Is Bitcoin a Bubble?

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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“Is bitcoin a bubble?”

I get asked that question with surprising frequency at investment conferences and seminars.

I say “surprising” because I haven’t written much about the cryptocurrency and digital payment system - and don’t pretend to be an expert on it.

Of course, neither are most of the people I hear spouting off about it these days.

I’m happy to share what I know and - just as importantly - don’t know about bitcoin... and why I don’t recommend it.

Four years ago, I had dinner at the Oceanaire in Baltimore with my colleagues Eric Fry and Joel Bowman.

Over the meal, Joel waxed enthusiastic about the many benefits of bitcoin:

  • Unlike fiat currencies - virtually every government-issued paper currency in circulation - the supply is limited.
  • Transactions are quick and easy.
  • They are also private and beyond government control (unregulated).
  • Transactions are irreversible.
  • And there is no paperwork.

He conceded that there was a lot about the currency he didn’t fully understand and that he’d even had some of his own bitcoin stolen from his digital “wallet.”

Yet that didn’t dampen his enthusiasm.

“Just buy it, Alex,” he said. “Buy it and hang on to it. You’ll be glad you did.”

I didn’t. But Joel - a long-term believer - must be a happy man today.

Bitcoin was about $270 then. It’s closer to $6,800 today.

You might imagine I regret not buying it. But I don’t. At least, not any more than I regret not betting on the winning number on the last spin of the roulette wheel at Caesars Palace last night.

A lot of things about bitcoin seem hinky to me. For example, no one knows who created the currency.

The inventor is an unknown individual (or group of people) named Satoshi Nakamoto. It was released as open-source software in 2009.

Bitcoin - like other cryptocurrencies - is based on the blockchain, a decentralized database technology that serves as a ledger for recording secure transactions.

And while bitcoin offers all the advantages I cited above, it has drawbacks too.

For starters, most merchants and individuals don’t accept it. There is no physical form of the currency, so you can never take delivery outside the virtual world. There is also the risk - as with any new technology - of unknown technical flaws.

An even bigger problem for this medium of exchange is the wild swings in valuation.

Who wants to owe someone bitcoin and find when it comes time to pay him or her back that the currency is worth five, ten or a hundred times as much?

Conversely, who wants to be owed bitcoin and find when it comes time to get repaid that it’s worth half, a tenth or a hundredth as much?

One reason bitcoin has appreciated so dramatically is it has a limit of 21 million coins. (About 17 million are already in circulation.)

But the explosion of competing virtual currencies dilutes the value of this limited float.

There are more than 1,000 virtual currencies out there currently, with 67 worth at least $100 million.

How can we know that one of these others won’t prove more popular than bitcoin, knocking it off its perch? (And how can we be sure that new currency won’t get dethroned by another still better one? And so on.)

There are plenty of smart investors who are both for and against bitcoin. Two of the most prominent pessimists are JPMorgan Chase CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett.

Buffett says, “I don’t believe in this whole thing. I think it’s going to implode.”

Dimon is even more blunt: “It’s a fraud.”

However, Bill Miller, the former all-star manager of the Legg Mason Value Trust and the current manager of Miller Value Partners, has a whopping 30% of his hedge fund’s assets in bitcoin.

His fund is up over 70% year to date - and Miller remains bullish. He concedes, however, that “there is still a nontrivial chance bitcoin goes to zero.”

The blockchain is truly innovative. It’s here to stay.  Cryptocurrencies too.

But I don’t invest - or speculate - in things I don’t understand.

And bitcoin just doesn’t make sense to me.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

Editor’s Note: It’s great to read Alex’s financial straight talk... but it’s even better to see it in person.

At the 20th Annual Investment U Conference, you can. The event runs March 15-18, 2018, at the Four Seasons Las Vegas. Spots are already filling up. Click here to claim yours.

A More Conservative Investment in the Digital Payments Revolution

Alex isn’t confident enough yet in the investment potential of bitcoin to recommend it. But he agrees with the crypto crowd about one thing - digital payments are taking over the world.

Alex prefers to invest in this trend through PayPal (Nasdaq: PYPL), a fast-growing financial technology, or “fintech,” a company that has brought substantial gains to Oxford Communiqué subscribers.

Here’s Alex checking on PayPal a couple of weeks ago...

A survey by CAN Capital found that mobile payments technology is overtaking e-commerce as the biggest trend in retail consumers’ spending habits.

This is good news indeed for PayPal (Nasdaq: PYPL), a member of our Oxford Trading Portfolio.

Spun off from eBay (Nasdaq: EBAY) two years ago, PayPal is at the forefront of the digital payments revolution. The company allows consumers and businesses to securely transact with each other online and - using mobile devices - in public.

PayPal customers can easily access their funds and safely move them. They can send money in the U.S. or abroad, make donations to a cause, or even pay over time with PayPal Credit, a reusable credit line without the plastic.

The firm now has more than 218 million active customers. Its global payments platform is available 24/7 in more than 200 countries and with more than 17 million merchants, enabling customers to pay in more than 100 currencies and move funds to bank accounts in more than 50 currencies.

The company is a huge beneficiary of the growing use of smartphones. Mobile payment volume soared 54% last quarter.

Many of these payments were made with its Venmo app.

If you are not familiar with Venmo, a) you soon will be, and b) you are definitely not a college student or millennial.

Venmo is PayPal’s peer-to-peer payment platform that’s popular with young adults who want to send money to their friends at no cost.

The app has gone viral. (Like Xerox and FedEx, it has even entered the vernacular, as in “Just Venmo what you owe me.”)

' Payment volume on Venmo hit $9.4 billion last quarter, up 93% over a year ago.

What Google is to search and Facebook is to social media, Venmo now is to person-to-person payments. And its services are free to the user.

“What is the revenue model in that?” you might reasonably ask.

Just this: According to CEO Dan Schulman, every time a merchant or consumer uses an additional PayPal service - free or not - their lifetime value to the company doubles.

- Samuel Taube with Alexander Green

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