, they’re not even assets.”
Now that you understand cryptocurrency, there are more pressing questions to write on your Buffett pad. Such as, when will you sell? Or will you trim and buy again? Perhaps there is no strategy because as the AFR’s Tom Richardson suggested this week, there is no alternative. “If risk-free returns on cash were closer to 5 or 6 per cent globally,” Richardson argues, “there’s little doubt Bitcoin would still be a fringe asset widely regarded as worthless by amateurs and professionals alike.”
American economics professor Nouriel Roubini is scathing about Bitcoin and other cryptocurrencies. 'It’s not a unit of account, it’s not a scalable means of payment, and it’s not a stable store of value. Calling them cryptocurrencies is a misnomer, they’re not even assets'
MORE ON THIS TOPIC: Morningstar’s Bitcoin webinar
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