Duncan Glassey: Bitcoin and Bandwagons
In the past few months, it might appear, at least to some, that making money in markets is easy – just buy Tesla or Bitcoin and you are sure to double your money! That is to confuse gambling with investing, and these are certainly not recommendations by the way, writes Wealthflow’s Duncan Glassey.
Bitcoin – boom, bubble or bust?
In October 2008, a mysterious white paper was published by an unknown author titled “Bitcoin: A Peer-to-Peer Electronic Cash System” and the world had been introduced to its first ‘cryptocurrency’. Driven by blockchain technology, the main attraction compared to traditional currency was clear – Bitcoin provides a decentralised way for two parties to exchange value. In other words, Bitcoin has no need for a governing body, no central bank and is merely a digital ledger that facilitates and records transactions. Without getting too granular about how exactly this works, the complicated mathematical procedures in place make falsifying Bitcoin transactions unlikely with today’s technology (although never say never!).
Twelve years down the line the cryptocurrency space has seen thousands of alternatives, or ‘altcoins’, come to market, all of which attempt to improve upon the blueprint pioneered by Bitcoin. One challenge is scalability – Bitcoin can handle a paltry 350,000 daily transactions compared with VISA who executed ≈500m per day in 2019. Furthermore, in a society that is ever more focused on sustainability, a currency that requires enormous warehouses full of energy-hungry computer equipment to keep it going, feels like a square peg in a round hole. A useful tool built by the University of Cambridge estimates that the Bitcoin network currently consumes around 110 TWh of energy per year, roughly the same as the Netherlands!
Despite the implementation issues, the value of Bitcoin – and many of the ‘altcoins’ mentioned previously – have skyrocketed of late leading to a lot of excitement for investors (or rather gamblers). The only thing we know for certain about investing in cryptocurrency is that it is highly speculative. The extraordinary volatility of most ‘coins’ makes them an unreliable store of value. Going to sleep and waking up 10 per cent richer (or poorer) is commonplace. Furthermore, Bitcoin is not a capital asset – it does not pay dividends, nor does it have a positive expected return. Positive outcomes are simply the result of demand outstripping supply, although investors are quick to forget that the future expectation of demand is already factored into the current price. There are 18.6 million Bitcoins in existence, yet recently the sale of 150 Bitcoins resulted in a price drop of 10 per cent demonstrating no depth or liquidity to the Bitcoin market.
It is possible that we may one day transition to a world where cryptocurrency is adopted by the masses. Who knows if that is even remotely likely, and better yet who knows which cryptocurrency will be the one that ticks all the boxes? As an investment today, cryptocurrency plays no role in portfolios and any investor (gambler) should be willing to accept a maximum loss of 100 per cent.
GameStop – Reddit vs Wall Street
This is another example of gambling masquerading as investing. In what is a fast-moving situation, a group of amateur investors using discussion website Reddit as a platform, have banded together to take on the professional hedge fund space in the US. The group has focused their conversation on a few stocks of late, the most recent of which is an American consumer electronics firm, GameStop. On the one side we have the hedge fund managers, who are engaged in a process known as ‘shorting’, essentially betting that the share price of GameStop will go down over time. A successful short involves…
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