Bitcoin's value in USD terms since 2014 (Source: here)
The conservative world of finance is replete with extremely intelligent people, including prominent central bankers, who will swear on their mothers' graves that Bitcoin is a hoax, a criminal enterprise, an asset without value, without future.
Many of them have no idea what they are talking about.
Yet, the financial media quotes them all day long, not because they know their stuff, but because they are powerful. Once you have worked in financial circles for long enough you realise that the sceptics reverse their opinions as soon as the market turns, in order to remain relevant. And when they U-turn, no one holds them to account for the nonsense they spewed just the day before. Such is the revolting relationship between the financial media and power; a bit like two eels fucking in a bucket of snot.
Which means you are better off thinking for yourself. I happen to be a big fan of Bitcoin, because I see a real need for this kind of asset.
For one, Bitcoin is an electronic, infinitely divisible asset, which makes it accessible to everyone and hence far more democratic than, say, conventional bonds and stocks.
Second, Bitcoin is created, distributed, traded, and stored using blockchain technology, which is fundamentally safer than conventional financial assets as far as counter-party and operational risks are concerned. Bitcoin is traded without financial institutions as intermediaries, so your trades are not at risk of a bank failure, while trading costs are much lower than in the banks and FX bureaux, say, in airports. For more fundamental information on Bitcoin, see here.
Third, unlike other crypto currencies and particularly fiat currencies, Bitcoin is issued in a finite quantity, which will never exceed 21 million coins. This restriction on the supply of Bitcoin guarantees that it is never at risk of inflation. Bitcoin therefore shares some of the most attractive features of gold, albeit with far superior liquidity (meaning it is much easier to trade).
My view is that Bitcoin will become more and more widely held and hence much more liquid over time. This will stabilise its price at which point more people will hold Bitcoin for the same reasons they hold conventional money, namely as a unit of account, store of value, and medium of exchange.
Recent developments lend support to the optimism about Bitcoin's future. The US government is advancing on multiple fronts with respect to regulation (see here). Regulation is crucial, because it induces confidence and enables large institutional investors, such as pension funds and insurance companies to participate in the market. Growing involvement of institutional investors obviously drives up the price of Bitcoin, which is fortunate if you own some, but the real importance of their involvement is that it reduces the biggest risk to Bitcoin, namely that it is outlawed by governments fearful of the threat it poses to monetary policy (this risk remains clear and present, in my humble opinion).
Private hedge funds have recently emerged to offer sophisticated actively managed crypto products - see an example here) and a large number of Bitcoin-referencing exchange traded funds (ETFs), which offer a cheaper way to invest than actively managed funds, are now also available (see here).
Personally, I find the potential of Bitcoin in emerging markets (EMs) especially intriguing in light of the problems faced by EM policymakers due to fragility of their currencies. At the slightest sign of uncertainty, be in country-specific or global, investors tend to ditch EM currencies in favour of the Dollar or the Euro. Since Dollars and Euros are in limited supply in EM countries episodes of flight from EM currencies can lead to serious balance of payments problems, even defaults. Even perfectly well-managed EM economies are not immune to stampeding investors.
Some EM policymakers are therefore rightly considering the possibility of complementing or even replacing their fiat currencies with Bitcoin as legal tender. Indeed, El Salvador and Central African Republic (CAR) have already done so. Bitcoin has the advantage of reducing reliance on US Dollar and Euros, which of course carry their own macroeconomic risks. The US Dollar dropped 50% in value between 1969 and 1979, but these days there are wider geopolitical risks to consider too. An increasingly nationalistic and insular US government could well exploit the might of the Dollar to bully smaller nations. Bitcoin avoids these risks, because supply is limited and Bitcoin not controlled by any government.
Having said all that, I would not buy Bitcoin right now.
For one, never to pay attention to anyone who flogs an investment idea when that investment happens to be trading at its all-time high! Amateur investors tend to get sucked into markets during the latter stages of rallies, which is precisely when big guys, who caused the rally in the first place, are looking to off-load positions and take profits. This is why amateur investors often end up holding the baby as the price falls, losing tons of money in the process, experiencing many sleepless nights, or worse.
This week Bitcoin traded above USD 72,000, an all-time high. If you already own a position in Bitcoin as a long-term investment, then congratulations! Hold on to it! My bet is that Bitcoin's volatility is far from over, however, so follow the market. Decide how much you want to invest when the price falls. Set three or four attractive levels to buy, say, 10%, 20%, or 30% below current valuations. And then wait. But make sure you actually buy when the time comes, which is much harder than it sounds, because when the market crashes everyone is screaming blue murder!
The basic mantra of investing is always the same: buy when it is cheap and sell when it is expensive! Remarkably, such behaviour is highly unusual in financial markets, where Investment horizons are short. Market-makers love to whip the herd into a proper frenzy, because it increases trading revenue when amateurs are first sucked into the bubble late and then spat out afterwards in the ensuing crash.
As for investing in general, I urge anyone other than the most seasoned professional investors to stick to a simple three-pronged strategy:
(1) Make sure you invest! Every second your money is idle you get poorer, either because you forego returns or because inflation is eating away your cash.
(2) Diversify! Diversification is the closest you will ever get to safety in financial markets.
(3) Invest tax efficiently! Taxes are so punitive in many countries that ignoring them can amount to financial suicide.
In reality, even this simple three-pronged strategy is far from easy to implement. For example, very few people have the skills to do (2) or (3) without which (1) becomes highly risky.
For this reason, it is also a good idea to hire a professional investment manager. Sadly, investment managers are expensive and many will screw you over, especially if they work for a bank. I would therefore invest very considerable time and effort in identifying a competent, trustworthy, and reasonably priced investment advisor. If he or she moves to another institution maybe you should move your assets too. Good advisors do not grow on trees and always remember that the smartest of all criminals do not rob banks, they work for them.
Not until after you have implemented the three-pronged strategy together with your trusted investment advisor should you consider making stand-alone investments, such as picking specific named stocks, individual currencies, particular commodities, bonds issued by separate governments or companies, or indeed Bitcoin. Stand-alone investments are extremely risky, because they lack diversification and amateur investors are always at a huge informational disadvantages vis-a-vis professionals, who spend their entire lives getting close to issuers, etc.
The odds of beating the market on stand-alone investments are therefore extremely slim. Other than sheer luck, the best chance of winning on a stand-alone investment is to think long-term. Long-term thinking is the only edge the amateur has over the professional, who tends to be ridiculously myopic. Assuming the long-term view is actually correct, the amateur will beat the market if he or she already holds a big position in an asset when it starts to rally, as Bitcoin has just done. Bear in mind, though, that this strategy requires that the investor is able to hold the investment through protracted market downturns, which in some cases can be longer than the investor is able to remain solvent. So never invest more than you can afford to lose!
The End