I am frequently asked about my thoughts on Bitcoin. Usually our discussion includes me explaining that when you invest you need two things: a) a good story and b) compelling valuation. When it comes to Bitcoin, there’s definitely an interesting story, but when it comes to valuation, it doesn’t make sense. This isn’t to say that people can’t make money on it, but it’s not investing, and in the long run in situations like these, they will almost always lose.

 

Recently, Veritas, which is an independent investment research company, hosted an interview with Bob Seeman, managing Partner at Cybercurb in which they discussed Bitcoin as an investment. Bob is an attorney, electrical engineer and entrepreneur. He has authored multiple books on Bitcoin, crypto-currency and Ransomware.

 

I want to stress, I am not an expert on Bitcoin or crypto-currency. I have had it explained to me and have something of a general knowledge of it, but still find the details difficult to explain to others. I am however a professional investor, and as Bob Seeman points out, knowing how something works is irrelevant for the purpose of investing in it. We have never recommended investing in Bitcoin.

 

I cannot provide you with the interview as we are not permitted to rebroadcast it, however I thought I would share the notes on Bob Seeman’s opinion.

 

According to Bob:

• It’s gambling, and it’s the volatility that is exciting.
• Bitcoin is not a currency, nor is it even an asset. People are not using it as a medium of exchange. People buy bitcoin in order to sell it at a future point. Over 99.7% of transactions are for market trades. A true currency is overwhelmingly used for the purchase of goods and services.
• What happens to your money when you buy Bitcoin? You are not investing, you are just cashing someone else out.
• Bitcoin doesn’t produce a cash flow, or anything at all really, and the price clearly doesn’t reflect its utility (it’s use). This illustrates Bitcoin’s value being a bubble.
• El Salvador tried to use bitcoin as a currency to avoid inflation, and failed. The Government forced businesses to accept bitcoin as a currency. They even opened up accounts for every person and gave them $30 of bitcoin to start. Virtually all residents took the bitcoin and immediately converted it to USD.
• Some people in Ukraine right now are being paid in Bitcoin because the banking system has broken down, but they are not spending it. And when the banking system returns, it is most likely they will exchange it and use a different currency to transact.
• There are more illegal transactions than legal.
• 0.15% of all transactions are for the purchase of illegal goods and services, which doesn’t sound like much, but remember: over 99.7% of transactions are market trades. So that leaves less than 0.3% of the transactions for goods or services of which 0.15 are illegal. This is a threat, as there is an incentive for future government regulation.
• Over 40% of bitcoin is held by 100,000 people.
• Over 20% is held by 1000 people.
• There is no oversight or disclosure requirements, or regulation and he contends the price is being manipulated regularly because of this and the high concentration in a few hands.
• The SEC has been hinting that bitcoin is not a security and recently doubled the size of its crypto enforcement team. This will add pressure to deflate the bubble.
• There is no evidence that it is correlated to market fluctuations (positive or negative) so it is not a hedge. It has acted inconsistently to market volatility
• A Bank of Canada study that was recently done on purchasers of bitcoin and determined that on average they are retail investors (non-professionals) who have a good understanding of technology, block-chain and crypto currency, but they are financially illiterate. That is not a good combination. Knowing how something works does not assist you in investing. You do not need to know how a car works to buy a car, use a car or understand it’s value.
• At a value of $40,000, 55% of investors in Bitcoin are currently underwater (in a loss)
• At $35K, 75% of investors will be underwater.
• Many Central banks around the world are working on their own crypto-currency. This is a threat to its future.

His main point, or threat was the following:

He feels that this will at some point go to zero or close to it. The Achilles heel for Bitcoin is the environmental problem. Just to run the bitcoin network alone takes 0.67% of global electricity production- same as the Netherlands or Sweden uses.

The public cloud uses 1.0% of global electricity- that’s in essence all our e-commerce and internet usage. Greenpeace has stopped accepting donations in it, and has begun lobbying for the ban of Bitcoin. A movement is starting to gain traction, and we are seeing governments begin to move in this direction.