Alright, let’s talk about Bitcoin…

One of the most controversial and volatile assets, Bitcoin is – depending on who you ask – either a total fraud or the future of finance.

In the former camp, you have the likes of Charlie Munger, Warren Buffett’s late business partner, who called it “totally, absolutely crazy stupid gambling.” Last year, in his previous proposal to ban cryptocurrencies, he added:

I think the people who oppose my position are idiots… I don’t think there is a rational argument against my position.

Charlie always had a way with words…

Meanwhile, the younger generations, the “hodlers” and the “crypto natives,” are just as expressive in their support of Bitcoin. To them, Munger was out of touch. At best.

But here’s something we all can agree on: Cryptocurrency is a hot topic. A “HUGE” one, actually, ever since Donald Trump started talking about it earlier this year.

You probably know this on some level thanks to mainstream financial media reporting. But let me make it as clear as possible:

In July of this year, Trump headlined The Bitcoin Conference, the biggest cryptocurrency event of the year.

At the event, Trump promised to fire SEC Chair Gary Gensler on “day one.” Without getting into the weeds, it’s fair to say that Gensler – as far as the crypto community is concerned – might as well be Darth Vader.

And Trump appears to be keeping his promise.

Yesterday, the president-elect nominated Paul Atkins to run the SEC. Atkins has been a critic of Gensler. And he’s expected to bring a friendlier environment to the Commission. The community certainly liked it.

As of yesterday, one bitcoin now fetches one hundred thousand U.S. dollars. Shares of Coinbase (COIN) – the only publicly-traded crypto exchange – were up 6.3% by yesterday’s close.

My guess is that short- and even mid-term, crypto is headed higher from here.

Most crypto enthusiasts see the market rising further next year after Trump takes office. Fundstrat Cofounder Tom Lee even said last week that Bitcoin could hit $250,000 by Christmas 2025.

It’s a big claim, and a big story.

So, to get some perspective on the topic, I turned to an enthusiast close to home.

My 22-year-old son.

Don’t Be Fooled: Bitcoin Has Its Benefits

I’ll admit it. I’ve long been skeptical of Bitcoin and crypto in general.

It made no sense to me – building a currency out of thin air. It sells no products. It has no cash flow. And good luck putting an actual valuation on it.

At first, second, and even third glance, I concluded it wasn’t worth my time or money. And it definitely wasn’t worth recommending to my readers.

The way I saw it, the whole house of cards was going to collapse sooner or later.

But then my son began researching cryptocurrency, writing about it, and even advising others on the subject. He also started to share his enthusiasm about it with me. So I started listening.

And, I have to admit, he makes some good points, such as:

  • The world is becoming more digitally connected.

  • Bitcoin has overtaken silver to become the world’s seventh-largest asset by market capitalization.

  • Cryptocurrency can help diversify your portfolio.

  • A handful of reputable institutions such as iShares, Fidelity, and Invesco now offer cryptocurrency exchange-traded funds, helping to legitimize the asset class.

  • It’s an alternative to traditional currencies, which are too often manipulated.

Those are all worthwhile considerations, with that last one standing out in particular. After all, look out how badly our political and financial leaders have bungled the U.S. dollar for years.

Mark Kritzman, a senior lecturer at MIT Sloan – hardly a conservative institution – and three colleagues determined last year that “the overwhelming driver of that burst of inflation in 2022 was federal spending, not the supply chain.” You can read the full math-driven research here if you don’t believe me.

And then you had the Federal Reserve denying that inflation for months on end.

Cryptocurrency, for all its faults, didn’t suffer from such influence. As my son pointed out in one of his most recent writeups, “Bitcoin is decentralized and operates independently of any single government or institution.” It’s not like “fiat currencies that can be created endlessly” since it’s “capped at 21 million coins.”

Put like that, I can definitely see the appeal.

But the Cryptocurrency Risks Still Outweigh the Rewards, in My Book

So why are investors like Munger so very against cryptocurrency? My son has a few answers to that as well, including how “cryptocurrency markets are highly volatile.” Which is true.

If you didn’t know that already, I’ll refer you back to that chart I showed in the beginning. And then I’ll quote my son again:

Bitcoin often sees corrections of 10%-20% during periods of heightened volatility. However, altcoins – other cryptocurrencies besides Bitcoin – are hit even harder. These smaller, less established coins can experience corrections of… 50% or more, making them significantly riskier.

However, according to him, there’s a more intrinsic reason why so many people continue to turn down the opportunity: “The psychological propensity to oppose change.” And, again, he might be right in there.

Perhaps part of my dismissal of the subject has been based on being old-fashioned.

Perhaps.

But as enthusiastic and well-versed as my son is on the subject, I can’t say I’m completely sold. There’s just too much uncertainty involved in this emerging market, and I don’t like too much uncertainty.

Not for me. Not for you.

There’s always going to be risk involved in any opportunity, financial or otherwise. As I’ve stressed so many times, there is no crystal ball we can rely on when making decisions.

However, there are factors we can assess in order to diminish risk. And when it comes to investments, those factors include:

  • Management, which cryptocurrency has none of;

  • Track record, which cryptocurrency is short on;

  • Future potential, which very much relies on the U.S. dollar’s path from here…

Because, for all of Trump’s legitimate pledges to enhance Bitcoin’s viability, he’s also pledged to defend the U.S. dollar. By cutting government spending and fighting outside attempts to create a new reserve currency, the dollar is set to become more attractive, not less.

In which case, Bitcoin and its crypto allies won’t be as attractive for mass consumption.

My son opened my eyes to Bitcoin. I don’t think I’ll ever recommend it, but I can’t dismiss it either. And I fully acknowledge that I might one day regret not getting in when Bitcoin was “only” $100,000 per coin.

But I’m going to hang tight with my safe and steady dividend companies all the same.

Regards,

Brad Thomas
Editor, Wide Moat Daily

MAILBAG

What are your thoughts on Bitcoin? Write us at [email protected].