The price of Bitcoin has risen 64% in 2024 so far. That’s after rising 156% in 2023!
Last week, a client brought to my attention that the CEO of the largest asset manager in the world, Blackrock, suggested that crypto is a good long-term store of value. He likened it to digital gold.
This might all seem like good news for crypto investors. I don’t think it is.
My past musings on crypto
A few years ago, I expressed my reservations about crypto in this blog post. In essence, I outlined several reasons why I wasn’t enthusiastic about it and didn’t consider it a worthwhile investment. Since writing that blog, I have dedicated more time to understanding and closely monitoring the crypto market.
Fund managers have jumped on board
In October 2023, the US Securities and Exchange Commission (SEC) granted approval for the first spot Bitcoin Exchange-Traded Fund (ETF) after rejecting similar applications multiple times. Currently, there are over 10 listed Bitcoin ETFs in the US, with BlackRock, under its iShares brand, offering one of the most widely recognised ones with the code IBIT (listed on the NASDAQ). After only 2 months, the total investment in IBIT has surpassed $20 billion. These ETFs provide a simple and cost-effective avenue for investors to invest in Bitcoin. There aren’t any spot crypto ETFs listed on the ASX, yet.
Asset managers, including BlackRock, have a vested interest in attracting investment dollars because their revenue is directly tied to the assets under management. Management fees are calculated as a percentage of the ETFs’ assets. Consequently, there is a commercial incentive for asset managers to promote the advantages of investing in Bitcoin through an ETF. Therefore, you should maintain a healthy level of scepticism of any commentary that an asset manager makes.
The impact of these Bitcoin ETFs on the asset’s performance is still uncertain. Some suggest that they could enhance its popularity and demand, potentially leading to a price increase. On the flip side, other commentators propose that the ease with which investors can buy and sell their holdings through ETFs might also contribute to increased volatility.
10+ years on and still no one’s using it!
For over a decade, crypto has gained considerable attention. Advocates of crypto have suggested that it could eventually replace traditional currencies. However, after a decade, it hasn’t been adopted as a means of exchange, rendering it without practical utility except as a speculative investment, to use for criminal activities such as money laundering, and El Salvador has adopted Bitcoin as legal tender.
I do acknowledge that blockchain technology does have a lot of utility and function and believe it holds potential for many applications.
When considering traditional share investments, investors typically evaluate the product or service a business offers and consider whether the demand for that product or service is strong and sustainable. This fundamental analysis is crucial for understanding investment risks and potential returns. However, at the moment, crypto, unlike traditional investments, lacks an inherent function or purpose. Therefore, it presents a high-risk investment, as speculative sentiment has the potential to shift rapidly and vanish entirely in a short period.
The best explanation of crypto I have read is that it’s a social Ponzi scheme. In this context, the success of the scheme hinges on existing investors convincing new participants to buy into crypto. This aligns with the ‘greater fool theory,’ which essentially suggests that one can buy overpriced assets with the expectation that someone else will come along and pay even more for them in the future i.e., the greater fool.
Everything is popular until one day, it’s not. Popularity isn’t perpetual. Strong fundamentals are.
Storage of value… I think not!
Arguing that crypto serves as a reliable store of value faces two main challenges.
Firstly, there’s the issue of significant and largely unascertainable counterparty risk. Crypto is often held on exchanges under custody arrangements, and these exchanges and custodians operate without regulation or independent oversight. In the event of hacks or bankruptcy, there’s a substantial risk to crypto holdings. A perfect example of this is FTX, operated by Sam Bankman-Fried, who has been convicted of 7 counts of fraud and conspiracy. It is estimated that investors lost $USD8 billion. I acknowledge that some exchanges have taken significant steps to improve safe custody. However, an asset class that is worth over $USD1 trillion should not be left to self-regulate.
As I understand it, if crypto is held on the blockchain (not on an exchange), this eliminates any counterparty risk.
