As some of my financial planning clients and subscribers to the Switzer Report maintain their enthusiasm to collect a bitcoin or two, bitcoin bugs keep predicting that the precious plaything of the tech nerds is closing in on US$100,000. This comes as the AFR looked at the bitcoin convention in Sydney last week and the impression on reporter James Eyers wasn’t a positive one.
Sure, I know there are always bitcoin doubters, and I can’t say I’m a card-carrying cynic when I consider bitcoin, as I think there’s a growing group of believers. This will ensure this quasi-currency will always be with us.
On the convention, this is how Eyers saw it: “It has the evangelical feel of an event by self-help guru Tony Robbins. Indeed, the energy is high because the day before, bitcoin had gone through $A150,000 a coin for the first time. A bitcoin is worth more than a kilogram of gold.
“But these are scenes pointing to peak crypto hype. Another exchange has set up a phone box blowing fake banknotes through the air, creating a frisson for the person inside. Others are lining up to ride a mechanical bull.”
As an educator and adviser, my problem is that bitcoin is a classic speculative play. Its chart shows that. It’s this I want to focus on today. I’ll do that and contrast it with other investments that have been rocket performers but they’re less prone to huge volatility.
Have a look at bitcoin since inception below.
Bitcoin $US
That’s volatile! When it falls and rises, it provides spills and thrills! In the past year, bitcoin is up 150% from $US38,704 to $US97,165.90!
Now compare bitcoin to say a hotshot local company, such as Promedicus (PME).
Promedicus
While bitcoin put on 150% over the past 12 months, Promedicus was up a whopping 150.6%. What I like about a company such as PME is that it is a real business and is less likely to be susceptible to the kinds of triggers that could send a bitcoin investment nosediving into big losses.
If you want to be a bitcoin player, remember in March 2021 it was $61,000. By July, it was $31,000. Then in November 2021 it was $64,000. By year’s end, it was $16,000! If you can stomach such ups and downs, then bitcoin is your poison.
But don’t just think Promedicus has been a better or as good performer as bitcoin, have a look at these huge risers in 2024:
And then there are solid risers that aren’t prone to being smashed, such as:
Another thing I like about a lot of these less volatile investments is that many pay a dividend, while you trust them with your capital.
Also, if you buy into bitcoin now at US$96,938 or $148,966, what is your likely percentage gain this year? Let’s say it makes it to US$120,000. Your gain could be 34% but it could easily fall by that.
It’s a punt. As the chart shows, bitcoin has really steep rises and then big falls over some time, which could be hard to take if you don’t like losing money!
Bitcoin went close to US$20,000 in December 2017 and fell to US$3,400 by December 2018 and then hovered between US$5,000 and US$10,000 until October 2020!
Let’s look at Xero over that timeframe i.e. 2017 to 2020. And then to now.
In December 2017, Xero was a $28 stock. By December 2018, it was $39. The gain was 39%. Meanwhile bitcoin had lost 83%.
Since December 2017, Xero has risen by around 517%, while bitcoin has spiked 380%, but it has come with a lot more nervous times to live through.
The only way you make huge profits out of bitcoin is to buy it when the world dumps it. But that takes guts. The best times were at inception, but pre 2017 was good. And then there was the $3,600 mark in February 2019. The Coronavirus crash of March 2020 brought a price of $6,200. And in December 2022 when the US copped 11 interest rate rises, the price was $16,800.
This unusual unpredictable curio currency has surged 37% on the arrival of Donald Trump. If that’s not the riskiest reason for parting with close to $100,000 for a bitcoin punt, then I don’t know what is.
Big US investor and former CIO at Legg Mason Capital Bill Miller said investors should have 1% of their portfolio in bitcoin. If you have a super portfolio of $1 million, then a $100,000 bitcoin would be 10%. That looks risky.
A 1% exposure to bitcoin bought when it falls is an OK strategy. But I’d be careful about buying now after that Trump spike since November 5.
Later this week, we’ll see the October jobs report for the US. If it’s stronger than expected, then the Fed could dump the expected December rate cut and the stock market wouldn’t like this.
Interestingly, the companies I cited largely are expected to fall in price because they have done so well. Therefore, it’s not way out to think bitcoin is due for a pullback.
Remember when the S&P 500 fell a tick over 20% when interest rates started to rise in early 2022? Bitcoin slumped, wait for it, 89%!
On the companies that have performed brilliantly over the past year, here’s the consensus views on these stocks over the next year:
And then there are solid risers that aren’t prone to being smashed, such as:
The takeaway message from the outlook for these stocks is that negativity is more expected than positivity, and it’s primarily the tech-oriented stocks are more in favour with expert analysts than more ‘real world’ companies.
Back in July, US market gurus were tipping a pullback was on the cards for later this year. It still hasn’t materialised, which heightens the chances of a pressure on more risky assets.
On the subject of risk, this from James Eyers should be taken on board before jumping on the bitcoin gravy train: “Adrian Przelozny, CEO of Independent Reserve, another local exchange, who was also manning a booth at the convention, says investors need to come to bitcoin with a long-term horizon.”
I’ve interviewed Adrian for my Switzer Investing TV program. This is what he wisely said: “It’s not an investment I would recommend to anybody with a time horizon less than a few years,” he says.
“It is very volatile, and if you are buying it today with expectation you will make money tomorrow you might be out of luck. But if you are willing to hold for a long period it has proven to be a very good investment for that kind of time horizon.”
This is why I say that I’d prefer to buy bitcoin on a big sell-off rather than when it’s making new highs.
I’m not sure how bitcoin will respond to the growing rotation out of big tech stocks in the US and into small- or mid-caps, but I suspect bitcoin is more aligned to big tech share price movements than smaller companies.
By the way, Przelozny isn’t happy with the lack regulation of cryptocurrency right now. “There is a real risk new players won’t do the right thing, make a mistake, or who knows what,” he warned. “Many retail customers aren’t educated enough on what to look for and can’t look to the regulator to see who are the good players in the space, as there’s no licensing.”
Timing is everything in investing. The same applies when it comes to bitcoin. If you’re diving into it, be careful what you sling on to it and when you do it.
