Blog post

With the significant price appreciation of Bitcoin and other related cryptocurrencies at the end of 2017, we saw the media and general public question the validity, valuation and future of these assets. Being involved in cryptocurrencies myself and advising on the tax implications for clients throughout 2017 and 2018 I experienced many conflicting ideas, opinions and predictions on the future of crypto markets like Bitcoin.

From my recent conversations, it seems as though people are quick to dismiss Bitcoin (and other cryptos) as a scam, a fraudulent market or a currency for the underground economy. Most of these opinions are based on very little research or understanding of the new asset class, and many are simply regurgitate what they hear from the media or popular naysayers such as Warren Buffet. Considering Mr. Buffet’s professional portfolio is comprised of more than 20% US financial institutions it’s no wonder he’s not a fan of Bitcoin.

Early bitcoin adopters are often called “lucky” and more recent investors are labelled as “gamblers”. New Vancouver real estate owners on the other hand are called homeowners and are often incentivized to enter the market regardless of whether they can truly afford such a purchase. I would argue that a couple earning $200,000 of household income buying a $1,000,000 bungalow in BC is certainly riskier than investing in Bitcoin. First, many crypto investors are investing without the use of leverage and their crypto holdings only account for a relatively small percentage of their overall portfolio. First time BC homeowners, however, are often leveraged up to 95% and have very little room to maneuver if their income drops significantly.

Culturally, however, we placed great importance on home ownership regardless of the financial risks it night carry. Your real estate agent thinks it’s a great buy and your banker says you can “afford it”. Maybe if you had 2 professionals telling you the same about Bitcoin you would by jumping in head first.

Some of the same people that completely dismiss cryptocurrencies will have no problem justifying Canadian real estate prices. Markets can be irrational. They can be undervalued, they can be overvalued, they can be strong or they can be weak. Having a strong opinion about the direction or integrity of an asset class can be a useful exercise as an investor. However, opinions based on emotional attitudes towards a particular market are not constructive. This is what I feel people do with their opinions about Bitcoin. To simply dismiss Bitcoin and alike as nothing more than a “scam” is not only short-sighted it’s both ignorant and self-defeating. Many successful public companies such as Amazon and Apple were once viewed by many as “too risky” or “foolish investments”.

I speak to hundreds of people a year on a variety of different political and financial matters. There is nothing I’ve seen in the past that people feel so convicted about than their opinion on the future of Bitcoin and crypto currencies. Considering my experience in the space I have to do my best to “bite my tongue”, as I’m amazed at how convinced people can be about something they know very little about. As many have pointed out in the past, this reminds me of how people spoke about the internet in its infancy. Perhaps new technologies and societal changes scare people to the point of irrationality.

No one can perfectly predict markets. However, what type of price appreciation or longevity will cryptos like Bitcoin and Ethereum need to experience before some of the public concede that perhaps this is something of potential value and not a “complete scam” as many profess. Even the brilliant Bill Gates recently dismissed the future of bitcoin and stated that he would short it if he could. Guess what Bill…you can. But I doubt that he would be willing to take this bet in any material way.

I’m not convinced either way about the ultimate future of cryptocurrencies and by all accounts, I shouldn’t be. Having an unquestionable opinion about the future prospects of something like Bitcoin is never productive. We need to continue having an informed and open discussion on the benefits, dangers and prospects of cryptocurrencies. Emotional attitudes about new technologies are common, however, they should not inform educational and investment decisions.

I can’t predict where bitcoin will be in 10 years. However, if we end up at all-time highs well above $20,000 USD, I wonder what the critic’s, that was so sure bitcoin was going to fail will think then. When will their egos let them concede? $30,000, $40,000 or perhaps when Bitcoin gets to $50,000?

This is not about being right or wrong, history will claim this truth. By being so dogmatic in our approach to the valuation or perceived valuation of any market is counterproductive and never value added.

Investment decisions do not happen in a vacuum. Buying $10,000 worth of bitcoin may be a relatively light bet for some, just like buying an $800,000 bachelor condo downtown Vancouver can be a terrible idea for someone else. We all have to make investment decisions based on our risk tolerance and personal financial situation. Bitcoin is no different than any other new or untested asset. There’s a risk it goes up and a risk it goes down. Assuming you know the future, and claiming a prospective truth based on an emotional reaction to technological change will only serve to narrow your mind to other social possibilities and future opportunities.