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Would-be bitcoin buyers must read this before punting

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As the year nears its usual ending, I have to say that this often-called ‘money guru’ is sick and tired of one persistent question: “Is bitcoin a good buy?” And even more, I hate having to say: “I don’t know.”

It doesn’t look like the kind of investment that I recommend to people. It looks more like a punt on the racehorses. And if you’re buying in now, it looks more like a big outlay on a long shot in the Melbourne Cup.

I interviewed the President of the Bitcoin Society (or some name like that) about three years ago on my TV show and he was referring to a hotelier in the Wooloomooloo area, who was accepting bitcoins for accommodation. Then they were worth about $200 and that was a more understandable punt. However when you’re being asked to invest $20,000 and when the price can drop $1000 overnight and then rebound $2000 the next day, I have to throw my hands up and say: “Stay away unless you can afford to lose $20,000.”

Three weeks ago, I told my subscribers to the Switzer Report that I thought Fortescue was a good investment. I quoted research done by expert analysts who study the company, the outlook for iron ore prices and other relevant price-determining factors. Its share price went up 8% over that time and this is the kind of ‘advice’ I feel comfortable about because there are a lot less unknowns.

But with Bitcoin, it's the classic Donald Rumsfeld descriptor of something head-scratching: "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."

With bitcoin there are so many unknowns and as the greatest investor of all time, Warren Buffett has advised us — don’t invest in anything you don’t understand!

My old mate, financial planner Noel Whittaker, put it sensibly in Fairfax publications: “In my opinion, Bitcoin fails every investment test. If you buy government bonds, you receive a guaranteed income plus principal repayment at the end of the term. 

“If you buy shares, you can make a decision based on the financial statements and profitability of the company. If you buy real estate there should be a nexus between the land value, the cost of improvements, and any potential rental income. In other words, you are making the decision on concrete information.”

But that wasn’t all he said. “Bitcoin works on the greater fool theory: a fool buys today in the hope of on-selling to a greater fool tomorrow. It's more like the allegory of the box of strawberries sold from person to person at ever-increasing prices. 

“Finally, the buyer who had paid $100 for a box of strawberries that had cost only $5 a few buyers ago, stopped the cycle by opening the box. To his dismay he found the strawberries were rotten! When he complained, the response was, "but these strawberries were meant to be sold – they were never meant to be eaten". Each buyer had bought with one aim – to resell for a higher price to a fool who still believed in the impossible dream. At least your Bitcoins can't rot. They never really existed.”

And this revelation has to be a worry.

“The Swedish founder of Bitcoin.com Emil Oldeburg has sold all of his Bitcoin, saying the cryptocurrency is ‘the riskiest investment you can make’.”

“Speaking to Swedish website Breakit, Oldeburg said Bitcoin was practically unusable because of the long waiting times for transactions and the unusually high transfer fees.”

But wait there’s more!

“An investment in bitcoin right now I would say is the most risky investment you can make. It is an extremely high risk,” he said. 

“I've actually sold all my bitcoins recently and switched to bitcoin cash.”

On the subject of unknowns and bitcoin, this worried me from the terribly British-named Financial Conduct Authority.

“The financial regulator has issued a stern warning against a speculative frenzy over initial coin offerings (ICOs) in cryptocurrencies such as bitcoin that have been promoted by celebrities including Paris Hilton,” the Guardian newspaper reported. “The FCA said anyone investing in ICOs should be prepared to lose all their money, with some of the schemes floated potentially outright frauds.”

I have to say this new ‘coin’ business looks crazy. The number of cryptocurrencies available over the Internet as of 27 November 2017 is over 1,324 and growing!

And then there is the tax office issue. If so many people are making capital gain on buying and selling bitcoin, why wouldn’t the ATO want to charge a capital gain tax? And why wouldn’t all tax regulators around the world have the same idea? And why wouldn’t all central banks be worried if cryptocurrencies spread like topsy and were uncontrollable and not easy to monitor?

This is digital disruption that not only could hurt an industry (just like what Uber did to taxis), it could disrupt government policy.

I think regulation could be the biggest threat to bitcoin and its impersonators out there.

Good luck if you have a punt on bitcoin but don’t think it’s an investment — it’s a gamble like the four-legged lottery called racehorses.

By the way, I don’t think bitcoin will disappear but its high prices undoubtedly will.

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Published: Wednesday, December 20, 2017


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