Bitcoin: FOMO or JOMO

David Crozier

The talk of the investing universe at the minute is Bitcoin*, which burst through the $10,000 barrier this month, touching $17,000 before falling back a little. Bearing in mind that it started the year around $1,000, that is an incredible rise, by any standards.

So should you be investing?

Repeat after me: Bitcoin. Is. Not. An. Investment!

Can you make money with Bitcoin? Self-evidently, Yes, or at least, those who have been invested in it have made money. So far…

The key words being, So far!

It does not produce an income; there is no stream of future cashflows. The only way to make money in Bitcoin is to buy it at a low price, and sell it at a higher price. It is a speculation.

At its most basic, Bitcoin is a currency, as simple as that; a temporary token for people to exchange one form of accumulated wealth for another. There are a couple of articles here and here that explain the concepts a bit more, but I have to admit that I still don’t get it.

Blockchain technology does appear to have the potential to revolutionise financial record- keeping, so let’s not dismiss it out of hand, but I do have my concerns about the risks involved in speculating in Bitcoin.

Regulatory – at present, the registers for Bitcoin are anonymous, and governments don’t like this. Bitcoin is being used to launder money, and to buy goods and services on the dark web. Already China and South Korea have taken steps to clamp down on cryptocurrencies, and the FCA have warned that investing in this stuff could lead to you losing all your money.

Volatility – prices are ridiculously volatile, with prices fluctuating at more than 10% in a single day. In fact, that would count as a boring day this month. To be fair, much of this movement has been upward, but what goes up can, all too easily, come down.

Valuation – for me, this is the big one. What are you actually buying? As already noted, there is no stream of future cashflow that can be discounted back to a net present value. I see no rational reason for BitCoin to have the value that it currently does.

As a civilisation, we do have a history of allowing fear of missing out to drive decisions in an unwise direction. In the 1600s, a craze for tulip bulbs drove the price of these essentially valueless items to silly heights, only to collapse in 1637, in what is thought to be the world’s first speculative bubble.

Interestingly, the bubble appears to have been fuelled by the introduction of a futures market in tulip bulbs. This week, a future market in Bitcoin opened in Chicago. #justsaying

More recently, at the end of the 1990s in the dot.com bubble, investors – no, speculators! – bought shares in technology companies at an increasing rate, buying shares in company that had no profits and often no assets either. This, too, collapsed, bringing down some massive companies along with it.

All currencies in the developed world are now fiat currencies. That means that the amount of money in circulation is simply decreed by the government, or some other body, like the Bank of England. There is no longer a pile of gold somewhere to the value of all the sterling in circulation. It’s a made-up number, and the value of the currency against other world currencies at any one time is a measure of how much the rest of the world believes in the economy of the issuing country.

But at least there is an underlying economy. There are people designing cars and building them, people producing food, and serving it to you in supermarkets and restaurants. There are even people writing blog posts about Bitcoin and other financial issues. There is lots of economic activity leading to a tangible outcome, in many forms.

I just don’t see that with Bitcoin.

Sure, computers beaver away night and day looking for Bitcoins (consuming a phenomenal amount of energy in the process, mark you), and there is a limited supply of them, but a limited supply of – what?

“This time it’s different” are the four most expensive words in investing

Sure, if you want, have a bit of fun with a few quid you can afford to lose, but do not let fear of missing out distract you from your long-term financial planning goals.

For the record, I am sitting this one out. #jomo

*The comments about Bitcoin could equally be applied to any other so-called cryptocurrency
§ Sir John Templeton