When it comes to Bitcoin (CCC:BTC-USD) and other cryptocurrencies, I was one of the many nattering nabobs of negativity. This club included famed investor Warren Buffett and JPMorgan (NYSE:JPM) Chief Executive Jamie Dimon among others, so I don’t feel too bad.
I am changing my tune somewhat.
While I don’t think that Bitcoin and its rivals are all necessarily digital snake oil and agree that its underlying blockchain technology is a game-changer for financial technology, I am still leery about the sector as the bandwagon becomes increasingly crowded.
BTC Has Plenty Of Fans
I realize that Wall Street luminaries including Stanley Druckenmiller and Paul Tudor Jones gave bitcoin a thumbs-up last year. Top colleges such as Harvard, Yale, Brown, and The University of Michigan are reportedly holding crypto in their endowment. My question to crypto fans is simple: How do you value digital money?
In 2010, bitcoin sold for 8 cents. Seven years later, BTC traded for $960, and by the end of 2017, it reached a high of near $19,000 at the end of 2017. BTC recently topped the $40,000 mark after doubling over the month. The largest cryptocurrency surged 14 percent Friday after Billionaire Elon Musk “tagged” Bitcoin on his Twitter (NYSE:TWTR) biography. Last I checked, BTC was trading at $36,123. There is no way to know if this is a good price.
Throwing Darts At a Target
Indeed, analysts trying to forecast BTC’s future price are throwing darts at a target, hoping that will stick, which is a huge red flag.
“Analysts used to claim the price had something to do with the difficulty of ‘mining’ Bitcoin — the cost of the electricity and equipment it takes to complete the equations necessary to create new Bitcoins,” according to Barron’s. “Given the asset’s volatility and unpredictability, however, few still cite this metric.”
BTIG analyst Julian Emanuel compared BTC to the Nasdaq 100 and came up with a valuation of $50,000. Meanwhile, the Winklevoss Twins, large crypto holders, have said that BTC may reach $500,000 “one day” when it replaces gold, Barron’s said. Guggenheim Partners Chief Investment Officer Scott Minerd recently forecasted that BTC will crash to $20,000 and won’t see a fresh all-time high until 2022. However, Minerd expects BTC to be worth $400,000 at some point.
‘Mother Of All Bubbles’
In other words, Bitcoin is worth more because people think it’s worth more. This logic leads to what Bank of America recently called “the mother of all bubbles.” Coinbase’s John Mac Ghlionn, in a recent column, argued that BTC is an “epistemic bubble” which presents its unique challenges for investors.
“Epistemic bubbles involve individuals accessing information in a heavily biased manner, greedily accepting what they want to hear, and ignoring anything distasteful, no matter how accurate the evidence may be,” Mac Ghlionn wrote in a column. “In a nutshell, inhabitants of epistemic bubbles are only interested in accessing information that reinforces already existing beliefs.”
Meanwhile, the BTC bubble continues to grow. Coinbase, a platform where people buy and sell crypto, announced plans for an initial public offering this week. The BTC/Crypto bubble will crash at some point. It’s not a question of “if” but “when.”
All That Glitters
BTC fans often compare it to gold as a store of value. That isn’t necessarily a good thing given gold’s dismal track record for investors over the long term. A 2013 study cited by the New York Times found that gold earned an annual inflation-adjusted return of 1.1% from 1836 to 2011, lagging the 2.9% return of long-term bonds and the 7.4% from stocks.
“The price of gold is inherently unpredictable, as it lacks the traditional economic fundamentals for forecasting fair value,” according to a 2020 report from Northern Trust. “ So, its course over the next year is anyone’s guess.”
The same could be said for BTC, whose fans are passionate as “Gold Bugs.” The cryptocurrency could soar to unimaginable highs or plummet to zero. That’s way too much volatility for most investors, including yours truly.
On the date of publication, Jonathan Berr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.