Bitcoin has been in the news this week after the value of 1 bitcoin hit $50,000, with many people thinking it could hit €100,000 by the end of the year. This is a meteoric increase in value for the cryptocurrency that was invented in 2008 and if the predictions come through, an easy and quick way to make money. And while many people will make a lot of money out of it, I won’t and I’ll tell you why.
I am a long term investor. I like to put my money in an index and let it run without watching the price or wondering if it is time to get out. Going back to 1926, in every instance the S&P 500 gave a positive return where held for 20 years. That is what I want from my investment. Investing in an index doesn’t mean the same companies for the entire investment period, they will change over time and that is what I want.
It was only a few years ago that there were multiple cryptocurrencies and no one knew which one would emerge as the next Amazon and which would be the next pets.com. It is clear now that Bitcoin is the winner but for a while, there was huge risk for investors that they could have been backing the wrong horse, and many were.
It is also hugely volatile and as it is new, we cannot know if the next movement will be permanent or not. If you look at the history of its valuations:
These extremes in very short periods of time and the obvious need to pick a sell date to harvest profits makes it unsuitable for my long term view.
Like gold and other commodities, Bitcoin does not generate a return while you hold it. You buy it and hope to sell it at a higher price at some point in the future. With other assets like equities, bonds, property and even deposits, you can make a return while you hold it. That means that if you hold the assets for long enough, you will make back you initial investment while holding the asset. If you reinvest the return, you will get the compounding effect and be able to grow your money by even more. There is no compounding with Bitcoin or other commodities.
I haven’t taken the time to study what Bitcoin is about and how the blockchain technology works. As a financial advisor, I always tell my client not to invest in an asset that they don’t understand and I am following my own advice. For instance, I do not understand where the Bitcoin is kept. I have heard that it is kept in an electronic wallet but I have also read the sensationalist stories of people forgetting their passwords and losing millions of dollars worth of Bitcoin. And what about hackers? Surely if there is such huge amounts of money kept electronically, it is going to be prone to hacks and being robbed. It won’t be protected like my money in the bank is. So what happens if someone robbed my Bitcoin?
When Bitcoin was created by Satoshi Nakamoto is was supposed to be a decentralised digital currency that could be used to buy things without having to use a bank. It found popularity with criminals to buy drugs and weapons on the dark web before really coming into the mainstream.
The US dollar is the world’s reserve currency so having a decentralised digital currency has to have the goal of replacing the US dollar as the world’s reserve currency. But if you owned Bitcoin now, would you be spending it or hording it?
Or is it now trying to replace gold as a store of wealth? Like gold, there is a finite amount of Bitcoin, with 21 million Bitcoin available to be mined, of which approximately 18.5 million have been mined to date. Are we going to go back to the days of the gold standard where every currency is linked to Bitcoin? Countries stopped using the gold standard in the 1930’s! So what is it, a currency or a commoditity?
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22 February 2021