In this excerpt from SAM’s recent webinar event, Jason Blumstein, CFA® discusses the current limitations of cryptocurrency, and specifically bitcoin as an investment vehicle. This post is the third of a 3-part series from our June 2021 webinar: The Economy is Re-Opening, What Is The Path Forward?
Now, the final topic I am going to talk about is cryptocurrencies, which is currently all the rage and pervasive no matter who you talk to, whether it be my brother or your next-door neighbor, whomever you talk to they are all talking about cryptocurrencies. It is all over the media and newspapers; my mom even sent me a link the other day about some cryptocurrency.
Because everyone is talking about it, we felt it was prudent to address it.
So, what we have displayed here on the left is essentially the way the system for cryptocurrencies and specifically bitcoin works. I am not going to attempt to walk everybody through what this means because it took someone on our team 45 minutes to explain this chart to me. The biggest things to take away from this are: that there are many different players, it is convoluted, it is opaque, and there is a lot of moving parts.
And when you look to invest people’s money, or your own money, there is a concept of staying within your circle of confidence. If you stay within your circle of confidence, it is okay to say no. No one will ever get upset if you say no. If you say yes and you are not a 100% certain about it and something goes wrong, that is where you get into trouble.
So, given the opaque nature of bitcoin and cryptocurrencies, we would advise taking a breather from it, given the opaque nature of the asset.
Reasons To Think Twice About Cryptocurrency As An Investment Vehicle
Now, there are other tangible reasons why we have concerns about considering bitcoin, really all cryptocurrencies:
The asset kicks off no cash flow
If you are looking to buy a business or buy a piece of real estate, you value that based on the cash flow that the entity is kicking off to you, because at the end of the day if you buy it for a certain price, there is a quantifiable measure. You can say: ‘Okay, I bought it at a certain price. I know within X number of years I am going to get a return on my money and then after that I am going to get a further return on my money.’
With cryptocurrencies there is no cash flow. It [the value of the asset] is based on emotions, and we have seen this throughout history whether it be with tulip bulbs or even beanie babies. These things [products] are based on people’s emotions; you have just seen a history of things going up and then coming down based on people’s emotions.
Cryptocurrency is not sustainable or eco-friendly
The second thing, and the irony of cryptocurrencies is that they are not sustainable whatsoever. It takes a lot of energy to mine the cryptocurrencies. If you computed it just based on the U.S. consumption, it takes up about 2% of the U.S.’s energy consumption. And to gain a little more perspective on that, if you look at a smaller country like the U.K., it consumes about 31% of the electricity generated in the U.K.
Slow transactional adoption
There is also slow transactional adoption, meaning people are not really using it as a currency. They are really using it as a speculative investment tool, so no one is really using it as a currency. If anything, you’ve seen in the U.S. some chatter about cryptocurrency and its use in the U.S., and you’ve seen only recently China actually act on it.
Limited investment structures
Let’s just say you thought it was a good investment idea, the last part is that there is limited investment structures. The main vehicle used to invest in it is being priced at 40% higher than the underlying value of what people are pricing bitcoin in the marketplace, so there is no worthwhile investment structure for bitcoin or cryptocurrencies at this time.
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