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 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.