Can A Value Investor Buy Bitcoins?

There has been increasing interest in Bitcoins over the past months. First, there was news about its amazing rally over the past months, when it annouced that one bitcoin is worth more than an ounce of gold. Then came the news that it shot pass the US$2,000 per bitcoin mark. It then rallied passed the US$2,700 per bitcoin mark in less than two weeks. Following that, it crashed back to the US$2,000 per bitcoin mark in the next few days. Yet, after all that boom and bust in a short one month time, Bitcoin is now trading at above US$2,900 per bitcoin, nearly tripled its price from a year ago.

Fortune magazine even published an article, stating that if you have bought US$5 of bitcoin seven years ago, it would be worth about US$4.4 million today! Maybe the story added to the rally of bitcoin too.

Anyway, the rally of bitcoin has stirred up a mountain of comments from just about anyone. Even Mark Cuban tweeted this!

What Is Bitcoin?

Before I continue, for those who have completely no idea what I am talking about. Here’s a short introduction on what is bitcoin.

With that out of the way, the question I want to explore today is, “Can a value investor justify “investing” in Bitcoin?”
Ok, firstly I have to make a confession. I am a self-proclaimed value investor. I believe I was, now am and always will be a value investor. However or ironically, I also own some bitcoins.
Wait…. Before you go into “#$##$%&&*$$@#$#” mode, hear me out. I only own a few hundred bucks worth of bitcoin or (0.2 bitcoin) to be exact. It is just something I always do; by buying a little of a company or something I am interested in, to keep me vested to find out more about them.
Thus, that 0.2 bitcoin made me interested to read all those news regarding Bitcoin over the past few months. And I find the arguments that both sides are making equally illogical. Here’s why.

Bitcoin Is A Bubble!

On one end, many claims that bitcoin is a bubble because many people are getting rich easily from bitcoin. However, that argument is just half of the story. An asset bubble will only burst if there are a massive selling pressure on the asset and not enough new buyers to take up that supply. Even though Bitcoin has been rallying at breakneck speed, the majority of bitcoin is still concentrated in just 1% of the bitcoin community. Interestingly according to Wired magazine, the top three Bitcoin holders are;

  • Mystery investor Satoshi Nakamoto (The creator of bitcoin)
  • The FBI (Yes, seriously, this is not a joke)
  • The Winklevoss Brothers (The rowers-turn-facebook-creator/shareholders)

So only if this 1 % decide to sell down their stake in Bitcoin sharply, how would the “bitcoin bubble” pop?
Many financial bubbles in the past burst after the liquidity for debt financing dried up. This was how the Asian financial crisis and the global financial crisis unfolded. I am not sure if there are banks giving out debt for my bitcoin as collateral yet. So if not many people are using debt to buy bitcoin, where would the panic selling occur?
Yes, the price of Bitcoin is volatile. Extremely volatile is a better word. But to claim it is a bubble at this point? To be honest, I am not sure.

Bitcoin and other Cryptocurrencies Will Disrupt The Financial Industry (And Take Over The World)

On the other, there are evangelists who claim that bitcoin and other cryptocurrencies will replace most transactions in the world, taking away third party intermediaries like the banks, credit cards or e-payment gateway like Paypal.

Although the idea is noble, there are many instances where having a third party between payment is very important. For example, if there is a lead time for the merchant to send me my goods, I need a third party to hold on the payment till I safely received my goods. Or in a case where there is a refund policy, having a third party in between can make sure I will get back my refund if I want to.

However, in the world of bitcoin, there are no such things as a refund. Once I send the payment and it is confirmed, that will be that. If I need a refund from the seller, it would be based on the honesty of the seller himself/herself. And if the solution to that is to add a third party intermediary when I make payment in bitcoin, why would that be any different from what I am doing now with my credit cards? Why would I need bitcoin then?

Thus, I personally feel that the utility for bitcoin is limited and not as grand as many evangelists would claim otherwise. And if there is no real global utility for bitcoin, why would the price of bitcoin keep going up and up for no reason?

My Personal Very Flawed View

I am seated somewhere in the middle in the debate of the true value of bitcoin. I think bitcoin has passed the stage of being just a speculative asset used only by criminals or money launderers. It is reaching a point where many are seeing it as an alternative way to store their wealth, similar to how gold is to the older generations.

Gold has many similar characteristics as bitcoin. For one, both are mined; one from the ground and one electronically. Secondly, most people who buy it has no real use of it. It is merely used as a shortage of wealth.

And the reason people buy gold is that they are doubting the true value of paper currencies. Therefore, people might also start buying bitcoin when they do not trust their government issued currencies.

So a perfectly logical value investor who buys bitcoin (in large quantity) might be one who feels that there is some chance that all the currencies in the world would be worthless one day and he/she needs some form of insurance to store some of the wealth.

Unfortunately, I am hardly a perfectly logical value investor. With the huge rally in bitcoin prices, I too fall into the psychological trap of wanting to jump into investing speculating more of bitcoin? Will I act on my psychological weakness? Perhaps story for another day.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned but he does own some bitcoin.

Stanley Lim, CFA

Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer for the upcoming investment book: “Value Investing In Asia”, scheduled to be published late 2017. Stanley is currently the chief editor of Value Invest Asia.

2 thoughts on “Can A Value Investor Buy Bitcoins?

  • June 19, 2017 at 6:37 pm
    Permalink

    Bubble or not, just think about that:
    The current market cap of all bitcoins worth the entire CK Hutchison, would Mr Li Ka Shing swap his business empire for all this potential future currency?

    Reply
    • June 19, 2017 at 9:39 pm
      Permalink

      Thanks Hayes for the comment.
      Haha, He probably wouldn’t. But then again, the total gold market is about US$8 trillion, is that a bubble? Sadly, value of currencies are just people’s opinion on them. I do see cryptocurrencies getting more and more accepted in the world, especially with the younger generations. So, I don’t think I would write off Bitcoin or other cryptocurrencies so early. There are some really fascinating developments within the blockchain communities. it is quite interesting. But I agree with you, I would not swap my stock portfolio for bitcoin anytime soon. Haha
      Stanley

      Reply

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