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ladies and gentlemen this is your ppsa your party pooper service announcement just because something has gone up in price does not mean it's a good investment now thank you hey guys we're back with another more casual video talking about risks and investing and today we're talking about bitcoin. We have a bit of a break with our video scheduling so I figured I'd touch on the topic because as many of you know the cryptocurrency is going through somewhat of a second renaissance, if you will, hitting a brand new all-time high of over 40,000 and up roughly over 300 percent over the past year, which is a remarkable return. The thing is, bitcoin's actually something I've covered in the past. I made my first opinion piece video, my first party pooper video, on bitcoin, where I talked about how I thought it was a high-risk asset, a speculative asset, that didn't make it for a great retirement asset, and that was possibly in a bubble. But admittedly, that was three years ago, and things have changed with the cryptocurrency since then. On the one hand, companies continue to adopt the currency. We've seen Square and PayPal pushing it as an option on their platforms. On the other hand, with us going through a global pandemic and the US Federal Reserve employing stimulus measures to support the economy, a lot of people have seen this growing fear around inflation, that the US dollar might actually see its value depreciate faster than it has in the past. With massive quantitative easing and all these things, that makes the drumbeat louder for bitcoin. So people are now asking, with all these developments, have my opinions changed? The answer to that is no, not really. Bitcoin in my eyes is still a high-risk speculative asset that risks being in a bubble, as with anything that skyrockets in price. In fact, anything else is considered a speculative asset too, other currencies included. That's not to say that bitcoin can't keep going up in price. I don't know where it's going to go. But just because something is speculative doesn't mean its price can't increase. The only reason people speculate is because there is an upside, so of course it can continue to go up in price. But at the end of the day, there's no tried and true method for determining its value. So Richard, if you're not going to provide any in-depth analysis or tell us which way bitcoin's going to go, why make this video? I was going to get to that, my friend. Let me borrow this. I wanted to find a use for it. As with the first time we saw bitcoin see a surge in popularity, we started to see some red flags and concerning trends and attitudes in the investment field, and I really just want to address that, because there are a lot of people being irrational with their money when they see things like this happen, when they see these giant rallies. Today I want to highlight four reasons why I myself don't have any money in bitcoin. This isn't a bear case for the cryptocurrency to argue that it's going to crash or whatever, but these are things that I struggle with that make it easy for me to put into my too-hard pile. There are going to be people out there who call me an idiot for not buying bitcoin, but realistically, I've never suffered for not taking an investment, so I think I'll be okay.
The first is that there's no real method for determining what the true worth of bitcoin actually is, its fundamental intrinsic value. It's difficult to find the intrinsic value of anything, and you'll never get it to the exact dollar, but at least with stocks you can sort of estimate it. You can use forecasts of future earnings: if a company earns this amount over this amount of time, the price will be this. There's no real tried and true model for bitcoin that works to find that same value. While I've seen a lot of articles arguing that bitcoin's going to hit certain price targets, like 400,000 or a million per coin at some point, the truth is that no one in the industry knows where the cryptocurrency is going to go. They're all applying brand new models that haven't been tried and tested before, so it's almost like everyone's throwing stuff at the wall to see what eventually sticks, and that makes each individual model at high risk of being incorrect. As an example, some people try to apply a trading multiple sort of thing to bitcoin, doing something like the value of all bitcoins out there divided by its transactions, but that's not something that, in my understanding, has ever been shown to mean anything. Another thing people like to use is the argument that bitcoin's history shows that price always hits a new high after crashing from its past peak. But I would argue that we don't really have enough of a track record to know that that's a rule of nature, and there's a chance that it's violated in the future, especially when you consider that bitcoin today is vastly different, both in terms of utilization and its actual technology, than it was even five years ago. While this is more of an opinion than anything else, I do think a lot of bitcoin's price appreciation is just tied to people trying to get quick money. It's not tied to fundamental demand for the cryptocurrency. Well, it's hard to gauge that fundamental demand of people using bitcoin as a replacement for fiat currency or gold, for example. There are some charts that show that bitcoin's not really being used a lot more than it was back in 2017, when it hit its first peak. Transactions per day are roughly the same, and I actually think unique addresses are fewer than they were back in 2017. So while that might not be a smoking gun, it does raise a red flag.
Secondly, I still struggle with the idea of bitcoin being a good substitute for the US dollar, for a fiat currency, if you will. I know not everyone argues that bitcoin is going to eventually replace the US dollar, but some people do, and to that point I would argue there are still a lot of issues with having any sort of money or currency that fluctuates so drastically in price. It makes it near impossible to run an economy off of it. Quite frankly, there are a lot of things about bitcoin that, from the user's perspective, might make it less attractive than the US dollar. Inflation aside, which we'll get to, don't worry. But for a currency to substitute something so ingrained in our economy as the US dollar, it has to be kind of perfect, and there are things about bitcoin that aren't perfect. For example, the fact that you can lose all your money if you forget your password. We've all seen that story about the guy losing hundreds of millions of dollars because he forgot his password. So God forbid that grandma ever puts all of her money into bitcoin because her grandson told her to, and then has a senior moment and forgets the third digit of her password, with no middleman to rectify the situation. That's one advantage fiat currencies have over things like bitcoin. Yes, middlemen suck at times, especially for things like international cross-border transactions, but they do provide security in another sense of the term: password recovery, reversing transactions, and rectifying theft and things like that. I know people view bitcoin as the end-all be-all of security, and I understand the arguments for that, but since when did people start caring so much about their ledgers? I've never heard, before bitcoin, of people caring that the bank had the ledger for their bank account information.
