Charlie G. from Philadelphia, PA asks: Good afternoon Mitch, I would like to hear your thoughts on bitcoin as a long-term investment. Every time people think bitcoin is in a bubble, it just goes higher and we keep seeing more institutional buy-in. What do you think?
Mitch’s Response:
Thanks for writing, Charlie. I don’t write about bitcoin much, because I think its risks, benefits, ability to generate earnings, and valuation are not well understood.
So, the short answer to your question on whether bitcoin is a viable long-term investment is: I don’t know. But I’ll tell you why I’m not investing.
Bitcoin has no well-defined intrinsic value – it is not gaining much traction as a currency, and its real-world applications are growing but not as quickly as the hype would indicate. To be sure, bitcoin has a blockchain, which I acknowledge is a groundbreaking technology with extraordinary potential. But blockchain doesn’t generate earnings for bitcoin, and bitcoin itself isn’t profitable. At the end of the day, why is $50,000 or $100,000 the right price for one unit of a digital currency with no earnings? I’m not convinced anyone has a good answer.
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I also worry about the type of risk-taking that drives retail investors to buy bitcoin. Many retail investors are using heavy amounts of leverage on lightly-regulated exchanges, where derivatives contracts are sold cheaply and amount to essentially a ‘rolling of the dice.’ Many of these retail investors are trading simply in the hope of getting rich quick, with no real attention to fundamentals or value, and no real understanding of what bitcoin is. To me, it’s a problematic setup, and it helps explain why a -17% drop in 20 minutes – as we saw last week – is possible.
In my view, investing in bitcoin or other cryptocurrencies is a sign of investor impatience – wanting to take shortcuts in the effort to secure long-term attractive returns. It is leading to a sense that risky asset classes can only go up, and by extension is resulting in retail investors ignoring fundamentals – which, in bitcoin’s case, don’t exist.
Throughout the course of history, we have seen similar stories many times over. I am not saying Bitcoin is doomed and the bubble will burst any minute. For all I know, it could keep marching higher all year. But I do believe that excessive risk-taking and the practice of throwing fundamentals out the window – in exchange for the hope of making big returns – is a story that rarely ends well. And in my view, I do not want to be invested in a speculative asset class as such a story unfolds.
It’s completely natural to feel uncertain about your financial decisions at the moment. But in times like this, it is better to base your decisions on research, not emotions! Don’t sell and exit the market or wait on the sidelines out of fear.
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