If you have read my previous posts about Cryptocurrencies, Blockchain-backed companies and ICOs (link here and here), you might have an idea on what my views are on cryptocurrencies as investments. This post elaborates it further and the reasoning behind my views.
If you read my opinion piece on Digital currencies and Capitalism, you would know that I am in support of cryptocurrencies and its blockchain technology as a new age of progress in innovation and making industries more efficient and secure.
However, the key thing to note is I am strongly against cryptocurrencies (and other Blockchain innovations) as “assets” for prudent investing.
The underlying reason is simple, and I quote from my previous post:
The value of the “asset” is still not yet intrinsically or socially determined.
No one has any clue how much Bitcoin or Ethereum (or any other alt-coin for that matter) is worth! Is it $13,000? Is it $6,000? Who knows…
Efficient Market Theorists would posit that cryptocurrencies’ price on the markets are already fairly priced and reflect the worth of that “asset” at that point in time.
However, with such huge volatility in price (as is seen with Bitcoin), I strongly disagree that markets reflect the true worth of whatever cryptocurrency that attracts your interest.
In my quote, I highlight TWO important factors that, if either is fulfilled, would make it an investible asset for me.
These are: “intrinsically determined” and “socially determined”.
Intrinsic determination goes back to the very fundamentals of investing from a purist (or realist) perspective. It asks the question, “What would the value of this asset be worth if the business closed down today or if the (crypto)asset is defunct?“
For companies, it is very easy to do this – we simply use Book Values to determine how much the company’s remaining assets are worth after deducting all loans and liabilities.
For crypto, this is a huge question mark. There is simply no underlying “thing” for us to put value towards. Maybe the answer can be found in “social determination”, you ask?
Social determination is a little more iffy and concerns macroeconomic factors such as growth of an economy, market participants’ uptake, business cycles and politics.
To put a rough value based on social determination is not impossible. However, the current landscape on Blockchain and cryptocurrencies is still very uncertain – and government regulations, new innovations and contracts makes the valuation of crypto extremely unreliable.
In short – we still aren’t at the stage where crypto has become stable and widely accepted for us to put a value to the darn thing.
Therefore, it makes no sense investing in crypto right now – because (1) you don’t know whether you’re buying at an overvalued or undervalued price, (2) you assume that crypto will do supercedingly well in the future [thus covering any loss in returns if you bought way over its true value]
While I don’t deny crypto and Blockchain will change up industries and have a definitive impact on society, I don’t believe now is the right time to consider crypto or any Blockchain companies as prudent investments. It may rise or fall, who knows… but I prefer to stay away until the dust settles.