The only thing more debatable than politics is Bitcoin.
Ask Twitterverse if Bitcoin is a smart investment and you’ll get other answers. First, early users love to tell everyone when they first bought (or extracted) Bitcoin. If they bought it before a few minutes ago, they made a fortune.
Then there are the price investors who see Bitcoin as “artificial gold”, as Charlie Munger describes the cryptocurrency. According to him, Bitcoin is nothing more than a “total leaf”.
Instead of looking to convince someone from one point of view or another (although I would never bet against Charlie Munger), here are some questions before you start buying Bitcoin.
Bitcoin is said to be capped at 21 million. Unlike US dollars, which the Treasury can print at will, there is a constant restriction on the amount of Bitcoins that can be mined. Many argue that this strict restriction justifies the price, especially as the government prints more cash in reaction to Covid.
Bitcoin is not the only asset with limits. In 2007, the same argument about land as space costs soared, did not prevent costs from falling, nor did it prevent Bitcoin from collapsing in 2017.
In addition, Litecoin has a limit of 84 million, however, it does not represent only 25% of the value of Bitcoin. As I write those words, Bitcoin is quoted at around $35,000. Litecoin costs less than $165. Si a constant number of Bitcoin makes it so valuable, why does Litecoin fall behind?More fundamentally, if you can calculate a fair cost of Bitcoin based on the limit of $21 million. I can’t, but maybe you can.
Many rely on institutional investors who buy bitcoins to justify their current price. For example, Michael Saylor, founder and CEO of MicroStrategy (NASDAQ: MSTR) bet the company’s long term on Bitcoin. His company even borrowed $650 million in a five-year bonus to sink further into the cryptocurrency.
The query that is made a possible Bitcoin client is: “So what?”Institutional investors make bad investment decisions all the time. The point here is not that corporations like MicroStrategy made a mistake in making an investment in Bitcoin (although I think they did). The fact is that you don’t need to look full of stars when some institutional investors are turning to Bitcoin. In fact, all it has done is increase the value (bad for potential investors). What it won’t do is maintain unarspicable values in the long run.
The government borrows a ton of cash to respond to COVID. While the Treasury printing plant has not (yet) generated significant inflation in goods and services, it has triggered asset costs. It also calls for the long-term price of the fiduciary currency. as many like to describe.
It is true that when interest rates drop, the cost of assets increases, you can even say that we see it with Bitcoin, we see it with the value of inventory. This is an attractive moment with financial policy right now, and we wonder how much our government can borrow without consequences, but how to take this fact and translate it into significant value for Bitcoin or any other cryptocurrency?
Countless other people have been sounding the alarm about financial policy over the decades. Before Bitcoin, this was what gold traders used to sell gold. Insurance corporations use worry to sell annuities. Today, the same argument is used to promote Bitcoin. Not that the underlying concern is misplaced. This is because the concern cannot justify nearly doubling the value of Bitcoin in 30 days.
Some argue that the network effect is driving the value of Bitcoin upwards. Bitcoin, the first cryptocurrency, temporarily followed and, as more and more people buy bitcoins, it becomes more valuable. Litecoin, you haven’t noticed its value soaring.
A potential Bitcoin client deserves to challenge this argument. The network effect is where the usefulness of anything increases as more and more people adopt and use it. This can be applied to messaging apps or social media platforms. But does this apply to Bitcoin?
This may be the case if Bitcoin is used as currency, but it is not. In fact, it is true that as more and more people and establishments buy Bitcoin, the value increases, but does its usefulness increase?Is Bitcoin tuning more useful as more and more people buy it?If so, what exactly is the use you are improving?
Some might argue that it becomes a higher value store. More buyers accumulate Bitcoin liquidity. However, if this is the new definition of network effect, I wonder if it has not lost all its meaning. Either way, this is definitely not the network effect implemented on a social media platform. In addition, the same argument can be made about any asset that enters the bubble territory.
Finally, those who are buying Bitcoin deserve to wonder if they can take over volatility. Actually, there are two problems here.
The first apparent question is whether or not you can take care of volatility Can you keep Bitcoin even if it falls by 50%?This is a vital query for any investment, especially with Bitcoin.
The consultation of the moment is more fundamental: what does volatility in Bitcoin tell us as an asset?While some volatility is expected with any liquid asset, Bitcoin takes volatility to the extreme. Two days ago, it fell 17% below $30,000. exceeds $35,000. This suggests that value can be separated from reality, even for those who think Bitcoin is a smart investment.
If you buy Bitcoin, don’t bet on the farm.
Rob is contributing editor of Forbes Advisor, host of the Financial Freedom Show and Retire Before Mom and Dad – The Simple Numbers Behind a Lifetime of