To buy Bitcoin or not to buy Bitcoin - AXIAM Capital Management

Bitcoin and other crypto currencies have captured the imagination. The incredible rise in Bitcoin prices over the last three years has been a windfall for some, and it looks like an opportunity that is almost too good to be true.

It is at times like this that we need to stand by our sound investing principles, strategy and process.

“Serious investing consists of buying things because the price is attractive relative to intrinsic value. Speculation, on the other hand, occurs when people buy something without any consideration of its underlying value or the appropriateness of its price, solely because they think others will pay more for it in the future.”

Howard Marks – There they go again…again.

We agree with Howard’s Wisdom.

Should we buy Bitcoin?

Bitcoin is the most popular of an increasing number of crypto currencies. When considering whether to invest in Bitcoin, the rational approach is to analyse Bitcoin relative to our investment criteria. Here are some thoughts that inform our decision-making process:

It is difficult to establish the value of Bitcoin as it has no intrinsic value that can be measured.
The price of a Bitcoin has risen 3,900% in the last three years to September 2017, making it difficult to argue that its price is low. Buying anything when the price is high represents a high risk.
We believe that robust brands contribute to intrinsic value. It is difficult to argue that a cryptocurrency (of which Bitcoin is the largest), is a brand that brings differentiation and pricing power.
Owning a Bitcoin does not produce an income for the owner. It is not the same as holding a portion of a company that churns out increasing cash flow year after year, that is paid back to shareholders as dividends.

The only reason to own Bitcoin is because you believe that

(a) an already high price will go still higher and

(b) you will be able to find someone else to buy your Bitcoin from you at the higher price.

This behaviour is the definition of speculation. Warren Buffett also provides a sobering perspective.

“It’s a method of transmitting money. It’s a very effective way of transmitting money, and you can do it anonymously and all that. A check [cheque] is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”

Warren Buffett on CNBC in 2014.

So, according to our criteria for sound, safe, long-term income-generating investment, Bitcoin and related cryptocurrency derivatives do not meet our requirements.

We do not doubt that cryptocurrencies and the underlying blockchain technology have the potential for significant social impact, but social innovation does not always translate into winning investments.

At AXIAM, we followed a disciplined investment process and buy shares in companies when their share prices represent value. We do not speculate.

We buy shares in companies, irrespective of their geography, that have great brands that are known, loved and used around the world daily and we keep them for a long time. Sign up to our newsletter or follow us on Twitter to learn more about investment in the best global brands or contact our fund management team to invest.