Should You Buy Bitcoin? | Common Sense Investing


In my last video I told you about Bitcoin. What is it? Bitcoin is a relatively new thing called a
cryptocurrency. Some people think that you can compare it
to a traditional currency, or to gold, while others describe it as a new asset class all together. Whatever it is, excitement about its potential
for future adoption has lead to a rapid increase in price, which has a lot of people wondering
if they should be buying in. How Bitcoin is going to perform in the long-term
is anyone’s guess. Without long-term data on Bitcoin, or any
other cryptocurrency, it is not possible to make an evidence-based decision
about investing in it. I’m Ben Felix, Associate Portfolio Manager
at PWL Capital. In this episode of Common Sense Investing, I’m going to tell you what I think about Bitcoin. Let’s look at Bitcoin from the perspective
of it being a currency. Are currencies good investments? Traditional currencies do not have a positive
expected return. In a 2016 essay titled Long-Term Asset Returns,
Dimson, Marsh, and Staunton showed that over the last 115 years, currencies have jumped
around a lot in relative value, but you would not have been any better off with exposure
to one currency over another. Bitcoin has also drawn comparisons to gold. Unfortunately, that does not mean that you
should buy bitcoin. The evidence for gold as an investment
is not very good. Some people argue that gold is an inflation
hedge, and that bitcoin could be the same. In a 2012 paper, Claude Erb and Campbell Harvey
found that while gold has been an inflation hedge over the very, very long-term, “In
the shorter run, gold is a volatile investment which is capable and likely to overshoot or
undershoot any notion of fair value.” So if Bitcoin is a currency, it probably isn’t
something that you want to invest in. The price volatility of currencies, and gold,
does mean that while they do not have a positive expected long-term return, you may still be
able to profit by trading them – buying low and selling high as the price fluctuates. Of course, the problem with trading currencies
is that they are random and volatile, leading to extremely unreliable outcomes. In a Medium post, Adam Ludwin from Chain,
a company that builds cryptographic ledgers, explains that he views Bitcoin not as a currency,
but as a new asset class altogether. Much like stocks and bonds currently serve
public companies, Ludwin writes that cryptocurrencies are assets that serve decentralized applications. A decentralized application is a service that
no single entity operates due to its utilization of the blockchain. Ludwin explains that, in general, a decentralized
application allows you to do something that you can already do (like make payments, in the
case of Bitcoin) but without the need for a trusted central party. While decentralization sounds like a good
thing, there is a catch. By nature of being decentralized, decentralized
applications are slower, more expensive, and less scalable. They also have worse user experience, and
volatile and uncertain governance. When a service is completely decentralized,
there is no customer service center. There is no help line. There is no way to get your bitcoin back if
you lose it. In contrast, if you damage your US dollars
in a fire, you can bring the scraps to the US government and they will try to identify
the bills and reimburse you. That type of centralized service is lost with
decentralization. Ludwin explains that bitcoin is not best
described as “Decentralized PayPal.” It does not compare to PayPal in terms of
user experience or efficiency. It’s more honest to say it’s an extremely
inefficient electronic payments network, but in exchange we get decentralization. The obvious question follows: who cares about
decentralization enough to put up with a slow, inefficient, and inconvenient method of payments? The most obvious answer is people who want
their transactions to remain anonymous and who do not want to be censored
by, say, a government. Based on Ludwin’s arguments for Bitcoin
as a separate asset class that serves a decentralized payments application, its value will be derived
from the adoption of Bitcoin as a means of exchange. Buying Bitcoin in hopes of benefitting from
its widespread adoption, keeping in mind the very specific type of person that would value
Bitcoin enough to put up with its shortfalls, would be very speculative. In an interview with Cointelegraph, Eugene
Fama Nobel Prize winner and the father of modern finance, explained that he believes that
Bitcoin only has value to the extent that people will accept it to settle payments. He explains that if people decide they don’t
want to take it in transactions, its value is gone. When Fama’s interviewer tells him that Bitcoin
also derives value from its censorship resistance component, Fama says “I guess that for a
drug dealer that has a lot more value. But otherwise, I don’t see the big value
about that.” While Fama’s answer may seem flippant, it
touches on the same point that Ludwin made – Bitcoin’s price depends on its adoption. So why has Bitcoin’s price seen
such a sharp increase? It’s safe to say that the future supply and
demand of Bitcoin are highly uncertain, but the expectations of future supply and demand
are factored into the current price. Each time someone pays a little more to own
a Bitcoin, they are injecting their future expectations into the price. The recent rapid price increase is due to
people’s expectations that Bitcoin will be widely adopted in the future. The fact that the number of Bitcoins can reach
an upper limit is an often-used argument that Bitcoin will retain its value over the long-term. That may be true in isolation, but the future
supply of cryptocurrencies is a big unknown. New cryptocurrencies have emerged that attempt
to improve on Bitcoin’s design, potentially reducing the demand for Bitcoin as a payment
system. Bitcoin is either an inefficient currency
in the early stages of adoption with plenty of disadvantages and one big advantage over
traditional currencies, or its a new type of asset that serves a decentralized payments
application. In either case, the long-term value of Bitcoin
will mainly be derived from its adoption as a mainstream currency by the people who value
decentralization enough to put up with all of the downsides. There is no doubt that Bitcoin is based on
an exciting new technology with potentially widespread applications. Investing in Bitcoin is a bet that this technology
will meet or exceed the expectations that current market participants have for it. Just like I would be wary about investing
in gold, an individual stock, or a specific currency, I would be very hesitant about buying Bitcoin. And I’m not the only one thinking that way. Warren Buffett, one of the greatest investors
in history, recently said “In terms of cryptocurrencies, generally, I can say with almost certainty
that they will come to a bad ending,” If you must buy Bitcoin, keep in mind that
its market capitalization is still less than 1/3rd of 1% of the global
market capitalization of stocks. You might consider allocating Bitcoin to your
portfolio accordingly. Thanks for watching. My name is Ben Felix of PWL Capital and this
is Common Sense Investing. I’ll be talking about a lot more common
sense investing topics in this series, so subscribe, and click the bell for updates. I’d also love to read your thoughts and
questions about this video in the comments. In my next video, I will tell you why not
all index funds are created equal.

