Bitcoin: Stay Away From It In 2023
- December 13, 2022
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Bitcoin (BTC-USD) has no intrinsic value, in my view. That is the main point why I would not recommend buying it as a long-term investment. Although it is an interesting speculative instrument, I believe its real value is zero and it is therefore not worth buying for conservative investors. It can go up tenfold but then fall down to Earth. If you are considering buying BTC at a discount thanks to a massive correction, I would not personally recommend it. But let me explain my thesis in some more detail.
Bitcoin as an investment – difference from other asset classes
You might argue, indeed, that Bitcoin is not different from other asset classes. After all, everyone is buying BTC, even conservative pension funds do. The worse it is for them since they risk their clients’ money.
But after all, there is a risk to every investment and it is sometimes impossible to accurately predict what return a particular investment will generate. Let me consider other asset classes. Take the housing market. You are about to buy an apartment and you do not know exactly where the housing market will go next year. You take a loan to finance at least a part of your apartment buy. But you can use that apartment to live in or you can buy it to let. In the first case, it will serve yourself or your family. In the second case, you will end up getting a fixed income. An apartment is also tangible. In other words, you see what you buy, which is not the case with Bitcoin. Moreover, the housing market may collapse, and occasionally there are bubbles. Just think of the 2008-2009 collapse. However, unless there is a war or a natural disaster, your apartment’s value won’t fall to zero, regardless of how bad the crisis is. The value of Bitcoin, in contrast, can fall to zero.
Last month, for example, the second-largest crypto exchange FTX (FTT-USD) filed for bankruptcy last month. Many cryptocurrencies fall to zero. For example, Luna’s (LUNC-USD) value fell to zero and was therefore delisted from Binance (BNB-USD). You might argue that it won’t happen to Bitcoin since it is a highly liquid cryptocurrency. It may not happen, of course. But there are enough risks BTC may fail the way some of its fellow cryptocurrencies did.
An investment should also have intrinsic value. There is a market value to any asset, in other words, the price the buyer is willing to pay and the seller is willing to sell their asset for. However, besides that, an asset also has a true value it is really worth. Let us also take a construction company. It generates net cash flows and has some net assets (asset – liabilities) on its balance sheet. You can determine the company’s intrinsic value by estimating its NPV (Net Present Value of its future net cash flows) or simply taking its net asset or book value. The company also does business, and has a reputation and a future. True, there is a possibility its financial reports may turn out to be inaccurate. Remember the Enron case. Something also can go wrong, for example, a recession might happen. But normally you know what you pay for. Bitcoin in turn has no financials at all. It does not own any assets. When you buy it, you buy unaudited and unverifiable electronic entries. Not to mention that, unlike bonds and stocks, cryptocurrencies don’t generate any passive income whatsoever.
You might also like to compare Bitcoin to gold, at least many media persons do. But, in my opinion, this is incorrect. I agree with the thesis that fiat money keeps losing value at a fast enough pace. Most of this actually happened due to central banks’ attempts to support their economies during the COVID-19 lockdowns. But gold has been existing for thousands of years as both a store of value and a medium of exchange. Crypto technologies in turn are very new. Gold can also be used as a commodity. It is still used in producing appliances but most importantly jewelry. Central banks also hold physical gold bars as their strategic reserves. Holding Bitcoins instead would have been easier and less costly but they don’t do this. Instead, they have recently been buying more gold. So, gold and cryptocurrencies are different stories.
Now let us consider the future of Bitcoin as money.
BTC and functions of money
Many analysts say that Bitcoin can effectively be used as money.
But here are the functions of money:
- It is a medium of exchange – in other words, it has to be accepted in exchange for goods and services.
- It is a store of value – we save it to use later.
- Unit of account – we use it to measure value in economic transactions.
Very well. But which one of these functions does Bitcoin or any other cryptocurrency perform?
To start with, we cannot use Bitcoin as a proper store of value. Why is that? Because its price is highly volatile. Let us have a look at the diagram below. It shows BTC’s three-year price history.
