The amazing rise of Bitcoin has been one of the most exciting things to happen in the financial world over the last two years.
Everyone and their dog is talking about it. Is it a good investment? Can you get rich from buying bitcoins?
If you had bought bitcoin a few years ago and held until today you would literally be sitting on millions of dollars.
However, I don’t think that rise will happen again. In-fact, there’s a real danger that Bitcoin will suffer big falls at some point due to the following reasons:
Nothing holding up the value
Nearly every other asset class has some form of income generation to justify its profit.
An investment property generates rent for its landlord, which means the property can at least be compared against its gross yield.
Most businesses generate a profit, allowing investors to analyse statistics such as price/earnings ratios. If it isn’t yet profitable you can at least make a projection for a few years down the line and use a discounted cash flow model to get a value for today.
Cash in the bank or bonds will generate a yield for investors. Reliable governments provide excellent guarantees for money in the bank or the bonds that it sells to the market.
Bitcoin does not have anything backing its rise in value.
Bitcoin may seem completely outlandish to most of us, but it’s already an inferior product according to experts.
The long-term use of bitcoin will be justified by its use in modern society. There’s a reason why Blackberry phones, CDs and VHS tapes have all disappeared from use. They became obsolete.
‘Bitcoin cash’, a spin-off, is seen as the better product and could replace bitcoin in the future as the preferred cryptocurrency.
There are literally hundreds of other coins vying to be the number one choice, there is no guarantee that bitcoin will retain number one status.
It’s pure speculation
Booms never end well for the item involved or the investor when the music stops.
Bitcoin will probably be seen as a new-age, snazzy trading tulip in the years to come. It’s far worse than the excitement that surrounded Liquefied Natural Gas Ltd (ASX: LNG) or Reffind Ltd (ASX: RFN) in recent times.
Bitcoin is a great invention and I can understand why the early-adopters wanted to use it as a genuine currency without influence from governments.
However, it’s been wildly inflated beyond a currency and has been turned into a trading tool that’s testing the ‘greater fool theory’ to its limits.
A bitcoin could justifiably be worth $100 or even $10, instead of the crazy prices we are seeing today.
Bitcoin is fascinating to watch from the sidelines, but you won’t catch any serious investor getting caught up in it.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.