The price of cryptocurrency Bitcoin continues to skyrocket, lifting more than $400 this month alone to the latest price of US$4628 – up 750% for the year. A number of pundits have elevated their price targets for the cryptocurrency more than tenfold, and you don't have to look far to find forecasts of Bitcoin prices of $50,000 to $100,000 in the next few years.
Investment writers everywhere are fielding queries about Bitcoin. Do you know how many times I've been asked questions about a2 Milk Company Ltd (Australia) (ASX: A2M), which is up 815% in the past 2 years?
By the way I ask that question you know that the answer is 'zero', but funnily enough, an 800% return in A2 Milk is pretty close to the returns that today's Bitcoin buyers will get if prices actually hit $50,000.
The rise of Bitcoin
The popularity of Bitcoin as an 'investment' is so insidious because it doesn't conform to any conventional investing framework. First, there's no assets, so it is hard to calculate a 'liquidation value' which is the bare minimum you would expect to receive if you had to sell your Bitcoin. Second, there are no cash flows, so you can't value it in terms of how much future return it's expected to provide to you. Third, Bitcoin isn't actually an investment 'security' at all, and is thus outside the reach of most investing rules and regulations.
Fourth, it's not fully understood yet how profits on Bitcoin are accounted for tax purposes. At least one US paper I have seen suggests that using Bitcoin to make purchases could lead to a tax liability. For example if you buy Bitcoin at $1000, and then the value rises to $1200 and you use the $1200 to purchase groceries or something, you could have to pay tax on the change in values.
Fifth, because it is so ever-present and the headlines are screaming about profits made by other people, Bitcoin seems strangely 'accessible'. Everyone starts to think that hey, maybe they could make serious money in bitcoin too. It's just this kind of process that sets the stage for huge risk-taking from ill-informed investors.
By all means, have a small bet on Bitcoin. Just keep it to a responsibly small amount of your wealth (I suggest less than 1%) and fill your boots with high-quality, cash generating investments that will actually support you in retirement.