In the spring of this year, Bitcoin’s price was lingering around the $45,000 mark. Now it is somewhat more than $15,000. It took just about 6 months for this cryptocurrency to lose two-thirds of its value. So, it is very unreliable to keep your savings in BTC to later buy, a car or a house, for example. For this very reason I believe BTC cannot be used as a unit of account. It is very hard to put a price tag of 3 BTC on your car, for instance. It is possible, of course, but in that case your car would be worth $45,000 ($15,000 per BTC) today but $15,000 or, say, $150,000 tomorrow since Bitcoin is quite volatile unlike fiat money. It could, in fact, be used as a medium of exchange but not everyone would accept BTC as a payment for goods or services due to Bitcoin’s very high volatility. Also, in some countries there are rigid rules and regulations aimed at controlling cryptocurrencies. That is because cryptocurrencies are sometimes used in shadowy transactions. Bank transfers are very easy to monitor unlike crypto payments. But I will touch this subject later on.
You might be thinking that I am absolutely sure the BTC would collapse in value in 2023. I do in fact accept the possibility it may not happen. One of the possible reasons for Bitcoin’s COVID-19 price surge was the Fed’s and many other central banks’ endless money printing. Many financial institutions and private individuals were therefore left with plenty of idle cash they wanted to invest. Some of them decided to buy cryptocurrencies in order to “hedge” money from inflation. So, if the Fed eases its monetary policies, BTC might surge again.
There is a feature of BTC that is somewhat in favor of it: namely its limited supply. Technically, only 21 million Bitcoins can be mined. However, in my view, this on its own does not make BTC a valuable investment with high intrinsic value.
Another factor that can make the BTC appreciate is its legalization. For example, earlier on there were rumors a new cryptocurrency would be created in Ecuador and backed by gold to facilitate transactions across the country. The idea was not realized, however. But there is a possibility some countries might issue more lenient laws regulating Bitcoin. Some developing countries, especially the ones struggling with hyperinflation, might even legalize BTC as an alternative currency. If that happens, Bitcoin will be here to gain. However, this is highly uncertain and even unlikely. After all, many governments worry about the anonymity characteristic of BTC transactions. So, in fact it is likely many new stricter regulations will be passed in the field.
As I have mentioned before, I believe Bitcoin has no intrinsic value. So, it is hard to estimate its real value the way we can do it for stocks and even ETFs. However, we can have a closer look at this cryptocurrency’s price history.
Here is Bitcoin’s 10-year price history graph above. It is, indeed, very volatile. It surged tremendously in 2020 but now it is trading down substantially.
As the diagram above suggests, Bitcoin is down 75% from its all-time highs.
Concurrently, if one had invested $10,000 10 years ago, one would have ended up with almost $294,000 now. I know how attractive this sounds. But it could well be that the bubble is bursting right now.
In 2020 I wrote an article about investing in Bitcoin when the price of that cryptocurrency was surging and said it was not a good idea. But we can actually compare the “cryptomania” to other historical asset bubbles. I am sure everyone heard of the tulipmania happening in the Netherlands in the 17th century, the South Sea bubble and of course the Dot.com bubble in the 2000s. There are many more examples of this. But they all show that a “trendy” asset class is only worth as much as the market is willing to pay for it. Trendy assets are not normally worth much at all but due to many investors’ enthusiasm, their prices kept surging. Asset bubbles end quite bad. A similar situation seems to be happening now.
Don’t get me wrong. I appreciate crypto technologies have a future. But I do not like the idea of buying any cryptocurrency, Bitcoin included. There is a possibility it would soar to all-time highs. But eventually, in my view, it should reach its intrinsic value, zero. There is too much volatility and too much uncertainty. But it is an interesting speculative asset, by all means. If you hold Bitcoins and they have lost some of their value, you might be lucky next year if they surge. This could happen if the Fed gets more dovish. But I do not recommend buying BTC to conservative investors just because it is off its highs.
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