Bitcoin: A Fisher's Unwise Investment Choice

Fisher Investments has reviewed what investors should know before buying Bitcoin. The recent renaissance of Bitcoin has sparked enthusiasm for the world's biggest cryptocurrency. However, Fisher Investments cautions that investors should look beyond Bitcoin's recent returns and understand what they are investing in. The demand drivers for Bitcoin appear fickle and are not anchored to widespread retail or industrial uses, like gold or other commodities. Bitcoin doesn't produce cash flow or earnings like bonds or stocks, nor is it a widely used medium of exchange like currencies. Its price is largely driven by sentiment and speculation, which can change rapidly. In addition, the capped supply argument doesn't seem to consider the numerous crypto substitutes available, which could fragment demand. Bitcoin's short history also makes it challenging to predict how it will perform across different market and economic conditions. Lastly, Bitcoin exhibits extreme volatility, with frequent and intense price changes, making it difficult for investors to navigate. Therefore, investors should carefully consider the risks and rewards before making long-term investment decisions about Bitcoin.

Bitcoin's extreme volatility makes it a risky investment

Bitcoin's price depends heavily on supply and demand. As an asset, it has been quickly adopted by investors and traders, and speculation about price movements plays a critical role in its value at any given moment. Media outlets, influencers, industry moguls, and cryptocurrency fans can create investor concerns, leading to price fluctuations.

Bitcoin's market value is influenced by the number of coins in circulation and how much people are willing to pay. The cryptocurrency is limited to 21 million coins, and as the circulating supply gets closer to this limit, prices are likely to climb. However, it is challenging to predict what will happen to prices when the limit is reached, as there will no longer be any profit from mining Bitcoin.

The actions of large investors, known as "Bitcoin whales," can also impact volatility. If these investors were to liquidate their significant Bitcoin holdings suddenly, prices would likely plummet as other investors panicked and followed suit.

Bitcoin's price history has been volatile, with frequent and significant swings. In 2021, for example, Bitcoin's price skyrocketed to almost $69,000 following the introduction of a Bitcoin-linked exchange-traded fund (ETF). However, when investors realized the ETF was linked to Bitcoin through futures contracts, prices dropped back down to around $50,000.

Bitcoin's extreme volatility undermines its reliability as a store of value or a hedge against inflation in the short term. Its value seems to hinge primarily on speculation and market sentiment rather than intrinsic value. Therefore, it is a risky asset compared to more traditional investments such as stocks or bonds.

There are thousands of crypto substitutes available to investors

There are thousands, or even millions, of crypto substitutes available to investors. These include other cryptocurrencies, or "altcoins", such as Ethereum, Ripple, Litecoin, Cardano, Binance Coin, Polkadot, Solana, and Avalanche. These coins offer some advantages over Bitcoin, such as faster transactions, improved privacy protection, and the ability to build smart contracts.

For example, Ethereum is the second-largest digital currency by market capitalization and is considered one of the safer options for investing in cryptocurrency. It is a decentralized software platform that enables smart contracts and decentralized applications (dApps) and has a wide array of functions and constant innovation.

Ripple is another popular alternative to Bitcoin, particularly for international payments. It is a money transfer and currency exchange network that processes transactions globally and does not need to be mined. It also offers fast settlement and low fees, and is being used by large financial institutions.

Binance Coin is another major player in the cryptocurrency space, with a market capitalization of over $42 billion as of April 2023. It is the medium of exchange for the Binance cryptocurrency exchange and can also be used to invest in the Binance Smart Chain network.

Other stablecoins, such as Tether and USD Coin, are also popular alternatives to Bitcoin as they are pegged to real-world assets like the US dollar, providing a stable value.

With so many alternatives available, investors should carefully consider the risk/reward dynamics of Bitcoin compared to other available assets before making long-term investment decisions.

Bitcoin's short history makes it difficult to predict its future performance

Bitcoin has only existed since 2009, and its software was made available to the public in 2009. In the 14 years since its creation, Bitcoin has undergone rapid growth to become a significant store of value both on- and offline. However, this brief history makes it challenging to understand how it might perform across various market and economic environments.

