Bitcoin – the new gold?

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Bitcoin [noun]
cryptocurrency created in 2009. It is the first decentralised digital currency that works without a central repository. It functions as a peer to peer network where transactions take place directly between users, verified and recorded in a public ledger known as a blockchain.


I’m getting tired of people asking me about Bitcoin. There’s so much happening in the world of finance at the moment. Big tax cuts in America, a booming economy in Europe, and a big dose of political uncertainty in New Zealand.

Loads of interesting stuff to discuss, debate and argue about. But no, people from all walks of life are fixated on the cryptocurrency phenomenon. Some of them even see it as a genuine investment strategy.

It’s hard to blame people for being fascinated, with Bitcoin up some 1000 per cent this year. But when every man and his dog is jumping on the bandwagon – regardless of whether they understand it – it’s slightly concerning.

The value of any investment is the sum of all the cash flows it will generate in the future, brought forward to today.

For a share in Auckland Airport, that’s all of the payments from airlines who land on the runway, the earnings from the shops inside the terminal, and the parking fees we pay. For an investment property, it’s all the future rental payments added together. Simple.

For a start-up or a block of bare land, there are no earnings, that’s true. However, the value is premised on the expectation one day the company or the land will one day generate some cash.

So where’s the investment value in Bitcoin, and what do you get in return for each dollar you put in?

Perhaps you’re waiting for it to replace traditional money, or maybe you don’t expect that to ever happen but you’re banking on selling it to someone else at a higher price regardless.

If it’s the former, then that’s a big if. The regulatory outlook for cryptocurrencies is highly unclear. Japan has considered recognising them as legal tender, while China has contemplated a complete ban.

If you’re there to make a quick buck, you’re in risky territory. Having said that, even if Bitcoin turns out to be your garden variety bubble, you might still do really well.

Prices could keep going higher for some time yet as momentum carries them up. Just make sure you get out at precisely the right time.

I understand the cynicism about central banks and conventional currencies, but I’m not convinced Bitcoin is the new gold. Precious metals have been a store of value for thousands of years, so the cryptocurrencies need a few more runs on the board yet.

Besides, a store of value shouldn’t exhibit such extreme volatility, nor should it be quite as susceptible to hackers.

Bitcoin sits firmly in the speculative category at present. You only need to look at a chart of its price to realise that.

That doesn’t necessarily mean it won’t play an important role in our financial system someday. It could, and the blockchain technology behind it might also become part of many mainstream applications.

However, at US$10,000, US$20,000 or whatever crazy price it reaches next week, I’d be a little wary.


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Mark Lister is Head of Private Wealth Research at Craigs Investment Partners, his Adviser Disclosure Statement is available on request and free of charge under his profile on craigsip.com. For personalised investment advice please contact a Craigs Investment Partners Investment Adviser or phone 0800 272 442. This column is general in nature and should not be regarded as specific investment advice. Craigs Investment Partners do not accept liability for the results of any actions taken or not taken upon the basis of this information. While every effort has been made to ensure accuracy, no liability is accepted for errors or omissions herein.

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