in my last video I told you about
Bitcoin what is it
bitcoin is a relatively new thing called
a cryptocurrency some people think that
you can compare it to a traditional
currency or to gold while others
describe it as a new asset class
altogether
whatever it is excitement about its
potential for future adoption has led to
a rapid increase in price which has a
lot of people wondering if they should
be buying in how bitcoin is going to
perform in the long term is anyone's
guess without long term data on Bitcoin
or any other cryptocurrency it is not
possible to make an evidence-based
decision about investing in it I'm Ben
Felix associate portfolio manager at PWL
capital in this episode of common sense
investing I'm going to tell you what I
think about Bitcoin
[Music]
let's look at Bitcoin from the
perspective of it being a currency our
currencies good investments traditional
currencies do not have a positive
expected return in a 2016 essay titled
long-term asset returns Timpson marsian
stuntin showed that over the last 115
years
currencies have jumped around a lot in
relative value but you would not have
been any better off with exposure to one
currency over another Bitcoin has also
drawn comparisons to gold unfortunately
that does not mean that you should buy
Bitcoin the evidence for gold as an
investment is not very good some people
argue that gold is an inflation hedge
and that bitcoin could be the same in a
2012 paper Claude herb and Campbell
Harvey found that while gold has been an
inflation hedge over the very very long
term in the shorter run gold is a
volatile investment which is capable and
likely to overshoot or undershoot any
notion of fair value so if bitcoin is a
currency it probably isn't something
that you want to invest in the price
volatility of currencies and gold does
mean that while they do not have a
positive expected long-term return you
may still be able to profit by trading
them buying low and selling high as the
price fluctuates of course the problem
with trading currencies is that they are
random and volatile leading to extremely
unreliable outcomes in a medium post
Adam Lud went from chained a company
that builds cryptographic Ledger's
explains that he views Bitcoin not as a
currency but as a new asset class
altogether much like stocks and bonds
currently serve public companies Ludman
writes that cryptocurrencies are assets
that serve decentralized applications a
decentralized application is a service
that no single entity operates due to
its utilization of the blockchain Ludwig
explains that in general a decentralized
application allows you to do something
that you can already do like make
payments in the case of Bitcoin but
without the need for a trusted central
party well decentralization sounds like
a good thing there's a catch by nature
of being decentralized decentralized
applications are slower more expensive
and less scalable they also have worse
user experience and volatile and
uncertain governance when a service is
completely decentralized there is no
customer service center there's no help
line there's no way to get your Bitcoin
back if you lose it in contrary
if you damage your US dollars in a fire
you can bring the scraps to the US
government and they will try to identify
the bills and reimburse you
that type of centralized service is lost
with decentralization ludman explains
that bitcoin is not best described as a
decentralized PayPal it does not compare
to PayPal in terms of user experience or
efficiency it's more honest to say it's
an extremely inefficient electronic
payments Network but in exchange we get
decentralization the obvious question
follows who cares about decentralization
enough to put up with a slow inefficient
and inconvenient method of payments the
most obvious answer is people who want
their transactions to remain anonymous
and who do not want to be censored by
say a government based on loved ones
argument for bitcoin is a separate asset
class that serves a decentralized
payments application its value will be
derived from the adoption of Bitcoin as
a means of exchange buying Bitcoin in
hopes of benefiting from its widespread
adoption keeping in mind the very
specific type of person that would value
Bitcoin enough to put up with its
shortfalls would be very speculative in
an interview with coin Telegraph Eugene
fama Nobel Prize winner and the father
of modern finance explained that he
believes that Bitcoin only has value to
the extent that people will accept it to
settle payments he explains that if
people decide they don't want to take it
in transactions its value is gone when
fom is interviewer tells him that
Bitcoin also derives value from its
censorship resistance component fama
says I guess it for a drug dealer that
has a lot more value but otherwise I
don't see the big value about that well
farmers answer may seem flippant it
touches on the same point that blood
would mate bitcoins price depends on its
adoption so why is bitcoins price seen
such a sharp increase it's safe to say
that the future supply and demand of
Bitcoin are highly uncertain but the
expectations of future supply and demand
are factored into the current price each
time someone pays a little more to own a
Bitcoin they're injecting their future
expectations into the price the recent
rapid price increase is due to people's
expectations that Bitcoin will be widely
adopted in the future the fact that the
number of bitcoins can reach an upper
limit is an often used argument that
Bitcoin will retain its value over the
long term that may be true in isolation
but the future supply of cryptocurrency
sieze is a big unknown new crypto
currencies have emerged that attempt to
improve on bitcoins design potentially
reducing the demand for Bitcoin as a
payment system Bitcoin is either an
inefficient currency in the early stages
of adoption with plenty of disadvantages
and one big advantage over traditional
currencies or it's a new type of asset
that serves a decentralized payments
application in either case the long term
value of Bitcoin will mainly be derived
from its adoption as a mainstream
currency by the people who value
decentralization enough to put up with
all the downsides there is no doubt that
bitcoin is based on an exciting new
technology with potentially widespread
applications investing in Bitcoin is a
bet that this technology will meet or
exceed the expectations that current
market participants have for it just
like I would be wary about investing in
gold an individual stock or a specific
currency I would be very hesitant about
buying Bitcoin and I'm not the only one
thinking that way Warren Buffett one of
the greatest investors in history
recently said in terms of crypto
currencies generally I can say with
almost certainty that they will come to
a bad ending if you must buy Bitcoin
keep in mind that its market
capitalization is still less than one
third of one percent of the global
market capitalization of stocks you
might consider allocating Bitcoin to
your portfolio accordingly thanks for
watching my name is ben felix of PWL
capital and this is common sense
investing I'll be talking about a lot
more common sense investing topics in
this series so subscribe and click the
bell for updates I'd also love to read
your thoughts and questions about this
video in the comments in my next video I
will tell you why not all index funds
are created equal
[Music]