For example, stocks have nearly 100 years of historical data, during which they have weathered recessions, wars, natural disasters, monetary policy shocks, commodities shortages, and health crises. This extensive data allows for informed forecasts and analysis of the current economic environment. In contrast, Bitcoin's short history means that its risk and return characteristics are largely unknown, making it difficult to determine whether it is a prudent choice for long-term investors.

The extreme volatility of Bitcoin further complicates predictions about its future performance. Bitcoin has experienced spectacular "booms" and "busts," with frequent and intense price changes. For instance, since 2017, Bitcoin has had over 180 days where its value dropped by 5% or more in a single day. Such volatility can make it challenging for investors to navigate and may lead to rash and counterproductive investment decisions.

While Bitcoin's recent renaissance has reignited enthusiasm, its short history and extreme volatility make it challenging to predict its future performance with confidence.

Demand for Bitcoin is driven by speculation and can change rapidly

Bitcoin's demand drivers seem fickle and are largely driven by speculation and sentiment. Bitcoin demand isn't anchored to many widespread retail or industrial uses, unlike gold or other commodities. It doesn't produce cash flow or earnings like bonds, stocks, or fixed interest, and it isn't a widely used medium of exchange like currencies.

The demand for Bitcoin is based on the speculation that others will want to buy it at a higher price later. Since demand is driven by pure sentiment, it can change rapidly. If demand drops faster than supply, prices can go down. This makes it difficult to determine if Bitcoin is a good long-term investment strategy.

Additionally, the "capped supply" argument doesn't consider the numerous crypto substitutes available to investors. There are thousands to millions of crypto assets available, and while not all of them are popular or durable enough to challenge Bitcoin's dominance, the sheer number of alternatives may fragment demand.

The rapid speed at which the crypto supply can expand to meet and potentially outstrip demand poses a risk to Bitcoin investors. With little to no barriers to entry, the overall supply of cryptocurrencies can quickly expand, potentially overwhelming demand. This is a risk that investors who are betting on Bitcoin's finite supply to keep prices high may be underestimating.

Ken Fisher doesn't know enough about Bitcoin to invest in it

Ken Fisher, the billionaire founder and chairman of Fisher Investments, has chosen not to invest in Bitcoin. In an interview with TheStreet founder Jim Cramer, Fisher explained that he subscribes to the school of thought that focuses on what must be done to turn a profit, rather than what could be done. He believes that to make money, one needs to know something that others don't, and in the case of Bitcoin, he feels he has no special insight.

Fisher's decision to stay on the sidelines when it comes to Bitcoin is informed by his understanding of the probability business, where he aims to keep being successful. He acknowledges that Bitcoin's capped total supply and decelerating issuance could act as long-term tailwinds to prices, but there are also many uncertainties surrounding the cryptocurrency.

One of the main concerns Fisher highlights is the fickle nature of Bitcoin's demand drivers. Unlike gold or other commodities, Bitcoin is not widely used in retail or industrial applications, nor does it produce cash flow or earnings like bonds or stocks. Its value appears to be driven primarily by speculation, which can change rapidly.

Additionally, the argument for Bitcoin's capped supply does not seem to consider the numerous crypto-substitutes available in the market. The rapid expansion of the crypto supply could easily meet and potentially outstrip demand, impacting Bitcoin's price.

Furthermore, Bitcoin's relatively short history makes it challenging to predict how it will perform across different market and economic conditions. Traditional asset classes, such as stocks and bonds, have a much longer track record, allowing for a more informed analysis of their risk and return characteristics.

While some investors may be attracted to Bitcoin's potential for outsized gains during boom periods, it is important to consider the extreme volatility associated with it. Bitcoin's price movements are notoriously difficult to forecast due to their frequency and intensity, making it challenging for investors to navigate its wild price swings.

In conclusion, Ken Fisher's decision to refrain from investing in Bitcoin stems from his honest assessment of his knowledge and understanding of the cryptocurrency. He acknowledges that he does not have any special insights into Bitcoin that could give him an edge over other investors. This lack of expertise, combined with the uncertainties and risks associated with Bitcoin, leads him to adopt a cautious approach and focus on more traditional investment avenues.

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