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Bitcoin - valid investment or criminally insane?


24. May 2018

Canaccord Genuity Wealth Management a well respected discretionary fund manager based in London discuss below where Bitcoin sits within their criteria for a valid investment.

"To us, any suitable investment requires a valuation methodology, safe custody and easy transferability. Bitcoin fails to meet these tests."

1. Valuation

Bitcoin has no proper valuation method or underlying value.

This is unlike equities which can be valued by their earnings or cash flow, bonds by yield, property by rental income and location and commodities by their industrial usage.

There may be scarcity, because only a limited number of bitcoins is produced, but scarcity does not create value unless the product has an economic purpose.

Should bitcoin be worth US$10,000, US$100, US$1m or 10 cents?

There is no measurement to help you make that decision.

2. Safety

Other investments have custodians, registries, etc. to protect investors.

With bitcoin there is no central financial or other authority such as a bank or government.

One astonishing statistic is that so far, 14% of bitcoin has been stolen or lost.

The private keys and digital wallets are inherently vulnerable and intermediaries charge enormous amounts to deal with that basic safety issue.

3. Transferability

It takes a long time and huge efforts to buy or sell (particularly to sell) bitcoin.

‘Mining’ – where bitcoin transactions are digitally verified and added to the public ‘blockchain’ ledger – is highly time-consuming, whereas equities and bonds can be sold in a fraction of a second.

To top it all …

Many governments, including South Korea, China and France, are now clamping down on cryptocurrencies such as bitcoin.

Bank of England Governor Mark Carney warned about a regulatory crackdown.

The list will get longer.

No wonder: a high percentage of bitcoin is in the hands of criminals, money launderers, malware producers and rogue governments.

Indeed, in an effort to stabilise its economic crisis, Venezuela is issuing its own national cryptocurrency, the petro, in an ICO (initial coin offering – there is one ICO a week these days).

It is claimed to be backed by the country’s oil, despite the country no longer producing or selling its oil effectively.

Finally, although cryptocurrencies seem to move up and down with risk appetite, their price graphs make the 17th-century tulip craze look like a triple-A rated government bond.

More importantly, out of 1,800 outstanding cryptos plus any future ICOs, are you confident you could pick the survivor ?

Blockchain may well be one of the technologies of the future (although it scores poorly environmentally, given the huge electricity consumption required for ‘mining’) but this alone doesn’t warrant investing in bitcoin or other cryptos for that matter and there are countless other reasons not to.

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