In recent months, there is a lot of hype over the surge in cryptocurrencies, namely Bitcoin. I mean, look at this sweet sweet chart:
(Courtesy of Yahoo Finance)
Man, about 2,100% return in 1 year based on the 52 week low compared to current price. You know there’s way too much interest when even the random aunties on the MRT are talking about investing (happened to me last week). So the question is, is Bitcoin still investable? Should you still dump your cash into it?
Why Bitcoin is not investable to me
By definition, an investment has to be something that has long term value. By its nature, it is not possible have any guarantee that Bitcoin will have any value 5-10 years down the road. Let me explain:
- Bitcoin has no underlying asset backing itUnlike traditional currencies, it has no government guaranteeing its value. Unlike other traditional financial assets, there is no underlying asset backing it. Stocks are backed by company assets, gold is backed by physical gold, etc. As such, you are at the mercy of the market. If Bitcoin ever has no demand, you are left with nothing to hang on to.
- Bitcoin is way too open and largely unregulated at the momentLet’s face it, in order to get widespread adoption, governments will eventually need to be regulate Bitcoin trading. Regulation will dampen the exuberance of recent months. Also, given the mysterious origins of Bitcoin and decentralised design philosophy, it is unlikely that governments will back Bitcoin as a global currency. This in turn affects the long term value of Bitcoin as a currency.
- Bitcoin has many design limitations and challengesAs Bitcoin is one of the first cryptocurrencies in the market, it wasn’t designed with scalability in mind. As a cryptocurrency, it also has all the unsolved problems associated with Blockchain technology like speed of transaction verification and vulnerability to attack. This has culminated in development of splinter versions (called forks in geek speak) of Bitcoin in recent months like Bitcoin Cash, Bitcoin Gold and Bitcoin Diamond by users trying to improve on the original Bitcoin.
What all this mambo jumbo just means is that Bitcoin is unlikely to be the final version that achieves widespread adoption as there’s still work to be done to get it to the level where transacting with Bitcoin is seamless, secure and quick.
- Bitcoin is a digital product, thus it is prone to hacking attacksLike any thing of value connected to the Internet, it is prone to hacker attacks. The Bitcoin could be stolen from exchanges or from your wallet and there’s nothing you can do about it. Exchanges and miners have had dodgy reputations in cybersecurity and it is a legitimate concern.
Should you still dump your cash into it?
Yup you heard me right. Despite all the challenges I’ve listed, I’m willing to bless somebody who’s brave to buy Bitcoin for a trade if they satisfy the following conditions:
- They use money that they can afford to lose (something like 5% of their portfolio tops)
- They have a diversified portfolio unrelated to cryptocurrencies.
- They know that they are speculating, and not investing.
- They are careful and not greedy little pigs.
What I’ve learnt over the years is that, if there’s sufficient idiots in the market, asset prices will go up despite there being no fundamental reason for the appreciation (Think dotcom bubble). That is certainly the case with Bitcoin. I wouldn’t be surprised if Bitcoin breaks the USD20K or even 30K barrier over the next year. Never go against the market, just take the money and run.
As my US stock sensei Jim Cramer always reiterates:
Bulls make money, Bears make money, Pigs get slaughtered.
Just don’t be a pig on Bitcoin and you should be fine.
Thanks for reading.