The guest commentary below was written by Jesse Felder of The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.
More than anything else lately, I have been asked for my opinion of Bitcoin. It seems the cryptocurrency’s popularity has made a major comeback since peaking three years ago and crashing more than 80% over the following 12 months.
However, since putting in its pandemic low back in the spring it has risen over 500% and anything that trades like that is bound to suck in speculators like moths to a flame.
In my view, Bitcoin simply doesn’t make sense as an investment nor as a currency alternative. It makes a great deal of sense as “trading sardines” if that’s what you’re looking for but I would guess most of those buying it today aren’t doing so with this sort of awareness. My guess is most are buying it because they do, in fact, believe it to be a good investment or currency alternative.
The reason I don’t view Bitcoin as a legitimate investment is that I use an old school definition provided by Ben Graham. Because bitcoin provides neither “safety of principal” nor “an adequate return” it therefore can only be considered speculative.
Furthermore, because bitcoin is not used as a medium of exchange nor provides any store of value, I can’t view it as a currency alternative either.
Some may argue the last part of that but bitcoin isn’t used in any meaningful way as a medium of exchange today. More importantly, as a store of value it has failed miserably countless times for countless cryptocurrency afficionados. Millions of dollars worth of bitcoin has been hacked even though crypto believers claim this is not possible. I’m not a fan of dollars but at least the $20 in my real world wallet can’t be stolen from the comfort of a hacker’s couch.
There’s also the problem with hard forks. Bitcoin believers rely entirely on the idea that bitcoin is limited in supply making it far more attractive than fiat currencies that are being printed like mad by central bankers around the world. However, bitcoin has already hard forked several times, multiplying the number and type of bitcoins in circulation. In fact, if you put together all the hard forks Bitcoin has undergone since it was first created, the number of total bitcoins has actually grown faster than the number of dollars. That’s a fact.
Then there is also the fact that new cryptocurrencies are being created all the time, many of which may be technologically superior to bitcoin, in all of its derivative forms. Fiat currencies have value because the powers that be declare they have value; that’s what “fiat” means. How can we know that, without this sort of support, bitcoin will not be supplanted by a better cryptocurrency, perhaps one that has yet to be invented (or one created by the powers that be and vested with full fiat support)? We can’t.
Again, bitcoin may make a great deal of sense as a speculation. Ponzi schemes can work out great for early adopters. But that doesn’t make bitcoin, in any shape or form, a good investment or even a store of value, especially for those late to the game.
And, for that reason, I can’t get behind it the way I would get behind what I perceive to be uncommon value in the stock market or a true store of value like gold.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.