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Whilst value investing does have its limitations, find out why we adhere to it: Bitcoin has enjoyed an extraordinary surge in both value and public attention recently.
The chart below maps the rise in the price of a Bitcoin in USD over the last few years, and a similar chart could probably be plotted for the number of column inches, the number of internet searches and the number of experts confidently proclaiming it to be either a speculative bubble, or the gold of the future. The strong divergence of views is a particularly interesting feature of Bitcoin.
Most commentators seem to fall firmly into one of the two main camps: In this regard, better analogues can probably be found in currencies or gold, which derive their value from utility rather than from cashflows. Thought about in these terms, Bitcoin is a fascinating phenomenon, whose value is probably a function of the extent to which it is — or becomes — widely trusted and used as a unit of exchange.
We can set out a simple framework that contemplates two extreme scenarios: This is the aggregate value we might expect Bitcoin to represent in a world where it becomes a legitimate alternative to US dollars or gold. There are currently around If you believe that the likelihood of this scenario emerging over time is greater than 10 per cent, you may well be justified in buying Bitcoin at the current price. Estimating that probability is obviously not a straightforward exercise, but we can list some of the considerations that might be taken into account in arriving at an estimate.
On the positive side we have:. There are many other considerations to take into account, as well as some Bitcoin myths that may need to be dispelled over time, but to my mind these are some of the more important issues.
There is clearly a good chance that Bitcoin implodes and that should tell you something about how much exposure you want to have , but there is also some probability that it has a bright future, and that probability may well be enough to make sense of the current price. If the end-point is a reasonably significant valuation, and the starting point is close to zero, then getting from the starting point to the end-point will naturally involve some eye-watering growth and extreme volatility.
Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. 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. Herman January 17, at 1: The number of 1. The can be explained in the below wikipedia link. To give you an indication — the number you quoted for USD would imply that per capita the average aggregate amount of USD held per citizen is dollars which is obviously not the case. That would be like me taking average of the market cap of BOQ and the earnings of commbank to get the market cap of Bendigo Bank.
Ultimately, whether it is AUD, USD, gold or bitcoin, all currencies are worth as much as what people are willing to transact them for. Luke January 9, at This throws up a very interesting scenario and a wildly different valuation. Sergey Golovin January 9, at If there are so many different cryptocurrencies available then some of them will end up on exchanges, like NASDAQ, or others, etc, and some will stay in shadows, or they will become exchanges in their own right.
If that is the case than how one could determine the quality of the exchange the house and transaction the deal , meaning how can one guaranty that exchange of products or services for the currency will be completed to the satisfaction of the participants?
Yes I hear that superior quality it is built into the software itself, but who controls the software? And what stops them to tweak that software? McAfee on Youtube talking to bunch of developers during presentation and trying to point out to them that during his simple transfers from one cryptocurrency to the next he was losing thousands of dollars because the complexity of the transactions and poor security of the systems. Say when he transfers from Bitcoin to Ethereum, etc.
So if that is the case, that dubious quality and poor security is still present, will there be system of ranking which will determine which exchange or currency is of a better quality?
Very much same as Skaffold does with stocks? Luke January 9, at 9: Surely the biggest treat to the value of a Bitcoin and any other crypto-currency are the growing plethora of crypto currencies? What is to stop the world being flooded with crypto-currencies to the point where they are all worth nothing? I am definitely in the bubble camp and think it is even worse than Tulips which at least had to be grown which takes time, the rate at which crypto-currencies can be created and none of which are government backed is limited only by the number of people coding them.
Chris December 18, at 8: Speculating on this, a few people have made a lot, most will make some but many will lose even more. Simon oaten December 18, at 8: I see it as a bubble or option value increasing re currencies????
Adrian December 18, at She described her success as phenomenal and Bitcoin as the way of the future. Justin Smith December 17, at 7: Punter December 16, at Even if prices moderate for a time, this will cause investors to sell, therefore becoming inflationary, e. Richard Whan December 15, at Jaco December 15, at 5: There are over cryptocurrencies in the world — it looks like any one can start its own cryptocurrencies many times over. Why use some one else bitcoin when you can start your own?
Paul Audcent December 15, at It seems to me that the whole business is built on greed. Wonder who started this whole fairy tale? My hope is Tim our funds are kept well away, your essay was very instructive. Thank you for that. Paul December 15, at 9: Tim Kelley December 15, at 9: A valid question, Paul. There are a couple of things that make tulip bulbs an unlikely choice as a store of value, including that they can be grown from tulip seeds, and have a finite life.
In contrast, BTC supply is limited and it lasts indefinitely; virtues that it shares with other stores of value like gold. Also, a fun fact: Having said that, bubbles certainly have arisen from time to time, and it is entirely possible that with the benfit of hindsight BTC will come to be counted among them.
Paul December 15, at 8: I dont know about anyone else but I AM firmly in the hold camp. Long term the potential is as good as any new social media stock, short term there are alarm bells of excesses in the market with hundreds of thousands of mums and dads buying in not understanding what cryptocurrency is or what its for. Fundamentally I view bitcoin as digital gold and the first digital commodity. The bitcoin network is fundamentally a settlement system not a payment system.
This can end up using x more energy than a regular credit card swipe. So what the engineers are doing are building payment systems on top where they bundle s of real world transactions into 1 and settle them on the blockchain see: Lightning Network, or payment services like Bitpay. What this means is that, when youre talking about slow confirmation times, youre better off comparing bitcoin to wire transfers and other high value transactions that can take days or weeks to settle, whereas bitcoin takes minutes.
The Quantum computing threat has been discussed to death by bitcoin developers over the past 6 years. It will require a system upgrade but wont nearly be the threat people are screaming about. Some discussion here https: The launch of Bitcoin futures this week is a strong signal that other hedging instruments will come in, and a Bitcoin ETF is inevitable.
Otherwise I think this article is pretty well balanced, much better than the majority of financial commentary out there. Notify me of followup comments via e-mail. You can also subscribe without commenting. Both existing and new subscribers can sign-in with Facebook. Click the button above and you will be prompted to link your existing subscription or create a new subscriber if you are a new to our site.
Is Bitcoin a rational investment? You are reading an article about: Editor's Pick , Foreign Currency. You have to be very careful when you talk about the aggregate value of major currencies. Thanks Tim good article. Question or two I have are somewhat broad I guess — 1. Paul, I take a counter-view: Roulette wheels are also asymmetric in the context of your description. Post your comments Cancel reply Your name: You don't seem to be a member of the community.
Active fund managers, especially value investors, are risk managers. Risk managers are always prioritising risk minimisation and particularly the risk of permanent capital impairment. With our investment process prioritising capital preservation, Montgomery has held a large proportion of cash through and