Investing in Bitcoin and other crypto currencies
Why you shouldn't buy bitcoins?
We've heard a lot over recent years about Bitcoin:
"Bitcoin prices skyrocketing"
"Who is the creator of Bitcoin"
"How does Bitcoin work"
"Bitcoin millionaire throws away his hardrive"
"Bitcoin used for money laundering"
This has left many potential investors in Bitcoin a little confused and ill informed.
I recently heard a radio phone in about money. There was a fellow who phoned in singing the praises of Bitcoins. He'd bought a few at £20 each and now they were worth hundreds each.
My concern is that this sort of chat may lead many to buying Bitcoins under the misapprehension that they can make a fortune at best or a sound investment at worst. It is to those people that I ask one question:
What's the value of a Bitcoin?
What is a Bitcoin actually worth? If your answer is along the lines of whatever the current price is then I ask you this:
If a Bitcoin is worth whatever the price is then why would you bother buying some? Surely the value is the current price and in theory the price is whatever the value is. You should only wish to invest in things that offer a return such as interest, rent or a dividend. These things can be assessed and valued over time. So I ask you what would be the reason for you investing in Bitcoin?
Bitcoin prices will go up
You might come back and argue that Bitcoin prices will rise. You're investing as in the future you will sell at a higher price and cash in your profit. But how do you know that the Bitcoin prices will rise?
There are no fundamentals in Bitcoin. There is no intrinsic value. Bitcoin prices are simply the result of other people's demand for a product that's in scarce supply. The price in the future is simply the result of whatever price someone else is willing to pay for it. That's pure speculation.
Bitcoins are quite unlike many other asset classes. At least wth property there is the physical land plus all the bricks and mortar put together with skill and intellect that most ordinary people could not do. With shares, there is the value of the underlying business and its ability to produce cash flow to be paid out in dividends to its shareholders. Wth bonds and other fixed income assets there is the ability to assess the regular interest payments (coupons) arising from the bonds. With Bitcoin there is nothing tangible underlying it.
The answer to the original question should be that you shouldn't want to buy Bitcoins. They are a pure gamble. There is no way that an individual could assess what the demand versus supply of all Bitcoins is or will be.
For those Bitcoin lovers out there, please feel free to argue your case...