Why Value Investors Hate Bitcoin

On the one hand, they don’t hold much value in themselves. On the other hand, they are extremely popular.

New cryptos are launched every week. Each claims to solve some problem. Despite all the hype, people can carry on with their lives properly without understanding a word about crypto.

But for a crypto enthusiast, people’s ignorance about the potential uses of crypto is not a reason to dismiss its importance.

In fact, they would argue for greater awareness. They will say that crypto is the future of money as we know it. Thus everyone should learn as much as possible about crypto.

In the financial markets, supporters of crypto seem to be winning the argument. This asset class is gaining more and more acceptance day by day.

Only time will tell how widely crypto will be traded and used in the future.

But there is a group of investors who don’t understand crypto: value investors.

bitcoin and value investors

Bitcoin is the largest cryptocurrency of all time.

This is 40% of the total crypto market cap. It is also twice as large as the second largest crypto, Ethereum, and 10 times larger than the third largest crypto, Binance Coin.

Crypto enthusiasts are drawn to smaller, newer coins. After all, the action is there.

But for most people, crypto is synonymous with bitcoin. This is despite the fact that over the past 12 years, its market cap dominance has fallen from 100% to 40%.

Think of it as a first mover’s advantage. In this case, the first mover has made such a huge impact on the financial world that it is impossible to think of other crypto in the same way.

Actually, this is the perception of value investors.

Most value investors around the world regard bitcoin as a purely speculative asset. And if the most influential crypto is speculative then what do others need to see?

When crypto first came into the public consciousness, value investors were just as confused as everyone else. They didn’t understand crypto because no one did.

But with time things changed.

Few investors embraced bitcoin over the years. Initially, they may have done it for quick profit. But now, many investors are seriously considering holding bitcoin for the long term.

This is a big change in perception.

Many investors now know at least the basics of crypto and are willing to take the time to understand this new asset class in depth.

But investors don’t care.

Not only do they not care about all the other cryptos in the market, but they also hate the biggest bitcoin.

The foremost critic is none other Warren Buffett’s Business partner Charlie Munger. He has made many critical comments about bitcoin.

Munger hates bitcoin mainly because of the anonymity it provides to criminal elements. He believes that bitcoin encourages antisocial behavior. They also think that bitcoins have no value.

Only time will tell what value bitcoin will provide to the world.

However, if you listen to value investors talking about bitcoin, you will notice two things.

First, they don’t really understand what bitcoin (or any other crypto) is or what it could be. In other words, they are not experts in the subject.

Second, they are not interested in understanding bitcoin. Some value investors have no opinion about any crypto at all.

Why is it like this?

Well, the answers will vary from one value investor to another. But there are similarities.

Here are some of the reasons we think value investors hate bitcoin (or any other crypto).

# It’s an alien asset class for them

Value investors live in a world of hard numbers. Cold facts matter to them and not much else.

They do an emotionally fundamental analysis of companies. It has to be like that. Emotions have no place in value investing.

If a stock is undervalued, a value investor’s emotions may not get in the way of buying the stock at the right price.

The same is true for selling stocks. If the stock has no margin of safety, it must be sold. No feelings are to be entertained.

Bitcoin cannot be analyzed in this way. After all, it is a currency. This is not stock. Buying bitcoins doesn’t give anyone ownership over bitcoins.

Like gold, bitcoin does not generate any cash flow. Thus, it cannot be valued in the traditional way of discounting future cash flows.

# This is an alternative to national currencies

Bitcoin and other cryptos serve as an alternative to national currencies. Successful value investing depends on a stable national currency.

You can see the problem here…

Suppose a value investor expects a stock to go up 50% in 2 years. He is assuming that the currency used to buy the stock will not lose much value in terms of the goods and services that can be purchased in those 2 years.

If the value of that currency falls 10% in 2 years, the value the investor has made is only 40% instead of 50%.

And the longer it holds, the worse it gets.

If the currency is losing value over time, the value investor is walking on the economic treadmill. Its momentum is the rate at which a currency depreciates. He has to exceed this speed to make profits.

Bitcoin acts as a currency that can be compared with other currencies. Despite heavy volatility, it has performed extremely well against the dollar over the long term. More and more people are thinking of bitcoin in this way as an alternative to the dollar.

This is bad news for value investors expecting returns in dollars.

#it’s very unstable

Value investors prefer volatility when they want to buy or sell. They want the stock to fall fast when they want to buy and go up fast when they want to sell.

But they don’t really like volatility otherwise. If they want to increase their holdings, they don’t mind the reforms. However, if given an option, they would prefer stocks that do not jump too much.

Bitcoin is too volatile for their liking.

#They are victims of their own success

Value investing demands patience. Most of the value investors make huge profits in the long run.

The way compounding works, most of the profits come at the end of the holding period. Warren Buffett was a billionaire in the 50s. But since then his net worth has grown more than 100 times.

That means the most successful value investors you’ve heard of are Old, Charlie Munger is an example of this.

The old saying rings true, ‘You can’t teach an old dog new tricks,

Making money from crypto demands a new way of thinking. Successful value investors may be too old to change the way they think that made them so successful in the first place.

Why should they change what has worked for them?

in conclusion…

These factors, or a combination of them, may explain why value investors hate bitcoin.

They don’t understand it. They don’t want to understand it. They know that it is an alternative currency that they use to buy stocks. It’s too unstable for their liking. And they don’t want to change what has been working for them for decades.

To truly understand something, you need to look at it from multiple angles. Bitcoin and crypto are no different. Value investors provide a valuable perspective on this new asset class.

But you are thinking of investing in crypto, you have to Learn from many other sources too,

This article is syndicated from Equitymaster.com