Bitcoin: sound investment or blockchain reaction?
The cryptocurrency frenzy seems to brush aside an old investing rule: know what you’re getting into.
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 US$51,750 ($66,440); 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 per cent.
To return to the Buffett advice, among the ironies of cryptocurrency is that any discussion of it typically stalls when it comes to explaining it. Let’s face it, the name doesn’t immediately suggest “public ledger”—the roundabout definition that is usually floated. To that end, a colleague this week offered a useful comparison, which expands on the ledger analogy, but sets it more specifically in the context of the prison system, which is much more fun and thus understandable. It goes like this:
“Prisoners need a proxy for currency as they are not allowed to possess cash. So how do they ‘pay’ for laundry service, hygiene products, protection, a haircut, a book, chocolate or even alcohol? The medium of exchange must be durable, uniform and have a wide acceptance. That is how instant noodles and canned fish became prison currency. But cigarettes are top of the pecking order.
“Notebooks are kept. Prisoner X will note down how many cigarettes he owes Prisoner Y, and Prisoner Y will make note of what Prisoner X owes him. That book documents all the transactions. To prevent fake entries, a third individual is selected as a witness. He signs the entry made in the books of Prisoner X and Prisoner Y. Cigarettes or instant noodles or canned fish are Bitcoin. Notebooks are ledgers. The similar format in the notebooks is blockchain.”
To that definition we should probably add the thoughts of crypto bear Nouriel Roubini, who this week produced one of his better lines when he said the “Flintstones had a better monetary system than Bitcoin.” “Fundamentally, Bitcoin is not a currency,” the economics professor known as “Dr Doom” 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 that you understand cryptocurrency, there are more pressing questions to write on your Buffett pad. Such as, when will you sell? Or will you trim and buy again? Perhaps there is no strategy because as the AFR’s Tom Richardson suggested this week, there is no alternative. “If risk-free returns on cash were closer to 5 or 6 per cent globally,” Richardson argues, “there’s little doubt Bitcoin would still be a fringe asset widely regarded as worthless by amateurs and professionals alike.”
American economics professor Nouriel Roubini is scathing about Bitcoin and other cryptocurrencies. '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'
MORE ON THIS TOPIC: Morningstar’s Bitcoin webinar
In Firstlinks this week, Graham Hand argues that the price of money is only half the problem for investors who want a safe deposit haven. “The Reserve Bank of Australia is pumping so much cash into the system that banks do not need customer deposits,” Hand writes.
Only about 20 per cent of Australians have a financial adviser, yet almost everyone heading for retirement would benefit from professional advice. Hand also hears from Tim Fuller, head of advice at Nucleus Wealth, who outlines the steps to expect in the advice process to encourage a few more people to make a call.
Elsewhere, the Ark Innovation Fund has been ultra-popular and for good reason when you look at the returns it’s had by investing in stocks such as Tesla, Shopify and Spotify. Amy Arnott runs the fund through Morningstar’s Global Risk Model and finds a few areas of concern.
There were a few surprises in wide-moat Berkshire Hathaway's fourth-quarter. Greggory Warren examines its decision to buy into oil company Chevron and phone company Verizon and why the Buffett-led fund trimmed its Apple exposure.
Morningstar's Brian Han weighs up News Corp's deal with Google and discusses the effect of Facebook's decision to block content from Australian media outlets.
We examine the ETF revolution. Eventually, exchange-traded funds will eclipse managed funds and become the industry standard, writes John Rekenthaler. While Emma Rapaport considers what active ETF managers have to do to capitalise on the trend.
Rekenthaler has also drawn up an invaluable Wall Street Checklist, which covers the fees, costs and complexities you need to know before you hand over your money.
Morningstar’s head of economic research Preston Caldwell offers seven reasons why the US economy is set for take-off. Households and businesses are in good shape and vaccine-driven herd immunity will propel growth, Caldwell writes.
Have you seen any self-driving cars on the road lately? 2020 was meant be the year, wasn’t it? We look at why this trend is still in the garage.
Local takeover activity is building. Nicki Bourlioufas outlines what to watch as subdued economic growth, a squeeze on profits and the low cost of capital boost the chances of more tie-ups.
The transition from hope to growth is afoot, argues Hamish Tadgell of SG Hiscock, who explains the portfolio changes he’s made in a bid to capitalise on the shift.
Prashant Mehra takes a comprehensive look at another crucial week in company reporting.
And finally, in Your Money Weekly, Peter Warnes argues that while stimulus and lower operating expenses have been a shot in the arm for company earnings, investors should brace for what happens when they wear off. “Some pandemic-related costs will become a permanent feature of the overall cost structure,” Warnes writes.
Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.