December 15, 2017
When I need to talk to a guy with blue hair and an intelligence level likely in the top 1% to understand an investment, I know it's not for me.
You guessed it, that would be Bitcoin. I'll be respectful and capitalize it with a "B" here.
The individual works for One Day In July as our software developer and computer scientist. He's a good friend of mine, and I've worked with him for 15 years. He does have blue hair, or partially blue to be accurate, and in the winter light it leans toward purple. The relevant point is that it takes his intelligence level for me to get an understanding of how the underpinning asset works.
Before you fire up your Coinbase account and try to notch some wins to proudly mention to your options-trading cousin at the holidays, let me point out a few things.
1. Bitcoin does not create value. It is a medium of exchange, much like, say, United States Dollars or Euros. Warren Buffett has referred to it as a fancy money order. It is not going to pay its owners a dividend and it produces no cash flow. It never will.
2. The underlying technology, blockchain, may have value as a distributed currency ledger system. No one knows, and they certainly don't know what companies will benefit if it does.
3. The "medium of exchange" function is primitive. Merchants that use it report it can take 2.5 weeks to get their money. This is not much of a problem if you are a drug dealer and need to launder money. You might be a little late on your Colombian payroll, but hey, no biggie, at least it's not traceable. But Bitcoin is almost worthless for legitimate businesses as the redemption network at this point is exceedingly slow.
4. There is an annoying problem for owners of Bitcoin in which their virtual wallets keep getting hacked and their investment stolen. Established United States custodians of money such as Charles Schwab, where much of our client money is held, spend enormous amounts of capital with hundreds of employees overseen by regulators making sure this doesn't happen. That guy coding up the bitcoin exchange in Slovakia in the basement of a doughnut shop? Not so much.
5. There is a theoretical limit to the number of bitcoin: 21 million. Unfortunately about 4 million of those 21 million have been lost due to "chain breaks," and may be lost forever. Look on the bright side: it's only about 19% percent of the asset that disappeared, it's a small price to pay for revolution. I wonder what would happen if 19% of Microsoft's shares disappeared this weekend?
6. Keep in mind that these exchanges generally are not regulated. Two large bitcoin holders could, in theory, be trading their asset back and forth to each other at higher and higher prices, with the intention of fueling bubble mania so others buy in. This is not allowed on a regulated, United States stock exchange. In Bitcoin-land, there is no oversight making sure people play by the rules.
7. I find it ironic that everyone quotes the price of Bitcoin in U.S. Dollars. If Bitcoin is so valuable, why not quote Dollars in Bitcoin?
I am not saying the price of Bitcoin is going down. This is probably the most perfect example of bubble mania ever seen, and the price could go much higher as grandma cashes out her IRA and decides to have one more go at the rodeo. (This family in the Netherlands just sold their house and moved to a campsite to go all in on Bitcoin. Not something I recommend. Either the investment choice or the camping in the winter with three kids during Christmas.)
At some point bubble mania will end. When it does, you will not want to be holding the losing end of that wishbone. Unlike Amazon's shares 15 years ago, value will not return.
If you ever feel bad about an investment, let me leave you with one link. This person from Jacksonville, Florida 7 years ago was posted on the Internet about making the first known commercial transaction with Bitcoin. Here is his actual post. He claims he bought 2 pizzas for 10,000 Bitcoin. Wondering what that's worth today? I'll let you do the math.