Probably one of the biggest things I don't really buy in the bitcoin argument is that fiat currency is garbage. Now hold on, I know some of you are grabbing your pitchforks and torches right now, but all I'm saying is that before bitcoin and cryptocurrency, I don't know that many people complained about inflation. In fact, if you look at inflation figures, which I know some people don't put much faith behind, we have some of the lowest inflation we've seen in US history, at least since the 1940s. I get that there are concerning things with the Federal Reserve. They have done massive quantitative easing. That hasn't been reflected in the inflation rate yet, and it could very well lead to inflation in other areas. We've already seen stock prices continue to rise, and I get that that's a concern. But do you think, maybe for a second, that what the Federal Reserve is doing might be helping the economy? That perhaps this was the lesser evil available to them? They and all other prominent economists around the world are employing the same strategy because they understand that contractionary policies in the past drastically worsened recessions. Sure, this might cause further problems down the road, and I'm not arguing that, but maybe, just maybe, they view it as being worth it. No money printable. Okay, if you believe bitcoin's not a great currency but stands as a good store of value, which I'd be more inclined to believe, it's not likely to continue increasing in price excessively over time. To understand this, you can look at gold, for example. Gold is another store of value, a safe haven, if you will, or at least some people view it as one. Over the past downturn, gold's price initially fell, which is kind of strange, but gold and bitcoin both increased initially as people fled the markets and looked to put their money into something safer. But with things recovering, at least on the stock market front, money has come out of gold and gone into the stock market, and there's certainly a chance that will happen with bitcoin as well. The whole point of a store of value is to exit the market and put your money into something while you wait things out. So when things recover and the storm passes, money tends to leave those assets. That's not to say they don't appreciate over time, but most investors don't expect double-digit returns from non-producing assets over the long term on an annual basis.
Finally, what's admittedly more of an anecdotal point is that I still think there's a lot of dumb money in bitcoin. It's not to say that people who own bitcoin are inherently dumb money, but on the one hand, a lot of people still argue for bitcoin from different perspectives, contradicting points about why bitcoin's valuable and things like that. On the other hand, I can't count how many emails I've gotten from cryptocurrency services asking me to promote bitcoin or their service, or to sponsor my channel, and to me that says there's a big oversaturation in this space. Not to mention that some of the people who have reached out to me for these sponsorships make weird statements that are again just red flags to me. I had someone ask me to promote bitcoin as a good retirement asset on my platform, even though from a portfolio management standpoint, retirement money isn't the money you put into speculative assets. I don't believe there are many portfolio managers, professionals, who would believe that cryptocurrency is a good retirement asset. I also had someone from another company argue that bitcoin had the best P/E ratio of any investment asset in the universe. Bitcoin doesn't have a P/E ratio, and that's what concerns me: these are the people running some of these companies and promoting bitcoin while clearly not understanding aspects of it. Finally, what I really believe is the sign of vast dumb money in a space is when you have all these people without economic backing or financial education arguing that bitcoin is the future, that there's no alternative, that there's no way bitcoin won't become the currency or safe haven of the future. As I've said before, there are no guarantees in investments, and only a sith deals in absolutes. It's not to say that someone who says bitcoin is going to go up might not be proven right, but the fact that they're making that claim in the first place shows a fundamental lack of understanding of how investments work. The point of investments is that you need to take on risk to get return, and you need to understand that there's a lot of risk with bitcoin, especially when you're expecting these high returns. There's no such thing as one without the other, and the more I hear people argue that bitcoin is a sure bet, guaranteed to be the future, the more I shy away from it. Those are all reasons why I'm happy to sit on the sidelines and wait to see what happens with bitcoin, rather than risking my retirement assets. There are smart people who hold bitcoin. It's not all fanaticism and irrational arguments. There are people who make very coherent arguments, and other people who just want to hedge their bets and put money into cryptocurrency. If you have your money in bitcoin, I truly am rooting for you, but you should understand the risk side of things. From a portfolio management perspective, you should not be risking your retirement on these speculative assets. And if you're an investor who doesn't own any bitcoin, just know that's okay. You're not alone, and it's okay not to invest in something you don't fully understand for fear of missing out. But Richard, you're going to miss massive returns? Maybe, but that's fine. You'll be left behind as fiat gets crushed? Probably not. There are other ways to invest, but I appreciate your concern. What is the great wealth transfer? It's upon us. No one, I repeat, no one knows where bitcoin is going to go in the future. Not me, not Dragon Slayer 64 in the comments section, not Bill down the road who works at the mechanics shop and has been watching a lot of Austrian economics YouTube videos lately, and especially not you, you big dummy brain.
To end this video, I'd like to highlight an excerpt from The Education of a Value Investor by Guy Spier, where he talks about the checklist he uses to determine whether he should look into a stock or just ignore it. One of the things he uses is to never buy into something he's being sold on, whether it be a fund or anything. The moment someone is trying to promote it to him, he'll just ignore it, and that seemed to work well for him, and I'm happy to employ that same strategy. So thank you for joining me today, guys. I hope you enjoyed the video. I promise I'll be getting back to more educational, structured videos in the future, but I did have kind of a break and I wanted to address this. Let's come back into the news. Thank you for joining me today, and as always, be safe out there.