Is it Worth Buying Cryptocurrencies?

Important Considerations Before Buying


Speculations in currencies are often risky. Some professional investment companies have already failed spectacularly in this regard. A total loss is also possible with cryptocurrencies if, for example, confidence is lost. Those who are aware of the risks may try their luck.

 

As a value investor and asset manager, I would advise against such a speculation. It may well be that the price will continue to rise to astronomical heights. However, in my view they lack a fundamental, intrinsic value. In this article I have summarised some basic considerations and will explain why I still do not hold any cryptocurrencies in my portfolio.

Chart of Bitcoin's price development over the last 12 months
Price development of Bitcoin within the last 12 months

The Basics

Value of a Currency

The value of a currency is not based on a material value. It is based, among other things, on the confidence that the currency is accepted as a means of payment. This is particularly true for digital currencies.

 

Duration of a Price Increase

A price increase lasts as long as demand exceeds supply. If demand falls or is completely eliminated, the price naturally drops as well.

 

Currency Speculation Risk

If you buy a currency in order to sell it at a higher price later rather than using it as a means of payment, you must find someone willing to pay even more for it than you already did.

Added Value of Cryptocurrencies


Economically speaking, there are some clear advantages of cryptocurrencies over traditional currencies:

  1. Fast international transactions within minutes (instead of days)
  2. Payment transactions are possible 24 hours a day, 7 days a week
  3. Low transaction costs, regardless of the country of origin and destination

Risks and Side Effects


Depending on your point of view, anonymity may be seen as an advantage or a disadvantage. I shall focus on economic aspects. Economically speaking, I see the following risks:

  1. Strong fluctuations in value
  2. New currencies with high speculative character
  3. No stabilising authority
  4. No intrinsic value

Investment or Speculation


I have been asked time and again whether I also invest in cryptocurrencies. In my opinion, cryptocurrencies are not so much an investment as they are a speculation.

 

A speculation in the economic sense is characterised by:

  • A short-term perspective
  • High risk
  • Focus on price development

This in contrast to an investment which may be characterised by:

  • A long-term perspective
  • Risk & Safety Assessment
  • Focus on performance

It would be a big mistake to confuse price with value. The price can develop independently of intrinsic value.

Chart of the price development of Bitcoin with interim high of USD 1'230.69 on 04.12.2013
Price development of Bitcoin with an interim high of USD 1,230.69 on 04.12.2013

Conclusion


The price explosion with Bitcoins this year brought high profits for those who already owned them. Whether the winner of today's purchase is the buyer or the seller will become apparent in the future.

 

Due to their advantages, cryptocurrencies will most likely continue to exist in the future. It is difficult to predict which or how many of them will survive.

 

In the case of bitcoin, the price increase in 2017 alone was over 1194%. Since the start of bitcoin, the performance has even reached several thousand percent. No one can say for sure how the journey will continue or even end. Anyone hoping to make a profit with cryptocurrencies must be aware of the risks mentioned above. Since its high of 19'706 USD the price has fallen to around 13'500 USD which is a considerable drop of more than 31%.

 

The previous price increase was enormous. It took place mainly in the last 2.5 years and especially in 2017. This should not obscure the fact that things can be different: Have a look at the chart above. The price of Bitcoins was already over 1'230 USD after a first hype. This was on December the 4th 2013, a little more than four years ago. Those who bought Bitcoin by the end of 2013 were in the red until April 2017. Only due to the renewed hype and the resulting increase the price rose significantly and by more than ten times above the high of 2013.

 

Cryptocurrencies are currently less a means of payment than an object of speculation. Due to the high fluctuations in value, I would not consider them to be an ideal means of preserving value or investing.

 

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