I am hearing more and more about Bitcoin from my friends. Bitcoin is all over the financial news and people are talking about making tons of money on every personal finance forum that I read. There is a lot of hype on cryptocurrencies.
Aswath Damodaran teaches finance and valuation at the stern school of business at NYU. I have watched all his lectures on youtube and my investing thought process is greatly informed by his lectures. He takes a holistic look at investments in a way that just makes sense. Many other people giving investment advice miss the forest for the trees and make large errors as a result. I believe that people “investing” in Bitcoin are doing that right now. Here is a video of Aswath Damodaran’s thoughts on Bitcoin.
I’m not against using Bitcoin as a currency. Bitcoin may very well become the most effective way to make financial transactions and I will adopt it when/if it becomes easier and cheaper to use than cash/credit cards. However, Bitcoin does not produce income, so it cannot be a productive asset. The only way that people make money is when someone else is willing to pay more for Bitcoin than when they bought it. This by definition is speculation. I consider myself very intelligent and have spent an immense amount of time researching and attempting to win at the speculation game in other areas with no success. I have learned that I am not good at speculation and that is why I will never “invest” in Bitcoin just like I don’t invest in Euros or Yen. I have no competitive advantage in that zero sum game (negative sum if you factor in transaction costs).
As a novice investor the returns in the speculation market will be appealing. You will see your friends making ridiculous amounts of money on their investments. You will be hearing about these gains from more and more people. You won’t want to miss out on all of these great returns and be left behind by everyone you know. Bitcoin right now is very similar to tech stocks in 1999. People kept bidding up the prices as more and more people started dumping all of their money into them. By the time that just about everyone was getting rich on tech stocks, the market collapsed.
This quote was what allowed Joe Kennedy to avoid the 1929 stock market crash. I have heard a similar one about taxi drivers giving investment advice before the internet bubble burst. The idea is that when people that normally pay no attention to the market start thinking they are experts, you are probably getting close to a crash. I think that Bitcoin is like that now.
What are your thoughts on Bitcoin? Do you own any cryptocurrencies?