Bitcoin has generated an amazing amount of buzz recently. According to Google Trends, web searches for the term “cryptocurrency” have increased nearly 10,000% over the past year. The press is reporting avid interest on the part of investors - not just large institutions, but individual investors as well. I’m not sure if the reports are true, but I have even heard of people taking out mortgages on their property to buy more bitcoins. A speculative fever seemed to have taken hold, driving the price of one bitcoin up around 2,000% to almost $20,000 last month (the price has since come down a little).
Until writing this article, I was feeling pretty good about my investment portfolio’s 34.4% gain last year. Compared to bitcoin, this seems like nothing. No wonder people are enthused - who needs stocks when you can buy bitcoin?
When it comes to stocks, I follow a simple strategy: buy stocks of good businesses, run by good managers, at good prices relative to value. How does bitcoin stack up when assessed according to these three criteria?
Good business? No, because bitcoin is not a business.
Good management? No, because no person runs bitcoin.
Good price relative to value? Unsure, but probably not. The price is clear, but the value is not clear.
As you can see, bitcoin isn’t going to make it into my portfolio anytime soon.
Only time will tell whether cryptocurrencies succeed. Right now, I am in the skeptic camp. I tend to think of bitcoin as a payment mechanism. For any payment mechanism to gain serious traction, it must be both used by masses of consumers, and accepted by nearly all merchants. In order for the masses to adopt anything, governments generally must be in favor of such adoption. Any fear of potential government interference will tend to limit bitcoin’s prevalence as a payment mechanism. Ultimately, unless bitcoin can attain the same ubiquity that other payment mechanisms currently enjoy, I believe it is destined for eventual failure.
Of course only time will tell. If I am wrong, I will…uh…eat my bitcoin.