• Watch our recent video insight with David and Damon Ficklin from Polen Capital as they give some insight into the strategy behind the Polen Capital Global Growth Fund here

Why I’m still not convinced by the Bitcoin bulls

Why I’m still not convinced by the Bitcoin bulls

I regularly pop on to Philip Clarke’s ABC Nightlife radio show to discuss, and answer questions on, investing and markets. This week, the board lit up with people wanting to ask about the topic du jour – Bitcoin. Is this explosion in interest a signal that Bitcoin is in bubbly territory, or a pointer that it’s here to stay?

Bitcoin has become such a divisive topic. I mentioned on Phil’s program that someone needs to explain to me the process or path Bitcoin (or some other cryptocurrency) follows to become a replacement for fiat money.

Fiat money is currency that is backed by the government that issued it (and its ability to tax its citizens), rather than by a physical commodity, such as gold or silver.

The difference between fiat money and commodity money relates to their intrinsic value. Historically, commodity money has an intrinsic value that is derived from the materials it is made of, such as gold and silver. Fiat money by contrast, has no intrinsic value – it is backed by the promise of a government or central bank. The promise is supported by the ability to tax and the promise is the currency is decreed capable of being exchanged for its value in goods.

Importantly, fiat currencies provide central banks with greater control over its supply and its price, and therefore the ability to manage the economy through monetary policy. A universal currency among all nations, with different strengths and weaknesses, as well as fundamentally different belief and value systems, would make the Euro’s impact on its constituent countries look like child’s play. The unknown consequences would make countries reluctant to support such a step potentially for generations.

Bitcoin supporters, advocates and zealots run a marketing message that runs from “new money for the world” to “money of the internet” and, more recently, to “digital gold” and to a “store of value”. But the arguments are all based on a belief or a faith in a transition to that status. Rarely are the arguments supported by an explanation of the path Bitcoin will take to arrive at that point.

As I mentioned on Phil’s ABC Nightlife program, I will happily add Bitcoin to my family’s investment portfolio if someone can articulate the path bitcoin takes to arriving at a universal reserve currency.  At the moment Bitcoin is still priced in US dollars, not the other way around.

And the reason I require that explanation is because it is one of the main arguments buyers use to justify purchasing Bitcoin.

Today Bitcoin is not a monetary system, even though many hope that it becomes one. Listen carefully to the statements of Bitcoin’s supporters and they are based on faith in an outcome the path of which is unclear if not impossible.

In the interview linked below, journalist Brett Scott, on the right of the screen, does a terrific job of articulating the issues underlying the bulls’ arguments. Meanwhile the Bitcoin bull only demonstrates faith in the outcome without articulating the path to that outcome.

Scott argues that just because an object is rising in price, it doesn’t mean it becomes a monetary system. He describes Bitcoin as a “Money Priced Digital Collectible”, which is certainly not a monetary system.

Scott notes that core to the Bitcoin marketing story is an imagined future point where the price rises and suddenly it “inverts” and everything is priced in Bitcoin. He explains his point by suggesting Bitcoin bulls may as well argue that the rising price and popularity of Apple shares will eventually mean everything is priced in Apple shares even though Apple shares derive their value from fiat money pricing.

While you need to be warned the debate is embedded on a cryptocurrency exchange’s website you can watch the debate here.

Feel free to comment if you can explain in detail the path Bitcoin takes from speculative collectible to world’s reserve currency.

Of course, you don’t need to believe it will become the world’s reserve currency to make money from Bitcoin. But then neither does it matter whether you trade Bitcoin, stamps, collectible cars, art, wine or low digit number plates – you can potentially make money in all of these things.

Click on this link if you’d like to listen to the most recent program.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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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3 Comments

  1. It’s somewhat ironic that those who point to Bitcoin becoming the universal reserve currency continue to measure its price in US dollars.

  2. Richard Deguara
    :

    To understand Bitcoin requires you to go back to the creator’s vision before it became a speculative asset that was traded on exchanges . And to understand this vision one must understand how the monetary system works. The current system of fiat money based on the rising indebtedness of countries with a promise to pay back these loans sometime in the distant future through taxes has deflated the value of sovereign currencies and therefore the wealth of the unsuspecting population. With this indebtedness there must exist an entity that is owed this government debt. This would be the Central banks backed in most cases by foreign countries, wealthy families or individuals. Thus we have a debt based monetary system with widening wealth discrepancy between the ‘haves’ and the ‘have nots’.

    What Bitcoin has created is a monetary system that is independent of the wealth imbalances of the world and attempts to put all humans on an even playing field and create a fairer medium of exchange. In the early days when Bitcoin was worth pennies of fiat currency anyone who believed in the concept of equal distribution of wealth could participate in this new economy. For the first time individuals could freely transact directly with those offering goods and services without going through an intermediary bank which gauged transaction fees which added no real value other than to make the banks and their shareholders wealthy from the work of others, charging hefty fees
    One could argue the value the banks provide is the middleman that validates the legitimacy of transaction. Well the inventor of Bitcoin found a way to solve the double validation problem between two untrusted parties through the use of an open ledger that is validated by a decentralised mechanism that cannot be hacked..

    This brings me to the value of Bitcoin. Rather than looking at it as a speculative asset that people expect to go up in value, one must look at the properties of the Bitcoin monetary system and determine what price the limited supply should be worth if it were to fulfil its promise to become a form of currency used by a world population prepared to embrace the technology. Clearly the more people that believe in Bitcoin the more valuable each coin will become. One could equate this to gold or any other precious metal however these do not have the same utility that Bitcoin provides.
    Eventually, the population of believers will get to a saturation point and therefore the value will find an equilibrium and stabilise. It will no more be a speculative asset but a stable currency. And it will have the added benefit that no bank or country can manipulate it like they do their own currencies and to some extent precious metals. Because no more can be printed the value it has, once stable, will hold its value if not increase in value with the rising population prepared to embrace it as a form of currency.

    Lastly some say that without electrify, Bitcoin is worthless. Well one could say the same thing about the modern economy. Without electricity the world as we know it will be extinct. So the whole world has an incentive to ensure electricity continues to get generated for many centuries to come.

    • I think calling Bitcoin a monetary ‘system’ is where the differences of opinion begin. Sincere thanks for so eloquently and elegantly presenting some of the arguments Richard!

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