17 January 2021
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What’s wrong with Bitcoin?

Peter Switzer
14 January 2021

Bitcoin has a problem and these ‘ads’ below underline its problem. It is a highly risky product being promoted to highly uneducated people in the tricky world of money.

Have a read of the promotional headlines and look at the images the promoters are using to get people in.

And by the way, I was reading a business story from the Miami Times, which, thanks to the Internet and search engines, meant a local Aussie reader could be advertised to about bitcoin!

Now I’m not even saying that bitcoin is a bad investment but I am saying it’s a risky one. And yet it’s portrayed as an easy ‘get rich’ way to a better life. And in an age where the Internet can target you anywhere you’re surfing on the worldwide web, uninformed Aussies could be tricked into losing a lot of money.

Be clear on this: bitcoin has its supporters. One is the legendary investor Bill Miller, the founder of Miller Value Partners, who admits to being very invested in the cryptocurrency.

Miller recently told CNBC that Bitcoin could spike 100% this year. But who knows if he’ll be right?

However, in the game of building wealth, you always have to be careful about headlines and ads. If you invest in anything you don’t understand, then you could cop a significant hip-pocket loss. And if you don’t pay for advice or seek expert views on whether you should invest in bitcoin, you can only blame yourself if the investment/gamble doesn’t pay off.

So let me do the homework for you and tell you what Miller said about bitcoin. Here goes:

  • He thinks inflation will eventually come out of the boom that will be powered by the huge fiscal spending worldwide because of the Coronavirus. Bitcoin is seen like gold as a hedge against inflation.
  • Yep, he did say its price could go up 100% this year but it’s a guess.
  • “One of the things that's interesting about Bitcoin is that it gets less risky the higher it goes, and that's the opposite of what happens with most stocks," he said.
  • Miller says if you can’t cop a possible 80% correction in the price downwards, then forget about bitcoin.
  • And here’s the really important piece of advice he gave:Investors should consider holding 1-2% of their portfolios in bitcoin as opposed to cash, because cash will be a “guaranteed loser” and lose at least 2% in value each year with the current inflation rate.” (businessinsider.com)

Bitcoin has had three 80% corrections, so it shows you how scary this investment can be. The chart below shows how the cryptocurrency performed in 2020, with a low of US$4,106 and a high of $41,946! This isn’t an investment for the feint-hearted but history says it has paid to buy when the market has completely dumped the stuff!

Bitcoin Over 2010-Now

The Big Ups and Downs of 2020

One big risk for investors could be a regulatory one.

Kiplinger.com’s Andrew Packer sees regulations on bitcoin as a “wild card” you have to understand could be levelled at the cryptocurrency world. “While fewer people might be asking about using bitcoin to buy illicit substances anymore, regulators are again taking a close look at digital currencies, this time with a focus on how these coins act as securities,” he wrote in early January. “The most noteworthy of late: In late December, the Securities and Exchange Commission SEC filed a lawsuit against the ‘altcoin’ Ripple. (Altcoins are any digital coin that’s an alternative to Bitcoin.) The issue at question is whether its digital currency is really a digital currency, or if it’s an unregistered securities offering. The news was enough to cut Ripple prices by more than half in just a few days, and several cryptocurrency exchanges stopped trading in the altcoin until the issue is resolved.” (Aside from the cryptocurrency XRP, Ripple is perhaps even better known as a payment settlement, asset exchange, and remittance system that works more like SWIFT, a service for international money and security transfers that is used by a network of banks and financial intermediaries.)

This is just another unknown issue for potential investors to think about. And it raises the question about how a Biden presidency will treat bitcoin.

There are no stated Democrat policies on the subject but it should be noted that Joe Biden’s Treasury Secretary, former Fed boss, Janet Yellen, has expressed some views on the cryptocurrency.

Forbes has reported that: “She has said that ‘she will say outright that she is not a fan’ of bitcoin, saying that many of the transactions that “do take place on bitcoin are illegal, illicit transactions.” She has speculated on the “very high” energy usage of bitcoin, as well as cybersecurity concerns around anonymous cryptocurrencies.”

I wouldn’t expect anything any time soon from the White House after January 20 that will hurt bitcoin’s price, but any serious talk of regulation (as opposed to an outright ban, which I can’t see happening) will be negative on a price that looks way over the top.

Meanwhile, comparisons of bitcoin to gold do look questionable because while they do tend to spike together, there’s a huge difference when it comes to volatility or price ups and downs.

The chart below tracks bitcoin and gold since March 2013. There are similarities when it comes to fear driving their respective prices higher but gold investors haven’t experienced as many big down phases, though on the other hand, they didn’t enjoy such a big spike in 2020.

The bottom line is if you want to play bitcoin, put on your seatbelt. And if you lose money, it will be your fault. But if Bill Miller is right, you could look like a genius, albeit a lucky one!

That said, let me remind you that Bill only recommends a 1-2% of your portfolio exposure to the cryptocurrency.

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