The craze surrounding Bitcoin is fun to watch, and I’ll be staying on the sidelines as a spectator. First of all – congratulations to the early adopters whose lives have changed from having the insight and luck to have put their savings into THE hottest asset on the planet in 2017, and that high temp description might be true in a literal sense given the breakneck speed and power consumption of the GPU’s dedicated to mining. If you’ve been watching the headlines and checking the price and reading up on how Bitcoin works, you might be tempted to jump in on the action. Who’d want to miss out on the potential for massive capital gains in short order? Here’s the thing, or two, that has me skeptical:
Our Thoughts on Bitcoin “Investing”
- Bitcoin does not produce economic value. It doesn’t sell goods or services. It doesn’t pay dividends or buy back shares. It’s simply an asset. When you buy assets as “investments,” you’re hoping to sell them to someone else at a higher price, i.e. you’re relying on the greater fool theory. I’d rather rely on a business that produces actual tangible sales and cash flows.
- The hype surrounding Bitcoin is a glaring red flag. I’ve had conversations with septuagenarians about why they should or shouldn’t buy Bitcoin. I just have to wonder who the “greatest fool” might be and if he or she has already bought a fraction or two of the wundercurrency. The bandwagon fallacy comes to mind.
- I wonder what happens when Big Money pours an overwhelming amount of cash into Bitcoin. The flow has already started from banks and sovereign wealth funds. Can the market withstand gyrations from when the tap is turned from a drip into a flood? What about when high-speed trading ramps into a frenzy?
- Will alternatives carry the day? It seems to me that blockchain is a breakthrough technology that will disrupt payment processing and perhaps the concept of currency itself. The banks and companies like Visa will throw their massive resources into remaining relevant, either by fighting or co-opting the technology. Government intervention seems to be inevitable. The long-term outlook for Bitcoin and its ilk is murky at best. Will it be around in 30 years? If so – in what form?
I’d be open to using Bitcoin as a method of payment and exchange of currency. I just don’t see it being viable as a sound investment. But hey, this is coming from a guy who thought iPads were ridiculous and would never catch on.
Mental Models and Bitcoin
We’ve mentioned using mental models from the latticework Mr. Charlie Munger has taught throughout his career. We feel the following mental models are worth thinking through before taking the plunge with your money into Coinbase.
Fear of Missing Out
Those early adopters mentioned above were able to take a risk (hopefully with sandbox money for investing) on Bitcoin. Secondly, miners who had bitcoin from being technically savvy in its early days cashed in awarded bitcoins to makes mounds of dough – like we said, congrats to them for doing so.
For those of us who were not part of these early days before insane price rise, there is a fear of missing out on making the same money the early adopters received. Are you feeling like you’re missing out by not investing at this time? Many of us are. Investing temperament requires us to keep these emotions in check unless we feel the value is there.
From the Mental Model Dictionary – “Social proof is the tendency to see an action as more appropriate when others are doing it.”
As more and more experts post articles stating reasons for or against Bitcoin, the social proof on either side of the fence rises. This mixes with uncertainty and confirmation bias causing investors to think their action is right because others do as well. If you have researched and made your own independent decision to invest, instead of relying on the action of others, then you defeat the mental model!
Everyday miners are awarded new coins driving us closer and closer to the 22 million limit articles have mentioned in their attempts to explain it. The opportunity to invest and make money within the cryptocurrency world feels limited due to this top out a number, are you investing in it because of this limited time opportunity that may not last?
This bias occurs when only reading articles, research, or opinions from sources that have the same belief as you – confirming your own. To avoid this one, we recommend reading articles against your own view and decide on your rationale against them. If you’re able to state the arguments against your feelings on Bitcoin better than those for it, then you have passed this one!
These are just a few that can be checked when making the final decision on whether or not to use your money in Bitcoin or other new cryptocurrency types.
We want to make sure to specify for this post we’re specifically talking about the cryptocurrency Bitcoin, not other options. Do we think those are good investments? Not so much, although we will readily admit to not researching each individually at this time. The feelings for us against the investment fundamentally comes down to one thing: the inability to calculate the true intrinsic value of one coin, and using that to make an intelligent investment decision.
What do you all think of the Bitcoin market? Let us know what you think!