Bitcoin Revisited: With Markets Uncertain, is it Time to Buy?

Bitcoin was worth $20,000 not long ago so, at $9,000 right now, it should be a good value, right? The answer is no one can really know.

In the 25 years I have been investing professionally there has been only one certainty and that is the future will always be uncertain. Now, with an aging bull market and economic recovery, rising trade tensions, growing Middle East strife, there is a heightened sense of uncertainty for investors, which is why some are tempted by opportunities that promise easy returns without the risk. That may be the reason behind the renewed interest in bitcoin, which is up more than 125% since the beginning of the year. But, considering everything we know about Bitcoin and its performance over the last several years, is that a good move for investors?

Although Bitcoin is nearing the $9,000 mark, it is a long way from its all-time high of nearly $20,000 achieved in late 2017. That year, the buying frenzy of retail investors drove the price up more than 500% in just 11 months before it plunged more than 80% over the next 11 months. I don’t know of many investors who can stomach that ride. But, if bitcoin was worth $20,000 at one time (not long ago), wouldn’t $9,000 be a good value with lots of upside potential?

Bitcoin is Not Really an Investment

The answer is no one can really know. It’s important to understand that Bitcoin is not really an investment. It has no intrinsic value. It produces nothing and has no social value. It’s only worth is what someone else is willing to pay for it with the hope they will sell it for more than what they paid. Hope is not an investment strategy.

It’s not Really Even a Currency

It’s not really even a currency, though that’s what it’s promoted as. While some businesses, financial institutions, and even governments recognize bitcoin as a form of barter, it has no store of value and it certainly has no stable value, which is common to all widely accepted currencies. To use it as currency, you must cash it out to a real currency. And, unlike real currency, there’s no way to store it safely, unless you consider the recent hacking of $40 million of Bitcoin from one of its exchanges to be a fluke. But there have been several similar hacking episodes on various bitcoin exchanges in the last several years.

In addition, there is no real consensus on what drives bitcoin prices. Some attribute it to the fluctuations in world currencies. For example, the recent runup in bitcoin seemed to have coincided with the steep decline in the Chinese yuan. Bitcoin prices also seemed to rise in response to the devaluation of Venezuela’s currency. Its value has also increased in recognition of its increased acceptance by businesses, such as Samsung and the Amazon marketplaces. Or, the price could plunge overnight as it did when South Korea announced it would ban bitcoin trading. However, in reality, the primary driver of bitcoin prices is media-driven speculation.

It Really Doesn’t Belong in an Investment Strategy

The on-again-off-again frenzy around bitcoin is reminiscent of many of the speculative, boom-bust investment fads of the past, such as Tulipmania and the dotcoms, in which people, driven by the fear of missing out, are more willing to buy something the more its price goes up. It ended badly back then and, as Warren Buffet said as it relates to cryptocurrencies, “I can say almost with certainty that they will come to a bad ending.”

Now very well may be the time to buy bitcoin, but nobody has any way to know with any degree of certainty because there is no way to place any value on it. That is the antithesis of serious, thoughtful investing. Our recommendation is to avoid cryptocurrencies, even during times of market uncertainty, and stay focused on your long-term investment strategy.

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