32 thoughts on “Should You Buy Bitcoin? | Common Sense Investing”

  1. This happens to be electronic tulip mania. The price will only keep shooting up until the theory of greater fools remains active. Not to mention, the exchanges for crypto are a pain to deal with in times of payment or cashing out your crypto.

  2. Bitcoin value is alot in the FOMO (fear of missing out). Many people buying just a little bit of it ''just in case'' it goes up, makes it go up and increase the FOMO again.

  3. "Without long term data on bitcoin it is not possible to make an evidence-based decision about investing in it." But we also know that past performance isn't indicative of future returns. (Is there a pithy abbreviation for that expression which is used so endlessly?) And your arguments in the video didn't seem to hinge on whether or not long term data existed. So I'm curious what long term data you were thinking of. Is it just a matter of building confidence about the long term viability of cryptocurrency as an investment — i.e. even if it a good amount of historical didn't show profitable long term returns it would at least have demonstrated longevity and therefore be easier to take seriously?

    P.S. Love this series, Ben. You and your PWL brethren will have saved me half a million dollars by the time I retire.

    [P.P.S. Hi Shawn.]

  4. If we subscribe to the belief that cryptocurrency is a new asset class or technology, then one would be almost foolish to not have some skin in the game, especially given its current relative miniscule market cap.

  5. If you have to ask why someone would want to be in a decentralized currency in today's world… then you are asleep

  6. Ben, what about the appeal bitcoin has of becoming the first global currency? With bitcoin, i can buy a product from Canada here in south africa without changing currencies, doesnt this factor into the expectation of its future consumption and usage?

  7. Crypto is entirely in the hands of humanity..if they have momentum to take it is an alternative currency they could change the world. I think a lot of wealthy people seem very afraid of it.. potentially it's world changing

  8. Give your thought on the future of the company Ripple which utilizes XRP – they have been targeting remittance and banks for adoption. They have the 3rd largest market cap.

  9. Bitcoin has been a lifeline for (some, prescient) Venezuelans as the bolivar crashes. I guess two kinds of people might invest in bitcoin: drug dealers, and people who saw the writing on the wall.

  10. Great video! However, I don’t think that drug dealers and criminals can benefit the most from decentralization. Cryptocurrencies are much easier to integrate into computer applications and technology in general, because you don’t have to rely on a middleman. Instead, internet is its native environment. That being said, you can be 100% sure that you own your funds and that you can securely transfer them to anyone else anytime. That is very useful from interaction between IoT devices (automating the economy of devices – eg selling data from sensors, paying for electricity when charging your car) to running decentralized applications exactly as programmed without any possibility of third party interference (online elections, credit scoring without revealing any sensitive data). This decentralized system is very robust, because it doesn’t depend on any third party subject that can lower the stability of the system.

    Also, the technology is in its early stage, someone refer to that as the mobile phones in 1990s. That is why there are currently little or none use-cases and adoption of cryptocurrencies. However, I do believe that it will improve in the future.

    I still don’t believe that cryptocurrency should be seen as an investment opportunity, because it is currently purely speculative asset and many people just see it as get-quick-rich scheme and run the prices even higher. As you said, it is not worth more than allocating just tiny percentage of your entire portfolio into cryptocurrencies.

    To Warren’s quote: Warren Buffet was always skeptical against any technology and he himself admitted that he doesn’t understand technology very well. He warned about investing in any technology stocks in the past and these companies now dominate the market.

    I really appreciate your effort and the time you put into preparation the informations for your videos. Your videos are very informative and well structured and this one is not an exception!

  11. Currently only 5% of my portfolio is in bitcoin, i really see it as something useful in the future, and i would like to add that its value is also derived from the energy wasted to mine a single bitcoin, much like the effort put by real human miners searching for Gold.