Secondly, the highly volatile nature of crypto prices is a major concern. For instance, Bitcoin’s volatility has typically fluctuated between 20% and 100%, which is very high. In comparison, the estimated annualised volatility of gold is around 15%. One potential solution to counteract this high volatility is to use stablecoins, which is a type of crypto. Stablecoins peg their price to other assets such as the US dollar. However, they still have the counterparty risk discussed above.
The combination of significant counterparty risk and high volatility makes crypto unappealing to investors seeking a stable means of wealth storage.
If it succeeds, it will be its ultimate undoing
A country’s ability to regulate its own currency is crucial for various reasons. This control aids in managing inflation, fostering economic growth and investment, enhancing international trade, and safeguarding consumers and businesses from fraudulent activities such as counterfeiting and money laundering, amongst other things.
Hence, if crypto was to gain broader acceptance, it’s highly likely that developed economies would implement regulations to govern its usage. Consequently, even if crypto were to achieve significant success, it would cease to maintain its decentralised nature – a characteristic often touted by advocates as one of its primary attractions.
How to build it into a portfolio
For all the above reasons, I do not recommend crypto as an investment.
However, I acknowledge that some individuals have made a lot of money through crypto, often gaining media attention. It’s crucial to bear in mind, though, that markets operate on a zero-sum basis. While winners may grab headlines, there are corresponding losers on the other side of each transaction, who often go unnoticed in the media.
Despite these considerations, if you still wish to invest in crypto, I recommend allocating only a small portion of your overall wealth to this asset. In other words, invest only what you can afford to lose. Your primary investment strategy should remain underpinned by high-quality, fundamentally sound assets.
The chart below suggests that adopting a trading approach for Bitcoin, rather than a buy-and-hold strategy, might be more advantageous, given the considerable variations in Bitcoin returns from year to year.
Bitcoin Returns since 2010…$BTC pic.twitter.com/M7zZ3xnx0Y
— Charlie Bilello (@charliebilello) March 10, 2024
Just realise that one day the music might stop, and the party may be over.
P.S. Here’s Vanguard’s recent view… it’s the second largest global asset manager.
Very poor analysis, just copied and pasted off a gold bugs forum. Superficial analysis, crypto has existed for over 14 years now, with a majority of informed investors holding their crypto off the exchanges in their own custody (there is no counter party risk). Crypto has evolved rapidly, has many use cases, many ways of being spent, many ways of getting on and off the markets (if you are informed). If you want a return, you need volatility, to some people investing in an asset class which so far has a 4 year cycle might be better than 10 year cycle, for many reasons. Greater Fools Theory – really, isnt everything greater fools, certainly property and the sharemarket is. If no-one is there to buy, the price will go down. Yes there are absolutely huge returns that can be experienced in crypto, you have only referenced Bitcoin, the largest by far and probably one with a relatively small return going forward. Bitcoin has old tech which is not beng improved, there are many other options in the crypto market. I suppose you can be like Peter Schiff and ignore crypto or you can educate yourself and look to make outsized gains while you can. Good luck.
Hi Stephen, I can assure you that all my blogs are 100% written by me and that I don’t cut and copy from anywhere. I’m also confident that everyone won’t always agree with my opinions 100% of the time, and I’m fine with that.
You may need to dig alot deeper in bitcoin, Your entitled to your opinion but some of what you have stated as fact is actually false. As a educator in the space I would expect you would want to be true and honest about facts. Read Broken money by Lyn Aldren may clear a few thing’s up for you.
I did have someone fact check the blog prior to publishing, but thanks for the tip, Brett.
Hi Brett,
If you are going to tell someone that something they have said is false, you should specify what exactly you are referring to. It’s possible that you’re correct and that something in the article is false, but without specifying what that is, how is that helping anybody?
It’s not helping other readers to be aware of the mistake you believe you’ve identified. It’s not helping Stuart to correct the mistake. It’s not helping you to re-read the part you believe to be a mistake, which may lead to a realisation that you misread or mistook something and that there wasn’t a mistake after all.
