Given the amount of chatter in the media about Bitcoin and cryptocurrencies, we thought a brief note sharing our views would be appropriate:
What is bitcoin?
I looked online for an unbiased definition, but couldn’t really find one. Bitcoin is a digital ‘currency’ that has a limit of 21M and is created with an immense amount of computing power (energy). The concept of a digital currency has been around for quite a while but blockchain technology has made it a reality. Block chain does have a plain vanilla definition:
Blockchain is a way to structure data, and the foundation of cryptocurrencies like Bitcoin. This coding breakthrough, which consists of concatenated blocks of transactions allows competitors to share a digital ledger across a network of computers without need for a central authority. No single party has the power to tamper with the records: the math keeps everyone honest. Forty of the world’s top financial firms are experimenting with the tech. (Source: http://fortune.com/2016/05/23/blockchain-definition/)
At the time of writing there are no fewer than 1100 digital currencies:
The number of cryptocurrencies available over the internet as of October 19, 2017 is over 1100 and growing. A new cryptocurrency can be created at any time. By market capitalization, Bitcoin is currently (2017-12-13) the largest blockchain network, followed by Ethereum, Bitcoin Cash, Ripple and Litecoin. (Source: http://www.businessinsider.com/list-top-cryptocurrencies-analysis-comparison-2017-10; https://www.investopedia.com/news/top-5-cryptocurrencies-marketcap/?ad=dirN&qo=serpSearchTopBox&qsrc=1&o=40186) Emphasis ours.
Is it a bubble?
Probably, but typically bubbles are only called ‘bubbles’ in the rear-view mirror. Bitcoins have no economic value and while they can be exchanged for goods, our opinion is that the political risk is much greater than what the market is pricing. They are also not backed by anything other than a limit of 21M bitcoins, however as noted above there are now over a thousand digital currencies and with enough time (weeks) and money, anyone can create a cryptocurrency. Not to mention the price of bitcoins has literally gone parabolic. If someone were asking our advice, we’d liken ‘investing’ in bitcoins to gambling. If one really wanted to buy some, our recommendation would be to decide whatever capital they are comfortable losing and speculate accordingly. If the investment doubles, sell half and let the rest run. To be clear, this is PURELY a speculative play.
In short, bitcoins do not pass our screen. Over the long term focusing on companies that have a competitive advantage and can consistently earn high returns on equity will generate the types of returns our clients require to meet their financial goals. We can’t value a cryptocurrency much less than a marijuana company without revenues. Recall, that our screen is ROE > 20% for at least 3 years running. The Dollarama’s (DOL) and Constellation Software’s (CSU) of the world probably seem boring in the context of cryptocurrencies that rise and fall ~20% in a day. However, DOL and CSU are compounding shareholder capital at ~30%/year, they have a business we can understand and forecast with a reasonable degree of certainty as to where they’ll be in the next 3-5 years.
As Warren Buffett says:
“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch.”
Short term speculation simply isn’t our pitch.
Mike Preto and Jason Del Vicario are Investment Advisors at HollisWealth, a division of Industrial Alliance Securities Inc. Based in Vancouver, BC, Canada, they work together in bringing a unique approach to managing money to ensure their clients are financially prepared for their retirement. They can be reached at 604-895-3349.
This information has been prepared by Mike Preto & Jason Del Vicario who are Investment Advisors for HollisWealth®. The opinions expressed in this article are those of Mike & Jason only and do not necessarily reflect those of HollisWealth. HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Hillside Wealth Management is a personal trade name of Mike & Jason.