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Why Bitcoin is Uninvestable

19012018 bitcoin

Why Bitcoin is Uninvestable

“What do you think about investing in Bitcoin?” is a question I am being asked with increasing frequency, as the cryptocurrency mania reaches a fever pitch. Is Bitcoin investable? I would argue that the answer to that question is a resounding “no”. A Bitcoin investment is an oxymoron, with a purchase of bitcoin falling into the domain of speculation.

There are two types of assets that an individual can purchase: (i) an asset that produces cash flows; and (ii) an asset that does not produce any cash flows. Investing refers to purchasing an asset for less than it is worth in the hope of procuring a future profit. For an asset that produces cash flows, it is possible to calculate that asset’s intrinsic value by summing the present value of all future cash flows.

Whilst the intrinsic value is unobservable, and calculating the value of a business requires making forecasts and other judgement calls, there is still a way to arrive at a value estimate which can be compared against the current market price. Investing is buying the proverbial dollar for 50 cents, with a necessary precondition being the ability to estimate that asset’s intrinsic worth. Conversely, assets that produce no cash flow do not lend themselves to the same discounted cash flow analysis.

How does one determine whether they are making a sensible investment if the asset produces no cash flow, and they are unable to derive an estimate of that asset’s intrinsic worth? The classic example of this type of asset is gold. Its price is determined by the rules of supply and demand. Purchasing gold with the aim of generating a profit relies on the greater fool theory – that is, someone else coming along down track and paying more for the asset than you did, given that there is no cash flow derived from a purchase of gold. Bitcoin falls into this category.

There is no obvious way of valuing bitcoin – it is very difficult, if not impossible, to ascertain the valuation goalposts. Is it worth $10 or $10,000? One cannot say with certainty.

Observe the following price chart for bitcoin over the course of 2016.

Screen Shot 2018-01-17 at 1.26.18 pm

Those who sold out at the end of 2016 were able to bank a healthy 119 per cent gain! Fantastic! Until they realised that if they had held on for just another year they would have made a 4194 per cent gain if they had sold at the December 2017 peak.

Screen Shot 2018-01-17 at 1.27.29 pm

This illustrates the underlying problem with purchasing Bitcoin: without any fundamental yardstick for valuing Bitcoin, how do you know when to sell? Is it $20,000? $30,000? What about $100,000? No one knows.

To clarify, I am not saying that there’s no chance Bitcoin could work out, and achieve its original goal of providing a digital peer-to-peer means of transacting that didn’t rely on a trusted third party (e.g., a bank). However, for those pinning their hopes and dreams on Bitcoin rocketing to the moon, caution is warranted. On the spectrum of gambling and investing, purchasing bitcoin falls much closer to the former.


George joined MGIM in September 2015 as a Research Analyst. Prior to joining MGIM, George was an investment analyst at Private Portfolio Managers where he covered global equities across various industries, using a value investing framework. George’s prior experiences include equities research and investment banking roles at both Citi and Greenhill & Co.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. It seems to me there is a difference between ‘value investing’ and speculation. For ‘value investing’ there is Roger Montgomery’s book “Valu.able”. Suffice to say that one has to investigate the underlying value of the stock. In contrast, speculation does not pay due regard to the underlying value of the stock. That is speculation can occur in shares without anything backing it such as ‘Bitcoin’ or a stock without paying due regard to its intrinsics. Such an example is the “Poseidon” share bubble of the 1960s and early 1970s.

    Applying the same questioning of the author in the 7th paragraph, “..those who sold out at the end of 2016….a gain of 119 percent….if they held out another year….a 4194 percent gain….” could also apply to ‘Poseidon’. Between late September 1969 to December 1969, the share price was between $1.85 and $50. That’s 2700%. Do you hold or sell out? What if you invested in December 1969 at $50 and sold in January 1970 at $200. That’s 400%. What if you invested in September 1969 and sold in January 1970, that’s $200/$1.85*100 = 10800%. They are all wonderful figures, BUT if you were expecting a price rise and invested in January 1970 at $200, you lost $150 per share by April 1970 at $50 per share. If you invested in September 1969 at $1.85 and sold at $50 in April 1970, you made a 2700% gain.

    Lots of “what ifs” and the problem with ‘timing’ an investment where the mode of operating is ‘rumours’ instead of financial fundamentals. One cannot rely and determine any risk management on ‘what ifs’ if the source is rumours and not solid goals as this article exemplifies.

    Anthony Pleticos, LLB(UNSW)(2012)

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