A couple of weeks ago, after a long day fly fishing on the Yellowstone river in Montana, a group of us were talking about the day’s fish count (specifically the lack thereof) when the discussion turned to cryptocurrencies.
Peter and I were attending a small annual investment offsite run by a U.S.-based Asian equity fund manager. The handful of partners in the room, unwinding with a cold beer, collectively held over a century of fund management expertise. When it came to financial markets, and Asia in particular, these guys know their stuff.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
But bitcoin? Not so much.
I was the resident sounding board… and these were the issues that most concerned my fishing partners about the world of cryptocurrencies…
“OK, Tama, but what if the Internet goes down?”
This was the first point of concern when it came to bitcoin. It’s one that a lot of people have.
And if you take a step back for a moment, it’s utterly absurd.
For example, I’ve never once in my entire life ever heard anyone query the wisdom of investing in Google, Facebook, or any other technology company because of the risk of the “Internet going down”.
Similarly, I know of nobody personally (in developed countries at least), who insists that all their personal monetary wealth be kept in physical notes and coins in their possession rather than at a bank (where your savings represent little more than numbers on an electronic ledger) – because they’d “lose it all” if the Internet went down.
And in the event that the entire global Internet communications system permanently collapses (which is what would need to happen for bitcoin to become totally worthless), I think you’d have bigger concerns than the small allocation of your portfolio that’s in cryptocurrencies.
“What about the risk of hacking?”
In certain circles, bitcoin and cryptocurrencies in general are synonymous with hacking – thanks to some high-profile hacks of cryptocurrency exchanges.
I point the finger at ignorant journalists who propagate their own poor understanding of cryptocurrencies to the broader public.
(Just a couple of weeks ago, for example, an op-ed in the Wall Street Journal entitled “The Bitcoin Valuation Bubble” stated that “Bitcoin is a favourite of money launderers and those evading capital controls”. Of course, there was no data to back up that assertion… there’s no need for “opinion” to be backed up by facts, I suppose.
Bitcoin is one of the most secure assets an individual can own. BUT it’s 100 percent up to the individual to secure it themselves!
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Just to be clear, cryptocurrency exchanges have been hacked. They are third-party platforms where you have no visibility as to how customers’ digital assets are being secured. That’s why I’ve said repeatedly that you shouldn’t keep large amounts of bitcoin on an exchange because when it’s on an exchange you don’t own it, they do.
And when it comes to hacking, you are far, far more at risk from other cybersecurity vulnerabilities – just look at U.S. credit reporting agency Equifax who announced last week that the Social Security numbers along with other personal information of up to 143 million Americans may have been compromised.
That’s a catastrophic breach. And this kind of thing happens all the time. So there’s no use worrying about bitcoin “hacking” when you can take full personal control and accountability for securing it yourself (rather than be at the mercy of an incompetent third party).
“What if the government bans bitcoin?”
China last week announced a ban on initial coin offerings (ICOs), where companies create and issue cryptocurrencies to the public in exchange for bitcoin or ethereum (the second-largest cryptocurrency). I wasn’t surprised at this, given the sheer volume of ICOs taking place – especially those with seemingly little to no business viability.
But China didn’t “ban” bitcoin. And even if a government did want to ban it, the question is “how”? That cat’s already out of the bag. And bitcoin doesn’t answer to any government.
There is no bitcoin head office, no CEO, no board of directors.
What’s more, there’s no incentive for a major economy to “ban” bitcoin. Any government that does is simply saying “we don’t want innovation, technology jobs, new companies, or enterprise in general”.
Now don’t get me wrong – there is and will be regulation, and there may even be a temporary shutdown of the exchanges. But regulation is a different story altogether. For example, don’t think for a second that Uncle Sam is going to let you make 10x on a cryptocurrency trade and not pay your “fair share” of tax to the coffers.
You’re right to be sceptical
Bitcoin is a completely new type of asset class for most people, so it’s right to ask questions. That’s a prudent approach for anyone considering allocating capital to any venture, let alone one you’re unfamiliar with.
But we all suffer a natural tendency to seek and interpret new facts as confirming our existing opinions. This is called confirmation bias.
So, if all you’ve ever read about bitcoin through the mainstream media is negative (“it’s just a bubble digital currency used by criminals”, for example), then you might have formed a highly negative view of bitcoin and cryptocurrencies in general. Furthermore, you will be more likely to look at news like the China ICO ban as confirmation of your existing biases.
I sit on the other side. I’m already long-since of the opinion that you should own some bitcoin, for example, and whilst finding further reasons to own it might feel nice, I’m more interested in reasons not to own bitcoin.
That’s why I like hearing counterarguments like the ones above. So if you happen to have any other reasons, concerns, worries or criticisms, please just reply to this email and let us know.
P.S. If you’re interested in taking the first step to expanding your investment horizon to not only bitcoin, but beyond into other cryptocurrencies, then take a look here – we’re offering readers of the Asia Wealth Investment Daily an opportunity to access a recently-released special report, “The Top 3 Cryptocurrencies You Should Buy Today,” along with a subscription to The Churchouse Letter, our flagship investment publication.