Is Bitcoin A Good Investment At The Current Price?
Bitcoin hysteria continues.
More and more people tell me they are buying.
Dan Bilzerian posted on Instagram the other day that he just bought a lot... probably around $2400 each.
Personally, I wouldn't be taking advice on investing from a guy riding off Daddy's money, who is famous for posting pictures with mostly naked girls.
He is entertaining.
But hardly an investing authority.
In fact, a couple days previously, he stated there wasn't a secret to getting rich. It was just luck.
I imagine he's aiming to get lucky on this Bitcoin trade, but his luck is likely to run out.
Thinking About Fundamentals
People talk to me about "the fundamentals”.
I've actually mentioned them in my past posts. But there's something missing from that conversation illustrated very poignantly by what Mark Cuban said when he first got into tech investing.
His broker had come to him asking about a company. He knew the company had a pretty good product, taking into account the strengths as well as the challenges.
At the time it was trading at $1 per share. Mr. Cuban said he'd bet on it and decided to invest.
Over the next few months, the price soared to $20 per share.
All of a sudden, the so-called investment experts and banking analysts (who knew nothing about the industry) started coming on television and used the same arguments about the fundamentals of the company that he had used at $1 per share.
Fortunately for him, he sold out slightly below the peak.
The stock collapsed and most investors suffered huge losses.
The same principle applies here with Bitcoin or with anything else, for that matter.
If you want to invest based on fundamentals (instead of technicals), you must consider price in the equation. Fundamentals justify a certain price level and those arguments don't work universally at all price levels.
Fundamentals vs Technicals
Technicals are different.
To quote the famous speculator Jesse Livermore (as most of you probably know, Tiho's favorite):
There's no stock too expensive to buy or too low to short.
Mr. Livermore didn't care about the fundamentals of the company.
It was all about reading the tape.
I'm not smart enough to do that. So I tend to invest based on fundamentals.
However, I've got some clients who are very good at it and they are waiting to short Bitcoin.
In other words, they are willing to bet on the downturn because they believe it's a huge bubble driven by greed... waiting to pop.
How I Use Fundamental Investing
Here's an illustration of what I mean by fundamentals related to price.
A company sells based on a multiple of its earnings.
This figure is calculated relative to other opportunities, most specifically based on the virtually risk-free level of US Treasury Bonds.
In today's environment, a solid company might be valued at around a 30x multiple. A fast growing company like Facebook or Nvidia at 40x. An old slow growing established company like a bank at around a 12x multiple.
Now, the fundamentals support that price level because there's a given amount of profit. If a very solid company is trading at 20x, this is basically the equivalent to a 5% annual rate of return.
The profits and the long term profit potential are the fundamentals.
They support a price at about a 20x level if it's going to have long-term stability based on current interest rates.
On the other hand, if it was trading at a 100x multiple that would now be a 1% rate of return.
Under this scenario, fundamentals would not support that price level, even though it's the same solid company.
Fundamentals Of Bitcoin
Bitcoin is no different.
You’ve got various supply and demand dynamics that are based on the transactional value.
Bitcoin, at least at the moment, has very little value as an asset to hold.
It will undoubtedly get some attention because it has a low correlation to other asset classes, so it provides some value in a diversified portfolio.
For criminals, it provides some asset protection.
For the most part, though, its value lies as a transactional instrument.
Meaning people use it to transfer money from one place to another like an alternative to Paypal, Visa, Mastercard, wire transfer, cheque.
It has some unique characteristics, such as being able to get around exchange controls and potential to facilitate transactions the normal banking system wouldn't allow.
That makes it attractive to some sorts of users.
It also has some significant disadvantages such as entry and exit friction, inability to handle extremely large transaction volume based on the present architecture, regulatory uncertainty, and high volatility (watch how the coming crash affects this).
Bitcoin Is Overpriced Right Now
So the question is what price level is supported by the current and future transaction volume?
This is what's missing from all these so called fundamentalist analysis.
They don't have any idea how to value it and aren't considering the price vs value relationship within their fundamental analysis.
I can tell you with 100% certainty the current price levels are not based on market fundamentals.
Take a look at people's comments as they buy in droves.
Are they buying for transactional purposes?
They are buying based on speculation, which means the price is mostly driven by emotions at this stage.
The fact is, as even as more places accept Bitcoin, probably fewer people are transacting in it for real commerce.
Because it's going up so fast in recent times.
Sometimes up 10% in a day.
So why would you buy something in BTC, if the money will be worth 10% more tomorrow?
Better to hold on and pay with cash or credit.
On the other hand, the reverse is going to happen when it crashes.
Companies won't want to accept it as much because the downward volatility fears are too great.
As you see 10% losses in a day, a major airline might think twice about accepting $1 million in ticket sales via Bitcoin, because it could be $900 thousand tomorrow.
It will be too much risk.
So they'll discourage accepting it, maybe charge a premium, or not accept it at all.
The Bottom Line
One day some form of crypto currency will perhaps be a mainstream payment method.
However, that will not happen until extreme volatility eventually settles and the current hysteria isn't helping.
Bottom line is that price and fundamentals need to work hand in hand.
Self-proclaimed crypto experts shouldn’t talk about fundamentals, without talking about the price.
Fundamentals exist to help you determine fair value and one should buy when the price is lower than the value of an asset.
That is essentially the goal of value investing.
When it comes to Bitcoin today, there’s nothing fundamentally sound about the price.