Investment Outlook , Published Jan 18, 2018
For a bubble to grow, it needs a compelling story. Bitcoin has it, and has caught the imagination of speculators worldwide. But the story has fundamental flaws and Bitcoin is unlikely to gain traction as a digital currency as currently structured.
The cryptocurrency was the fastest growing asset in the world in 2017. Bitcoin, in its various avatars, is the first digital currency or cryptocurrency. It utilises blockchain technology, facilitates secure peer-to-peer transactions and has enormous future application in terms of security of data. However, being a user of the technology does not make you an owner.
Bitcoin is neither a real currency nor a commodity, but has similar properties. It serves as a medium of exchange, and a store of value, just like regular money. Like gold and other precious metals, bitcoin is potentially an alternative asset.
For a bubble to propagate, it needs a compelling story. Bitcoin has it. It is revolutionary, a new digital currency, the new Gold. There is urgency in price action, scarcity in availability and a shroud of secrecy. Then there is fear and greed. It’s valuable because people believe it’s valuable. According to an article in The Guardian, the cryptocurrency was the fastest growing asset in the world in 2017.
The core argument for Bitcoin is that central banks are unable to control it or print it. Like Gold, Bitcoin has no inherent value, there is no income stream and no guarantor. So it isn’t an investment. It’s a perceived investment, driven by supply and demand. The counter argument is that all currency is also traded on perceived value. However, Bitcoin is ill-equipped to handle high transactional volumes. Coins need to be mined and there is a limited supply. As with all technological solutions, it remains highly vulnerable to obsolescence.
Bitcoin today is valued by the greater fool theory. Should Bitcoin achieve a level of mass acceptability, it may gain legitimacy, but governments are unlikely to hand away their currency to a digital competitor.
Bitcoin, by all means, is a fascinating speculative investment. As investors, we prefer assets we can value using dividends, income or earnings.
Investment Outlook 2018