Regardless of the short-term issues on the resurgence of COVID-19 driven by the Delta variant, lockdowns and restrictions, fully utilised monetary and fiscal policies alongside high inflation, the Australian and Global markets are at all-time highs. The current investment climate overloads investors with an excessive amount of information on traditional assets such as shares and property alongside speculative favourites such as GameStop and Bitcoins. It is easy to lose sight of the fundamentals of investing and below are quotes from the great investors of our generation to keep us in check.

“Never invest in a business you can’t understand.” – Warren Buffett

Many lost a fortune through the Global Financial Crisis (GFC) in investments that were not easy to understand and involved excessive complexity. While there’s likely something in blockchain and digital finance, the same caution applies to cryptocurrencies.

“More money has been lost trying to anticipate and protect from corrections than actually in them.” – Peter Lynch

Preserving capital is important. However, timing the market during and after a correction leads to investor’s becoming so focused on avoiding losses that they miss the initial positive market recovery. We have seen a bit of that ever since share markets bottomed in March 2020, with numerous forecasts for steep falls ever since and yet markets have fallen a few per cent every so often only to resume their rising trend.

“To be an investor you must be a believer in a better tomorrow.” – Benjamin Graham

If you don’t believe the bank will look after your term deposits, that most borrowers will pay back their debts, that most companies will see rising profits over time as the economy grows, that properties will earn rents, etc (and that the world will learn to shake off or live relatively safely with coronavirus) then there is no point investing. This is flippant but true – to be a successful investor you need a favourable view of the future.

“There is no free lunch.” – Anon

If an investment looks too good to be true, it probably is. Focus on investments offering sustainable cash flows (dividends, rents, interest) that don’t rely on excessive gearing or financial engineering.

If you are ever in doubt in the face of volatile market conditions, please contact one of our friendly financial advisers.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

2020 was a rollercoaster ride for investors, as we experienced the most volatile stock market in decades. However, the 30-40% dip experienced by ASX investors in a mere matter of weeks is nothing in comparison to cryptocurrency investors and Bitcoin fanatics who can experience this on a daily basis. Bitcoin has been all over the news recently as it has surpassed the psychologically important level of US$50,000 per coin on the back of Tesla’s $1.5 billion investment. This leaves the question, what exactly is a Bitcoin and can we view it as a valid investment?

What is Bitcoin

Attempting an analogy to explain Bitcoin is no easy task as there is nothing quite like it. Even the best comparisons out there will be imperfect.

Bitcoin is a virtual currency created in 2009 as an alternative to government issued ‘medium of exchange’, which most of us know as physical money. It is designed to hold a similar function as a ‘store of value’ with the closest comparison being gold, this is why many refer to Bitcoin as ‘Digital Gold’. The major difference between Bitcoin, gold and cash is that you cannot hold onto a Bitcoin and you definitely cannot fashion it into a piece of jewellery, it only exists on an electric file. Transactions for Bitcoins are recorded and distributed via a decentralised ledger, which removes the need for government control in the regulation of money supply, and hence Bitcoin is referenced as ‘Decentralised Money.’

Is Bitcoin money?

There are generally three functions of money:

• Money is a store of value: Consider it as a means of saving and allocation of capital. The issue with physical money is that inflation will erode the associated purchasing power over time.
• Money is a unit of account: This allows it to measure value in transactions and facilitates a means of exchange. All financial terms around profits, losses, income, expenses, debt and wealth can be measured against money.
• Money as a means of exchange: Put simply, you can buy things with it and it will be accepted almost anywhere and everywhere. Grocery shopping, buying a home or even lending services are all applicable with a universal understanding and acceptance of money.

Bitcoin has been surging in popularity; however, it is nowhere near being universally accepted as a unit of account or a means of payment. In light of recent events, some countries have even gone so far as to ban it entirely. Quoting billionaire Mark Cuban “Bitcoin would have to be so easy to use it’s a no-brainer. It would have to be completely friction-free and understandable by everybody first. So easy, in fact, that grandma could do it.”

