Just a month ago, Bitcoin surpassed the value of gold which made a lot of investors around the world look up and see if they can still get a piece of the action. I'm no expert in cryptocurrency but I've always been sceptical (career-sickness) about its valuation ever since its inception.
"They weren’t really designed to be a store of wealth. They weren’t meant for speculation, either. They were only supposed to be a secure way to transfer money."
This is not to say I don't see the value in blockchain technology. It's just that virtual currencies that can be mined just don't make sense to me. This article from David Kuo of Motley Fool Singapore has a better way of putting my scepticism across (emphasis mine).
Dear Foolish readers,
Guess what? I've come up with a really clever way to make some money from secure currency transfers. It goes something like this…
I bake a batch of cookies using my special recipe that's been handed down through the generations. No one bakes cookies quite like we do. I think they are unique and impossible to replicate.
They look just like coins but they are really just biscuits, which is why I have called them Bikcoins. Ta-dah!
So, the next time you want to transfer money from Singapore to, say, London, all you have to do is see me. Currently, each Bikcoin costs around US$1,000. There is no real reason why it should be a thousand bucks. I just plucked a number out of the air.
So, if you give me S$1,000, I will give you one of my Bikcoins in exchange.
And here's the clever bit.
When you get to London, just look up one of my relatives. Hand over your Bikcoin, and in exchange, you will get US$1,000 or the equivalent in sterling.
My family will know it's a genuine Bikcoin because it is made using our secret ingredients. Only I know how to make them. That’s downright ingenious, eh?
What's more, you can give the cookie to anyone you want. It’s like a form of currency that’s been encrypted with my secret recipe – a cryptocurrency, so to speak.
There's something else I should mention. The price of my cookies could fall as well as rise, depending on demand. Right now, I can’t bake them fast enough. So prices are high. But who knows what might happen by next week?
It could be worth a lot more or, perhaps, a lot less by the time you get to the UK. That’s a risk you will have to take.
If you think it might go up – and the charts seem to suggest that it might -- you could buy more and store them in an air-tight cookie jar until you need them. It could be worth a mint later on.
That would be fantastic, wouldn't it? You could store your entire wealth in a cookie jar, if you wanted. Brilliant!
But I suggest you don’t, though. You see, my cookies are quite sought after. They could get “eaten” before you exchange them for real money.
So are my Bikcoins worth all the effort?
That would depend. They weren’t really designed to be a store of wealth. They weren’t meant for speculation, either. They were only supposed to be a secure way to transfer money. But some people tend to get ahead of themselves.
It’s also important to point out that my Bikcoins have no intrinsic value. They are not like any other asset.
Unlike bonds, they don't pay coupons. Unlike property, they don't deliver rent. Unlike cash, they don't pay interest. And unlike shares, they don't pay dividends.
So all you have is the hope that I will exchange your Bikcoins for cash, when the time comes. You must also pray that they don't vanish before then.
There is something I haven’t mentioned, yet. I hear that other people are planning to, or have already, copied my idea. I believe that there are now 900 similar cookies on the market.
However, I think that mine are the best.
(But I would say that, wouldn’t I?)
And if you own one of my Bikcoins, you would like to think so too. That’s why some people like to talk up their value.
In fact, the feeding frenzy for my Bikcoins could drive prices much higher. It’s a supply and demand thing.
But that is until someone comes up with a better-tasting cookie. And when that happens, the value of my Bikcoins could evaporate. That’s the way the cookie crumbles.
No one can dispute that cryptocurrencies could one day be an effective way to transmit money.
But are we able to value them properly? I can’t. But I think that I can value stocks with some certainty.