    But i agree with warren buffet, it is a speculative investment at this point, and you are betting on someone else to pay a higher price that you did, but soon this will change as more adoption kicks in. Remember that every revolutionary thing takes time, and stuff doesnt happen over night.

  12. Bitcoin is worse than tulips. Backed by nothing. No inherent value. Unregulated trading wide open to manipulation. Wide open to hacking. Environmental mining disaster. Someone will come along and introduce a gold backed crypto currency and blow everyone else away.

  13. You can send 500 million dollars from Canada to China for just 40 cents and also it takes 10 minutes, where exactly is the part of unefficiency? Do research before putting up a video like this.

  14. Unpopular opinion incoming.

    Bitcoin has been among the best performing assets EVER created. 194,409,702% in 8 years. That's One Hundred Ninety Four MILLION Percent.

    In the 125 months that Bitcoin has existed, buying and holding Bitcoin in only five of those 125 months would have resulted in losses. Outside of those five months, buying Bitcoin at any time during 120 of those 125 months would have generated profits for the holder of the digital asset.

    In the last two years alone, Bitcoin has brought investors 457% returns, while gold brought in a mere 1.3%, oil 31%, and the S&P 500 at 19.9% gains. This is all meanwhile Bitcoin has mostly been in a bear market. We're now in the midst of a bull market and those of us who have taken the time to become knowledgable are making money hand over fist yet again.

    I have NO emotional attachment to any of the cryptocurrencies I trade, I'm here to make money.

  15. 3:33 "slow, inefficient, and inconvenient"? We pay all our Filipino staff using cryptocurrency, that they then exchange to PHP. It's far from slow, inefficient, and inconvenient.

  16. 6:09 Buffett is well-known for not being the biggest fan of tech stocks, case in point Amazon. So why would he be a fan of this new asset class, cryptocurrencies? He wouldn't. Why? He doesn't understand the space.

  17. Sign me up for some investing advice because:
    1) Like Warren Buffet, I'm closely connected to the central bankers and can borrow money at zero percent interest, then loan it out to others at 28% on their credit cards, while signing people up for those cards without their consent or knowledge.

    2) I'm a power hungry freak, e.g. Zuckerberg, the list goes on and on, that want to look into the private transactions of others to decide whether or not they should be "de-platformed" or "non-monetized" while ushering a Chinese-style social credit system.
    3) I don't mind that the money supply is increasing exponentially to keep the stock market afloat, rendering my traditional currency worthless. and eventually causing the stock market bubble to burst.
    And on and on and on.

  18. "If you want to know what’s going to happen in five years, you don’t look in the mainstream. You look at the fringe." – Steve Jobs

  19. I think you grossly underestimate the importance of decentralization. Just look at the Equifax breach – it could've been avoided altogether. Also, quoting Buffett on Bitcoin is like quoting a vegan on how they like their steak cooked. Despite his brilliance with stocks, he's clearly a luddite. Otherwise good video.

  20. "Its value will depend on how willing people will be to accept it as payment in the future." Correct, but just like everything else, including the dollar and gold.

  21. Good video, as usual! I like your logical approach. Now, my comment about Bitcoin: i agree that to some extent its future price will be determined by the adoption and need for decentralization. I just think that need for decentralization will be much higher than most people think. And the downsides (scalability, effectivity, etc.) will only improve over time to a point where they will not be an issue at all to an average Joe. As you mentioned, the market cap of crypto as a whole is basically nothing nowaday and that brings a lot of risk, uncertainty and volatility. It is deffinitelly not an investment that i would recommend to a client but the potential for growth of adoption and its price is just so big that i can't ignore it just because the risk involved might be higher than for example in gold or stocks. It took me about a half a year of studying Bitcoin and cryptocurrencies to realise their value and potential. It is not easy to really understand what is the fuss all about. And i am a nuclear physicist and someone who loves to dig deep in different technologies and their possible applications. Anyway, what i want to say is that yes there is a risk, but I think (after a few years of studying and trading crypto) that the risk is acceptable when compared to possible gains. Moreover, i think that the risk is actually much lower than most people think because the world needs cryptocurrencies in the future. Considering the course of todays technologies, people's needs, political (in)stability, etc… in my opinion Bitcoin and many other cryptocurrencies are inevitable. And my portfolio reflects my deductions. I currently hold about 40% of my investment in crypto (over 500% profit in last 2 years, but that is irrelevant, I'm in it for long term).

  22. “You might want to consider allocating bitcoin accordingly” is the most gentlemanly way I’ve ever hear someone say “don’t mess with that stuff”.

  23. Get your fact checked. Bitcoin transactions are NOT anonymous. In fact, the transparency of Bitcoin ledgers has enabled FBI to track down and arrest criminals.
    Second, you understated the importance of having a currency that CANNOT be debased by a government. Enjoy the bailout, repo and quantitative easing!

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