On November 26th by 4.30 am, according to trading records from Coinbase, an online market for Cryptocurrencies, Bitcoin (BTC) was trading at $17,331. By 9.30 am BTC prices had fallen to a low of $16,299, on December 1st when I wrote this article, Bitcoin was now trading at a high of $19,915.
If an investor has bought 1 unit of Bitcoin by 9 am on Thursday 26th, and sold at 3 am December 1st, his gain would be $3,616 or a 22.18% return. According to a report by the NASDAQ, BTC return this year has been like a Space X rocket, this year alone bitcoin is up 166%, gold is up 24%, US Bonds 7%, US Stocks 5.5%.
Cryptocurrencies have been up cumulatively 5,000% (yes Five thousand) but I have not personally considered them an investment. The reality is even as BTC surged to $19,000 in 2017, there was still essentially a bet on someone else buying them from you, what in finance is called the “greater fool theory” (it’s a real theory, google it). Bitcoin for instance has a fixed supply, so as long as demand increases, the price will go up.
Cryptocurrencies have no inherent value, if you had left 100 units of Bitcoin bought for $200 units in a vault in 2015 and returned in 2017, the value would still be $200 but the price you would sell it for would be $19,000. Why no inherent value you ask? well because Bitcoin has limited use except for speculating. A Bloomberg article in May 2019 based on data from blockchain researcher Chain analysis found, “only 1.3% of economic transactions came from merchants in the first four months of 2019, with little change from prior 2 years”. This was why I never considered investing in BTC, it was a game of chicken to see how high it could rise.
However, in November, I changed my strategy. I have now added cryptocurrencies as a viable investment in my portfolio.
Three reasons why I have now decided to buy cryptocurrencies:
- The world is awash with cash and low output, inflation cometh. Even before the COVID-19 hit, most of Europe and Japan were already offering negative rates and using monetary quantitative, then Biden won. Biden also nominated Janet Yellen as his Treasury Secretary. Yellen is a proponent of deficit spending, i.e. a Keynesian. All this translates to the fact that a lot of cash is going to pour into the Western economies soon and remain there to keep rates low, and the dollar low. Thus, any cash holding in US currency will see yields fall
- Global fixed-income rates are going to remain low, and Covid-19 has taken property funds off the table. Fixed income investing across the spectrum will see flat rates. This will mean all short to long-duration fixed income funds plus fixed income funds tied to income from rentals will see a fall in yields.
- There is now much greater acceptance and regulation of cryptocurrencies especially in the key market of the US. Facebook Libra ran into headwinds with his plan for a global cryptocurrency, but today the regulatory landscape has improved. US banks now can provide custody services for cryptocurrencies and the US Department of Justice policy enforcement for digital coins as well.
The summary of those three points highlighted above is this, investors seeking outlets to park cash that will at least hold value until there is clarity on inflation fears will buy cryptocurrencies. Gold was the go-to asset class to hold cash in times of uncertainty but cryptocurrencies are now seeing big utility enhancements. Paypal for instance will issue cards based on bitcoin to allow everyday buying and selling based on a bitcoin account. I am yet to see a gold-backed debit card. These enhancements mean bitcoin and other cryptocurrencies now can come out of the speculative space and into retail, again boosting demand.
That is a game-changer.
What is the risk to this? That Cryptocurrencies become so widely accepted that the US Treasury introduces her own Fed Coin. This move will draw away many who are buying Bitcoin and other cryptocurrencies and reduce demand for bitcoin, bringing down the price.