It’s been a rollercoaster ride for bitcoin investors over the last six months. In early November, the price of one bitcoin was just over $7,000. Then, all of a sudden, things got crazy. Over the next six weeks, crypto-mania literally took over the world. Everyone jumped on the bandwagon and its price surged to almost $20,000 in the blink of an eye.
Next, almost as quickly as it rose, its price retreated. Anyone who piled in near the top learned the hard way. By early April, the price was back under $7,000.
However, over the last month or so, the price has been trending upward again, rising back to $9,300, a gain of over 30%. Yet despite the fact the cryptocurrency has undergone a massive correction and is now trending up again, I won’t be investing in it. Here are four reasons why.
Hard to value
For starters, it’s impossible to value bitcoin. With a stock, I can look at earnings, cash flows and dividends, and use models or ratios to get a rough idea of what a company could be worth. Given that bitcoin has no earnings, cash flows or dividends, I can’t do that. How much is it really worth? $10,000 or 10 cents?
The greater fool
“As an asset class, you’re not producing anything and so you shouldn’t expect it to go up. It’s kind of a pure ‘greater fool theory’ type of investment.” – Microsoft founder Bill Gates
There’s also another important implication of bitcoin’s lack of cash flows and dividends. Given that the cryptocurrency doesn’t pay an income stream, it means that the only way I could ever make a profit from it, is if I can convince someone else to buy my bitcoin from me for a higher price than I paid. In finance, this is referred to as the ‘greater fool’ theory. Can I be sure someone else will pay a higher price than me for my bitcoin in the future? No.
Little real-world use
Bitcoin also has very little practical use, for several reasons. For example, look at its insane volatility. Since mid-December, it has fallen over 60%. Would I want to be paid, or receive my pension, in a currency that declines 60% in the space of a few months? No thanks. Furthermore, it’s almost impossible to actually buy anything with it. Can I head down to Sainsbury’s and pay for my weekly shopping with it? No. Can I grab a coffee at Costa with it? No. Bitcoin has very little real-world use.
Lastly, if there’s one financial expert I’m willing to listen to in relation to bitcoin’s prospects, it’s the greatest investor of all time, Warren Buffett. And it’s fair to say, Buffett doesn’t see any investment appeal in it at all, recently labelling it as “rat poison squared” and stating that cryptocurrencies will almost certainly “come to a bad ending.”
As a result, I’ll be steering well clear of it for now. The stock market is a proven way of building long-term wealth, so I’ll be sticking to shares for the foreseeable future.