Lee.
Thanks Lee. The subject can be polarising and people can be quite passionate about their points of view.
Crypto is very confusing to me. I don’t mean confusing as in how it works, but confusing as in why it has any value. It’s just a form of currency. People bang on about scarcity through a finite number of coins, but isn’t this argument invalid when other alternative coins are created??? It’s just like quantitative easing. Crypto is not an enforced currency permitting only one coin, so how can the scarcity argument be valid. And people bang on about how awesome crypto is as a currency. But I bet if you tried to monetise its use by charging people when they transact (to make it more than just a commodity) they’d tell you to get stuffed and use fiat currency. So if there is no valid scarcity and no ability to generate income from people transacting in the coins how is there any value? And like Stuart said who the hell actually uses crypto as a currency??
I’ve tried to ask crypto enthusiasts these sorts of questions, not to attack but rather to educate myself and see if I’m missing something. But I’ve never received any decent response. Like the other comments, crypto enthusiasts seem to be very combative and dismissive. Comments like “your facts are wrong” without giving any insight. How is that helpful for anyone? I guess I would be dismissive too if I had large sums of money reliant on ppl believing the hype.
Anyway my philosophy is there will be some big winners and a lot of losers in crypto. I’m happy to sit on the sidelines on crypto and put my money into assets that generate income. And also I’m investing in things that provide a net benefit to society, not a zero sum commodity.
That was a long comment but I’ve got so much value out of Stuart’s books and blogs over the years that it aggravates me when people attack his integrity or expertise.
Thanks for your kind comments, Daniel. I agree with your observations.
I usually like your content and find it largely spot on but its very disappointing to see how far off the mark you are on crypto. You really should educate yourself more thoroughly before pumping out this sort of content which has the potential to financially harm your audience
Bitcoin is a proven store of value and that is its current primary use case
Hi Marko, it is possible we have a difference of opinion. The facts I have mentioned are (1) limited to no use as a medium of exchange (2) high volatility (3) counterparty risk on exchanges.
Stuart your normally top notch , but you dropped the ball on Bitcoin and crypto.
1 I’ve have take a holiday and spent crypto to pay for food and accommodation , the whole holiday never used cash , I have credit cards that use crypto as a meduim of exchange. I sent money to friends and it clearly faster and supeiror method of transaction. ( 10cents was the cost of international transfer ) bitcoin is the best store of value right now better than gold which involves couterparty risk
2 yes it high volatility , but best return of the last 15 years making it the best store of value in the last 15 years
3 There is no counter party risk in bitcoin/crypto thats the point of it , you can and should use a DEX over CEX that way its peer to peer and there is no counterparty risk . using a centralized exhange opens you up to some counter party risk depending of the level of legitamcy of the exchange aka COINBASE verus FTX .
Peoples fear of tech, mean they dont want to spend the time learning . even for techical people crypto is a learning curve and plus defi is a beast.
your lack of techincal knowledge , mean you throw out crypto cliché, you havent fact check this article because most of it is based on crypto from 10 years ago and total wrong
current use case of crypto ;
gambling whole casinios run all transation on blockchain
I can buy US Treasury bills on crypto see ONDO finance USY
I can pay at hundred of thousand of comanys with USDT ETH SOL DOGE EG I can Pay my taxs and I did pay my taxes with usdt
I paid a dentist with doge coin
I can paid travel
I got a loan in defi
I can buy gold with gold back crypto
I can buy shares in a house on crypto
columbia tracks house title onchain
Larry fink has stated that the whole financial industry is moving to crypto
ALl phone apps and payment apps moving to crypto
your doublng down on a bad desision
Hi Azel, most asset classes have little volatility over time periods of 15+ years, but volatility is and should be measured annually.
What percentage of transactions around the world you reckon are settled with crypto? A very small percentage, right. That’s my point.
I certainly leave room for the possibility that I could be proven wrong in the long run, but at this stage, for the reasons stated, I don’t include crypto in portfolios.