Bitcoin has corrected by more than 45% from its peak.
I have been asked many times about my views on investing in cryptocurrencies.
And every time I have re-evaluated, but came to the same conclusion that I do not recommend investing in cryptocurrencies.
And my reason is very simple – I do not know anyone who knows how to value cryptos. If you cannot value any asset class, you cannot understand the risk involved, and therefore, it becomes a tool for speculation, not investment.
Investing needs all three important parameters:
1. Can be valued based on cash flows or any other reference metrics
2. Can evaluate maximum downside risks
3. Future prospects based on clearly defined factors, not just unsubstantiated supply and demand.
Bitcoin or any other cryptocurrencies qualify only on the 2nd factor – the maximum downside is zero price. The only usage people have found so far for cryptos is its ability to transfer a substantial amount of assets from one place to another without going through regulatory scrutiny.
Crypto enthusiasts provide the following argument in favour of Bitcoin: a limited number of coins. But anyone can create a cryptocurrency with a hardcoded number of coins. Nothing unique.
Another argument is that it is like digital Gold and should be valued like Gold based on demand and supply. But Gold is a unique metal that cannot be created by humans. Secondly, Gold has a history of being linked to outstanding paper currency. And if one links Gold to the current outstanding paper currency in a similar manner to how it used to be before the end of the Bretton Woods treaty in 1971, then one can attempt to determine the value of Gold.
Honestly, I do not know if Bitcoin should be valued at $100, $10,000, $100,000 or $0. If anyone can tell me, I am happy to reevaluate my thesis.
Till that time, I will always recommend not investing in cryptocurrencies.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
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