29 Mar 2021
Is it a bird, is it a plane, no it's Bitcoin
Article written by PSK's Chief Investment Officer Chris Lioutas
As much as it pains me, it is hard not to be aware of the meteoric rise in the Bitcoin price since its low last year, with a more than 10-fold increase to now.
The old adage might end up ringing true…. albeit, with a modern twist! When the restaurant floor manager of your local Italian pizza joint (lovely guy, one of the best) tells you he’s invested in cryptocurrency and that it’s definitely going higher, we might be closer to the top than the bottom.
Why has money poured into cryptocurrency (digital currency) like Bitcoin? There are a range of factors at play here, but the main one is momentum (i.e. return chasing). Other factors include the belief that the world will shift to digital currencies as we move more of our lives online, or the view that central banks are devaluing fiat currency (paper currency) by printing too much of it that we need a better store or exchange of value, or the view that blockchain technology may feature widely going forward with digital currency benefiting on that journey.
Momentum investing, or trading as we prefer to call it, largely involves buying more of something the more it goes up and selling more of something the more it goes down. It is an investment style which features in markets across the globe and has for many many years. The problems with momentum trading are that it is almost impossible to time (entry/exit) correctly on a consistent basis, you ‘re largely buying or selling with little to no fundamental reason for doing so, and you’re effectively relying on others to continue buying the same thing you’re buying (herd mentality).
When momentum trading is undertaken on traditional asset classes at least there is some semblance of fundamental reasoning in that these assets produce cashflows/earnings which then enables a valuation framework to act as a base.
Digital currencies like Bitcoin do not generate cashflows/earnings which makes it impossible to value. Other issues to be mindful of is that digital currencies may never function as an efficient and trusted medium of exchange, they may suffer from over regulation or potentially get regulated away, most have high transaction costs and slow processing, and the finite supply argument (versus the unlimited supply of fiat currency via central bank printing presses) doesn’t really hold true when you have a new cryptocurrency popping every other week.
Digital currencies might be here to stay and may have a lot to offer in the future, but no one knows.
Digital currencies of today like Bitcoin may even be superseded. Time will tell.
The key things to note are:
- Do you understand what and why you are investing in something?
- Can it be valued?
- Do you have any unique insights as to how to time your entry and exit?
- Can you get your original investment back in a timely fashion?
- Can you extract the gain you appear to have made on paper?
If you’d like to discuss any of the points raised, please do not hesitate to contact us on 9324 8888.
PSK Financial Services Group Pty Ltd (ABN 24 134 987 205) are Authorised Representatives of Charter Financial Planning Ltd (AFSL 234666), Australian Financial services Licensee and Australian Credit Licensee. Information contained in this article is general in nature. It does not take into account your objectives, needs or financial situation. You need to consider your financial situation before making any decisions based on this information.