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Bitcoin – valid investment or criminally insane?

Bitcoin is the world’s most popular digital currency. Having drawn millions of investors across the world, its value rocketed to nearly US$20,000 at the end of 2017, although its value has since dropped dramatically to c.$7,000 (at the time of writing). 

Bitcoin is the best known of the 1,800-odd cryptocurrencies. Their meteoric rise has drawn many investors, with some believing that the underlying blockchain technology (blockchain is a digital ledger in which transactions made in cryptocurrencies are recorded chronologically and publicly) could become one of the most powerful tools ever given to civilisation. But do investors understand the risks and does the underlying technology even matter?

Where bitcoin ranks on our 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.

 

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.

Photo of Michel Perera

Michel Perera

Chief Investment Officer

Michel is responsible for the investment process at Canaccord Genuity Wealth Management, with a specific focus on asset allocation and stock selection. He also works to maximise the potential of Canaccord Genuity's proprietary and industry-leading stock screening tool, Quest®.

Michel is an experienced investment strategist having spent the past 19 years at JP Morgan Private Bank where he was the Chief Investment Strategist (EMEA) responsible for running investment strategy and overseeing tactical asset allocation decisions for discretionary portfolios within the region.


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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

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