Is Bitcoin like gold?

The common theme around Bitcoin and gold is that they are both speculative in terms of their valuations and are both viewed as a hedge to conventional monies such as the USD. The main reason Bitcoin is more closely aligned to gold as opposed to shares is that cash flow, revenue, earnings, interest payments or dividends do not determine the prices of these instruments. They are only worth as much as people are willing to pay for them as an alternative asset and as a ‘store of value’.

Bitcoin specifics

• Bitcoin is a cryptocurrency; however, it is only one of the many thousands of cryptocurrencies available on the digital market.
• A cryptocurrency is held electronically and can be used to buy goods and services online.
• Cryptocurrencies are powered by Blockchain, which is a decentralised technology that manages and records transactions spread across many computers.
• Bitcoin is not dependant on central banks or governments in control of the money supply. It also does not flow through the traditional banking system.

To put it simply, regular people like you and I can contribute to the record-keeping of Bitcoin transactions via our private computers, however in reality, it is not that simple. The key takeaway is that Bitcoin is decentralised which removes the need for central banks (such as the Reserve Bank of Australia) and retail banks (such as our Big 4, CBA, WBC, ANZ & NAB). For those with little faith in government regulation and a heavy distrust in our banking system, this is Bitcoins greatest appeal yet this same definition around unregulated monies is also why so many stay far away from the digital asset.

In summary, we are not able to conclude whether Bitcoin can be viewed as a valid investment. It is somewhat similar to money, somewhat similar to gold and the price volatility of late bears similarity to an extremely volatile stock market. What we can agree on is that the digital asset cannot be ignored, with over $1.5 Trillion in cryptocurrency assets, it will be interesting to see if Bitcoin is still around at the end of the decade.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. Bitcoin is not on The Investment Collective’s Approved Products List and will not form part of any client portfolios. If you would like more tailored advice, please contact us today.

I’ve known ‘Joe’ for about a year. He’s a barista at one of my favourite local coffee shops. Most mornings our conversation doesn’t progress past the weather. However, last week, as he’s handing me my extra-shot cappuccino, Joe suddenly asks me, ‘Robert, I want to invest in Bitcoin. My mate bought some last year and quadrupled his money. What do you think, good idea?’
‘Joe’ I said, ‘Buy it if you want mate, but don’t call it an investment. Call it what it is, a punt.’

Bitcoin is like the money in your wallet, except it’s digital. It’s ‘digital money’. Encryption techniques are used to regulate the generation of new units as well as verify transactions. Nobody controls it and nobody’s responsible for it.

Now, although I don’t really understand how Bitcoin works, I’m pretty sure that at some point in the future, we’ll all be using some form of ‘digital money’ to buy things. However, I don’t know whether that digital money will be Bitcoin or something else.

But here’s what I do know. When my barista starts asking me about buying Bitcoin as an investment, red flags start going off in the back of my head.

The price of this ‘investment’ has just exploded over the last few months, as Joe’s mate and thousands of others like him, started buying Bitcoin aided by the numerous means by which they can now do so. And of course, the mainstream and social media are now awash with reports of how individuals have struck it rich trading Bitcoin. Meanwhile, all this excitement is being fanned by ‘market analysts’ predicting that having just breached the $20,000 valuation, Bitcoin is on its way to $1 million by 2020.

I also know that the associated volatility in price of these ‘digital currencies’ is simply stomach churning. For Joe and his mates, that’s perhaps exactly what they’re seeking; an ‘investment’ that will pay off big time within a short time. They don’t know how it works, and probably care less. They’re not interested in a steady, reliable income stream over the longer term. Everyone else seems to making big money, and they just want in on that action.

So, what do I know? It sounds like a punt, and if that’s your thing, good luck! Just don’t call it an investment.