With its breathtaking volatility and blitzkrieg media coverage, Bitcoin has quickened the pulse of many investors over the last few months. After nearly doubling over a period of three weeks between December and early January to more than $40,000 per unit, it then proceeded to lose nearly a quarter of its value just as fast, only to recover all of that lost ground before briefly surging above $50,000 in mid-February on a favorable tweet from none other than Elon Musk, CEO of Tesla. Investors excitedly talk about the limited new supply of Bitcoins, but in reality, the number of new cryptocurrencies seems to have no limit with over 2,000 introduced thus far — about half of them currently holding no value. So, what to make of Bitcoin?
Bitcoin is one of many cryptocurrencies that rely on a relatively new technology known as blockchain. Part of its mass appeal has to do with a variety of factors that underpin most speculative bubbles. To begin with, there is the newfangled underlying database technology upon which Bitcoin is built, as well as reported distrust of government and institutions in large parts of society, enhancing Bitcoin’s appeal among privacy aficionados. Large financial institutions’ willingness to give it a shot lends some credence to its staying power. Although, some Bitcoin owners have pointed to FOMO (the “Fear of Missing Out”), most investors are only buying it because its unit price is going up, not because they believe it’s really worth the current trading value.
In general, the JNBA Investment Committee shares the view of the Securities and Exchange Commission (SEC) that cryptocurrencies such as Bitcoin are not securities. But what about its role as “electronic cash” or “digital gold?” Based on the textbook definition that money is required to serve three primary purposes, including (1) unit of account, (2) medium of exchange, and (3) store of value; we see a few challenges. First, Bitcoin’s ability to serve as a unit of account is hampered by the fact that most goods and services today are priced in dollars. Secondly, the Bitcoin network has capacity constraints in a way that Visa or Mastercard does not, which calls into account its effectiveness as a medium of exchange. Lastly, while it may serve as a store of value over the long haul in a way that gold or real estate currently do, its current volatility challenges that assumption as well.
Only time will tell. However, one thing that will always persist is the difficulty of putting a valuation on Bitcoin because it does not produce any cash flow or have an earnings stream that would allow us to reasonably estimate what it is worth. It is clearly worth what it is in the eye of the beholder and therefore a speculative investment.
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