Bitcoin just made history.
According to CoinDesk, the world’s most-valuable virtual currency is up around 12% to a price of over U$21,000, hitting a new high.
The digital currency’s market capitalisation of US$404 billion is almost 4x higher than the market capitalisations of the three Singapore-listed 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 has a total market capitalisation of around US$111 billion now.
With even tech companies like Square and MicroStrategy buying bitcoin, should you jump on the bandwagon too?
Bitcoin, 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
Hard to Value
“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.”
In comparison, when we buy businesses listed on the stock market, we are able to value it by looking at the company’s earnings or dividends and determine whether it makes sense to pay for the company’s share price.
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$56.8 million in 2015 to S$75.8 million in 2019. Likewise, its free cash flow climbed from S$43.1 million to S$63.7 million during the same period.
To determine if Sheng Siong is a great buy at its current share price of S$1.54, 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?
Having said that, if we still wish to put some money into cryptocurrencies, we should practice position sizing to control risks since every investment or trading opportunity has its downsides.
What this means is that we should not go all-in on bitcoin but should only use a small percentage of our overall portfolio to buy cryptocurrencies.
Buyers should also note that bitcoin has been on a volatile ride, falling to below US$4,000 at the end of 2018 after rising to over US$16,000 just a year prior, a then-record high. A similar trend could happen going forward.
Let’s end off with a lengthy-but-worthy quote by Warren Buffett, which applies to bitcoin 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.”
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Disclaimer: 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 investing in any stock. The writer may have a vested interest in the companies mentioned.