Memo 22 – Bitcoins – Better or Bitter?

While we claim no expert insights or inclination on this topic, the record number of queries that we have received over past two months have pushed us to write on it. The interesting commonality to all these queries is the “left out” feeling. People have almost stopped short of asking”I don’t understand anything about bitcoins but is it okay to buy them?  Am I missing something big if I don’t buy them?”

Again, we are no expert on bitcoins or block chain, so allow us to borrow some insights from various participants in the bitcoin game. There are three distinct categories of people when it comes to investing in bitcoins.

  • Bitcoin Optimists (Category 1):

    The early investors, the millennials and the anti-government proponents across the world, who firmly believe that Bitcoin is a revolution and will become the reserve currency of the world. Winklevoss, the bitcoin billionaire, has gone so far ahead to say that Bitcoin will rise 15 fold from current levels and the combined value of all Bitcoins in the world will be equal to value of all the gold in the world!

  • Bitcoin Pessimists (Category 2):

    This category includes the world’s richest investor – Warren Buffet, world’s most important banker – Jaime Diamon of JP Morgan and lot of central banks across the world. They too have gone as far to say that Bitcoin is a bubble that will burst soon and small investors should stay away from it.

  • Bitcoin Opportunists (Category 3):

    These are people like you and me, who heard about bitcoins only a few months back and are attracted to it only because its price is going up each day. They care less (and know even lesser) about the fundamentals of Bitcoin and want to buy it with the sole objective of selling it higher at a future date.

Our simple observation is that people in category 1 have already made a lot of money by the virtue of being early investors in bitcoin and people in category 2 are anyways the richest people in the world. It’s the 3rd category that we are a little worried about. They are neither rich, nor do they have a great understanding about bitcoins and nor can they afford the losses, in case there is a crash in Bitcoin. Below are few things that you should keep in mind if you are tempted to invest in a Bitcoin.

1) Can Bitcoin Continue its Dream Run Forever?

Bitcoin’s value has gone up by 20 times in the last fifteen months. It boasts of market value of US$350bn. As per Winklevoss, Bitcoin can go up a further 15 times, meaning a market value of US$7trillion, which is equal to the total value of all gold in the world. While we are no one to say that this can’t happen, it is difficult to imagine that Bitcoin will create so much value in 10 years as gold could create in 5000 years. This is not the first time that there is such irrational exuberance around an investment category. We recollect 3 such instances in the past:

  • Zee TV:

    Between 1998 and 2000, the share price went up 200 times as investors were expecting that all Indians would own color TV and watch mostly Zee TV. The markets were right – most Indians now own a color TV but there are tens of other channels. The stock price of Zee crashed by 90% over 2000-02 and it took sixteen long years for it to recover to the 1999 highs.

  • Infosys:

    Share price of Infosys increased 30 times between 1995 and 1999. It lost 80% of its value in the next two years after the dot com bubble burst. It took 14 years for Infosys to reclaim the highs it touched in 1999. Note that Infosys reported record profit growth over fourteen year period from 2002-16.

  • Japanese Real Estate:

    Between 1986 and 1991, real estate prices in Japan increased 20x. One could buy 200 apartments in Manhattan for the cost of just one apartment in Tokyo’s prime neighborhood. The value of Tokyo Imperial Palace was rumored to have been worth as much as the entire state of California! The bubble started burst in 1992 and property prices crashed by 90% over the next ten years.

Learning from the past manias, we expect that block chain as a technology may survive and become main stream in a few years from now. But whether Bitcoin will survive or retain its value is anyone’s guess. At least the companies mentioned above generate profits. So there is formal way of valuing them. Bitcoin has no cash flows, so it’s very difficult to arrive at a fair value.

2) Are you too Late to Join the Party?

While it’s difficult to answer that, it is quite easy to understand that you are surely not early! Students, housewives and even mom & pop store owners in USA have started trading in crypto currencies. In fact some of them have even launched their own crypto currencies! There are more than 1,000 crypto currencies in the world.

3) Can you Afford to Lose 80% of your Invested Amount?

Let’s play a devil’s advocate and assume that Bitcoin will meet the same fate as that of Zee or Infosys. That would mean a 80% loss on your invested amount. Will you be able to absorb such losses without damaging your wealth?

Trivia – Stock Market is Our Bitcoin 🙂

While we have also missed the bitcoin rally, we have little regrets here since it’s a concept that we don’t fully understand (we are yet to meet anyone who understands it either). For those of you, who regret having missed the bitcoin, please regret missing these things too:

1) Page Industries – 50x in eight years!

This company manufactures & markets inner wear under the “Jockey” brand. Over past eight years, this company has increased its sales by 15x and profits by 18x. Some of our early investors were fortunate enough to get a lot of benefit here.

2) Titan Industries – 80x in fourteen years!

This popular watch company has been able to transform into India’s largest and most aspirational jeweller and optician in a span of 12 years. Its sales and revenue have increased by 22x and 28x respectively over this period.

3) TTK Prestige – 100x in ten years!

From being a pure cooker company, this company has transformed into complete kitchen solutions company over the past ten years. Its revenue and profits have increased by 8x and 25x respectively over the past ten years.

In fact, you should regret missing these opportunities more than Bitcoin. For the simple reason that unlike Bitcoin, which is esoteric and complex, these companies were simple to understand and you were surrounded by their products all your life. Everyone loves lottery tickets but the harsh truth is that there aren’t many lottery tickets in life. Rather than waiting for a Bitcoin miracle in your life, get into the habit of investing in stocks. If you remain invested in markets for long enough, there is a high probability that you may stumble upon a few bitcoins!

Feel free to reach out in case you need professional help with your investments!