I personally own a few coins a friend sent to me as a gift. But I have never invested in this hot blockchain technology nor have I recommended it to my clients as an investment vehicle for two reasons. First of all, I don’t think it meets enough fundamental criteria to be a currency and most important, not enough to be a investment asset class yet. At least not for my investment mandate. But I’m going to write about it because it is gaining momentum and relevance.
It has overtaken elite banks such as Goldman Sachs and Morgan Stanley in market capitalisation in addition to IBM, McDonald’s, and American Airlines, to name a few, with an astounding $160 Billions. That’s crazy for something we are still debating whether it has any fundamental value at all.
So what we have here, in the eyes of value investors, is a vehicle for speculators and euphoria drunkards for to deploy their hard-earned dollars in hope that more speculators will pour in and drive the price even higher. Don’t get me wrong, I love how it has been moving. A typical fund manager will be very happy with a 30% annual return and will most likely be a Wall Street rockstar if they can consistently do that overtime. After trading above $9,000 early this week, Bitcoin has put all of us to shame with a whooping 900% return year-to-date.
But why do we remain reluctant to jump in? Because, at least personally, I don’t think it’s a currency and definitely not an asset class yet.
The most important feature of a currency is to be a stable store of value. This is very important for investors as we want to make sure our investment will sustain value overtime and that we are able to quantify our expected future cash flows’ valuation. That is why it has been proven hard for countries with unstable volatile currencies to attract serious foreign direct investments. For instance, the US dollar has been moving anywhere between 0 to 2% sideways on a monthly basis. On another hand, Bitcoin has fallen over 80% at least 6 times over the past 5 years. Of course it’s always came back. This year alone it’s up over 900% – so no good as far as currency stability is concerned.
Another basic feature of a currency is for it to be a medium of exchange (to be able to facilitate transactions). Bitcoin is very inconvenient. It’s hard to make change and you must find two people willing to simultaneously exchange goods and services. Currencies like dollars or Rwandan francs solve this problem. I can buy a cup of coffee with the dollar or franc without having to sit down with baristas and give them investment advice in exchange for the coffee they just gave me. So the only reason to own a bitcoin is not to use it as currency rather for speculation.
Is it an asset class then? Not yet. But we believe it is going to stabilise and become a new asset class based on blockchain technology. So then it will be regulated and trade just like stocks, gold and other commodities. In fact, Leo Melamed, the Chairman of CME Group, the world’s largest derivative exchange, recently announced that they are looking at how they will regulate this technology then have Bitcoin futures trade like other derivatives. But until then, I’ll pass.
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