Webcast #33: Why We’ve Never Touched Bitcoin (7 minutes)

Because of the financial crisis and the unprecedented money-printing exercise that followed, Bitcoin was created in 2009. Given the heightened distrust for public institutions – namely the government and its central banks – the new cryptocurrency allowed transactions to take place without financial institution involvement as well as anonymously from the prying eyes of the government.

Last February 2021, Elon Musk announced that Tesla purchased $1.5 billion worth of Bitcoin and would now accept it as a form of payment from customers. Tesla’s endorsement of Bitcoin led to an immediate burst in demand from speculators. The cryptocurrency jumped from $38,900 at the time of the announcement to $51,200 in the subsequent month, a surge of over 30%.

Two months later in May 2021, Tesla reversed its decision to accept Bitcoin as payment, citing climate concerns. Last week, Tesla disclosed that it sold 75% of its Bitcoin holdings and bought traditional currency with the $936 million proceeds.

Tesla wasn’t the only speculator with deep pockets that took an interest in Bitcoin. El Salvador made Bitcoin a legal tender later that year in September 2021. It has since purchased $107 million worth of Bitcoin at an average price of $45,004.

Today, Bitcoin trades at $21,100. That’s a long way down from its all-time high of $68,800 where it sat eight months ago in November 2021. In fact, that’s almost a 70% drop.

If you add up the value of all cryptocurrencies, including Bitcoin, it’s about a $1 trillion market ($1.3 trillion Canadian). When we say “value”, we simply mean the sum of all dollars that its speculators would receive if they could convert their holdings to cash immediately.

We’ve never believed Bitcoin to have any value at all.

If you have an interest in laundering money or holding others at ransom, perhaps Bitcoin has some value for you. This is because of the anonymity it provides. But that’s the precise reason why we believe regulations are long overdue to govern the space.

Its advocates may argue that Bitcoin’s value stems from its scarcity. Similar to a commodity like gold, which has a finite supply, the fixed cap on Bitcoin is 21 million digital coins.

However, to be called “money”, the item must act as a medium of exchange. In other words, it must be able to facilitate a trade between multiple parties. Because of its exceptional price volatility – sometimes changing plus or minus ten percent in a single day – one could never write a forward-looking contract or price a good or service for any reasonable length of time using a commodity like Bitcoin as its currency.

If it’s not money, then what it is?

It’s nothing more than a speculation. As the “greater fool” theory rightly suggests, people will buy something strictly because they hope another person will be willing to pay a higher price for it later. While there is no actual intrinsic value in Bitcoin because it is not backed by anything, its unregulated environment is ripe to change, and its price volatility makes it unsuitable to be used in the future as money. For these reasons, we’ve never traded any cryptocurrencies and watch from the sidelines.

Instead, we focus our efforts on stocks backed by profits, revenues, assets, and cash flow.

(Note: all dollars listed above are in U.S.)