Q: Should I be considering adding bitcoin or blockchain to my portfolio? It feels like most people I know are invested and I may be missing out on the opportunity.
A: Sure, there may be some people who want to bet on it, but unfortunately, that’s exactly what it is – a pure bet.
The issue with bitcoin is that there is no there there. It is hard to see either a fundamental way to consider bitcoin a legitimate currency or a fundamental way to understand the intrinsic value of it. That doesn’t mean there isn’t some value to bitcoin. Because there is in the concepts and the technology. But just because there is value doesn’t mean that you should “invest” in it. At various points in time there was value to lots of other things too; Pez dispensers, Cabbage Patch dolls, tulips, trading cards, and beanie babies come to mind.
Let’s not ignore the concepts and technology of blockchain, which can be best described as type of secure electronic ledger. Blockchain technology is not going away and there are entirely great uses for this type of technology. Many of the companies we have in our funds are taking advantage of blockchain technologies, either delivering the chips that drive the computers, or providing software, marketing, custody, among other technologies that are the backbone of blockchain.
Q: How could one invest in bitcoin if they wanted to do so?
A: Currently there are no registered cryptocurrency mutual funds or exchange traded funds. A lot of companies are trying to develop one; however, the Securities Exchange Commission (SEC) has struggled with issues of security, fraud and custody.
The Greyscale Bitcoin Trust, ticker GBTC, is essentially a closed end trust that tracks the price of Bitcoin and can trade at a discount or premium to the NAV. The thing is though, there is really zero way, other than price, to say what it is worth because there are no cash flows associated with it, no discount rate, no fundamentals other than saying that was the price at one point, and here is the price today.
You could also open an account on Coinbase. I did this and it took me all of five minutes to get an account there. I haven’t done anything with it yet. I just wanted to see what the process was like.
If you bought a cryptocurrency on Coinbase (and there are thousands to choose from) what would you actually buy? In the simplest sense, you would buy a digital ledger of numbers that is uniquely yours. The hope is that someone someday in the future thinks that digital ledger is worth more than it is today. The other hope is that maybe you could trade that ledger for a certain value of goods and services.
Will cryptocurrencies eventually become legitimate? Will some type of digital currency ever take hold? Likely so. Which one though? There are thousands of cryptocurrencies in existence. I’m happy to wait for the SEC to officially register a mutual fund or ETF.
There is demand there and some legitimacy building. El Salvador, for example, established Bitcoin as a legal tender currency. It remains to be seen how this experiment plays out.
For now, there is also an incredible amount of fraud, scams and illegitimacy. That’s why, for me, it’s hard to take the “bitcoin as an asset class” seriously.
If you have any questions, reach out to me or your Modera advisory team. If you would like to submit a question to “Ask the CIO” for our next blog, please send to email@example.com.
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