Should You Invest In Bitcoins?
 
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Should You Invest In Bitcoins?

Sudhan P
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On Dec 7 2017, the price of bitcoin was US$14,038.97.

The digital currency’s market capitalisation stood at some US$235 billion on that day, much higher than the market capitalisations of the three Singapore banks – DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) – combined. The banking trio had a total market capitalisation of around US$116 billion then. 

Fast forward to around two years later, the market capitalisations of the Singapore banks are around the same right now, even after considering the scares surrounding the economy in general.

But…

Bitcoin’s price has plunged around 34% from its peak price and is going at approximately US$9,202.

Bitcoin price 4 Nov 2019 - US$9202
Source: CoinDesk

With such a huge fall in the bitcoin price, is it an opportunity for people to swoop in on Bitcoins now?

Bitcoins, Yay Or Nay?

Well, before that, let’s look at quotes by well-regarded proponents of bitcoin:

“Bitcoin is a technological tour de force.” – Bill Gates, co-founder of Microsoft

”[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.” – Nassim Taleb, statistician and author of The Black Swan

“It is not a speculative investment even though it is being used as such by other people. As Bitcoin network grows the value of Bitcoin grows. As people move into Bitcoin for payments and receipts they stop using US Dollars, Euros and Chinese Yuan which in the long-term devalues these currencies.” – Eric Schmidt, former executive chairman of Google

And here are the critics of Bitcoin:

“You can’t value bitcoin because it’s not a value-producing asset … it’s a real bubble in that sort of thing.” – Warren Buffett, one of the world’s most successful investors

“[Bitcoin] is the mother of all bubbles and is also the biggest bubble in human history if you compare it to, say, the Mississippi bubble or the tech bubble or tulip mania or South Sea Bubble … [T]he fundamental value of Bitcoin is zero.” Nouriel Roubini, an economist who predicted the housing bubble crash of 2007-2008

“Blockchain technology could change our world more than people imagine … Bitcoin, however, could be a bubble.” Jack Ma, founder and chairman of Alibaba Group

Hard To Value

In my opinion, bitcoin is not an investment, but a speculative instrument. Benjamin Graham, often touted as the father of value investing, once defined speculation as:

“Speculative operations are all concerned with changes in price. In some cases the emphasis is on price changes alone, and in other cases the emphasis is on changes in value which are expected to give rise to changes in price. I think that is a rather important classification of speculative operations.”

The monetary value assigned to a cryptocurrency depends entirely on the ability to sell it to another person at a higher price in the future, much like a greater fool theory.

In comparison, when we invest in stocks, we are able to value it by looking at the company’s earnings or dividends, and determining whether it makes sense to pay the market price for the company.

In other words, what we are essentially doing is finding out a company’s current worth given a stream of cash flow. Using that stream, we are able to value the company and come to a rational decision on whether to invest in it.

Let’s take the supermarket chain, Sheng Siong Group Ltd (SGX: OV8), as an example. The company’s net profit grew from S$47.6 million in 2014 to S$70.5 million in 2018. Likewise, its cash flow from operations climbed from S$71.7 million to S$92.2 million during the same period. To determine if Sheng Siong is a great buy at its current share price of S$1.19, we can discount the sum of its future earnings or cash flow to the present value by using a specified rate of return.

Still Want In

If you still wish to put some money into cryptocurrencies, you should practice position sizing to control risks.

We should not go all-in into Bitcoins but should only use a small percentage of our portfolios to buy cryptocurrencies. Even the world’s best investment has its risks.

We discussed a bit on cryptocurrencies and managing risks in our radio interview with MONEY FM 89.3’s Michelle Martin recently. You can check it out here.

Let me end off with a lengthy-but-worthy quote by Warren Buffett, which applies to bitcoins as well (emphases are mine):

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities … will eventually bring on pumpkins and mice.

But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

Want More In-Depth Analysis And Discussion?

Why not check out Seedly’s QnA and participate in the lively discussion surrounding investments.

The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before getting into any investment. The writer may have a vested interest in some of the companies mentioned.

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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