John Rekenthaler, vice president of research at Morningstar, two years ago stated that bitcoin became desirable because people wished to buy it, and even more desirable when its price soared. The popular basis for owning cryptocurrency has been, quite simply, because today's quotes will be higher tomorrow.
Which brings me to the question, when people buy bitcoin, do they have a sell thesis in place? This is best explained by someone who has walked this path.
Lex Hall, senior editor at Morningstar Australia, shares the dilemma he faces.
One of Warren Buffett’s most famous pieces of investing advice is devilishly simple. Before you put your money into that company you had your eye on, take out a note pad, preferably yellow, and write down the reasons for investing in it.
I wonder how many Bitcoin holders have conducted this exercise. I know I didn’t.
What about you? Did you buy Bitcoin because you had an unshakeable confidence in blockchain technology? Maybe, instead of Bitcoin, you opted for an “altcoin”, like say, Polkadot, and on your pad wrote, “I’m investing in Polkadot because of the heterogeneous multi-chain interchange and translation architecture which enables customised side-chains to connect with public blockchains”.
Or like mine, did your pad simply read, “I’m investing in [insert crypto] because, well, everyone else is.”
When I bought Bitcoin in December 2017 it was priced at about $25,000 and climbing. But no sooner had I pressed “buy” on my crypto app than it crashed. People laughed; so did I. After all, I’d had a nagging feeling that all it would take to plummet was for another mug like me to buy in. Funnily enough, I still have my 0.0352 portion of a Bitcoin. Fear not, I held on, if you can call it that, not out of courage, but because the only way was up, right?
Many share that optimism, judging by the record Bitcoin hit this week. At the time of writing, it was more than USD 51,750; and TradingView, a network of traders and investors, reports that Bitcoin was the most popular asset among Australians on the platform in January this year. Between July 2020 and January 2021, the volume of unique searches for cryptocurrencies on TradingView grew from 17,044 to 39,477—a rise of 132%.
It's only fair to add the thoughts of crypto bear Nouriel Roubini, who produced one of his better lines when he said the “Flintstones had a better monetary system than Bitcoin.” “Fundamentally, Bitcoin is not a currency,” he told Bloomberg. “It’s not a unit of account, it’s not a scalable means of payment, and it’s not a stable store of value. Calling them cryptocurrencies is a misnomer, they’re not even assets.”
Now I am facing questions such as, should I sell? Should I trim and buy again? Perhaps there is no strategy because as the AFR’s Tom Richardson suggested last week, there is no alternative: “If risk-free returns on cash were closer to 5-6% globally, there’s little doubt Bitcoin would still be a fringe asset widely regarded as worthless by amateurs and professionals alike.”
Lesson to be learnt from Lex’s experience: Always have a clear reason why you are buying, and a clear sell scenario.
Here is some additional reading material.
What is bitcoin?
February 2021: Attempting an analogy to explain bitcoin is precarious because there’s nothing quite like it. Even the best of them will be imperfect.
Does your portfolio need bitcoin?
February 2021: Amy Arnott, portfolio strategist for Morningstar, looks at the arguments in favour of bitcoin as an investment, and shares the reasons she continues to be skeptical.
Cryptocurrency: The good, the bad, the ugly
August 2020: Way back in 2014, Michael Falk Way was skeptical, not cynical. Six years later, he remains skeptical with a cynical bias. Here he explains what he sees as the good, the bad, and the ugly across the cryptocurrency landscape. (As far as blockchain goes, he has only optimism.)
Cryptocurrencies and Bullion
April 2019: This article tackles just one angle: the similarity between cryptocurrency and bullion. Both would behave differently from both stocks and bonds, thereby delivering diversification, and are far easier to trade than most tangible assets such as antiques or collectibles.
Are cryptocurrencies a good investment?
March 2019: John Making the investment case for cryptocurrencies is as hazardous as doing so for gold. Bitcoin became desirable because people wished to buy it, and even more desirable when its price soared. The popular basis for owning cryptocurrency has been, quite simply, because today's quotes will be higher tomorrow.
