“Recently, at a party, some friends and I were discussing Bitcoin. I was highly sceptical but they were boasting about the profits they have made in the last year. Just wondering what you think.
In my opinion, Bitcoin fails every investment test. If you buy government bonds, you receive a guaranteed income plus principal repayment at the end of the term. If you buy shares you can make a decision based on the financial statements and profitability of the company. If you buy real estate there should be a nexus between the land value, the cost of improvements, and any potential rental income. In other words, you are making the decision on concrete information.
Bitcoin works on the greater fool theory: a fool buys today in the hope of on-selling to a greater fool tomorrow. It’s more like the allegory of the box of strawberries sold from person to person at ever-increasing prices. Finally, the buyer who had paid $100 for a box of strawberries that had cost only $5 a few buyers ago, stopped the cycle by opening the box. To his dismay he found the strawberries were rotten! When he complained, the response was, “but these strawberries were meant to be sold – they were never meant to be eaten”. Each buyer had bought with one aim – to resell for a higher price to a fool who still believed in the impossible dream. At least your Bitcoins can’t rot. They never really existed.”
