In 2016 when Bitcoin first caught my attention, it was trading at around $400 per unit. It did not seem like an investment product at the time. It still felt like something straight out of Hollywood spy movies – a digital currency used for illegal transactions on the so-called “dark web” – terrorist financing, drugs, trafficking, all the stuff your mama warned you about.

By 2017, it had become more mainstream, only this time, as a Chartered Accountant, a candidate in the CFA program and a Corporate Finance / M&A professional who spent most days working on the valuation of assets (primarily equity), I did not understand what was driving the value of Bitcoin, so I figured I would be better off not buying it. It is 2021 and I still cannot say that I fully understand cryptocurrencies, or Bitcoin in particular.

Also, in 2017, I was preparing to leave Lagos for Stuttgart, so I needed all of my assets in liquid, less volatile assets – cash – and in Euros. Bitcoin would later peak at around $19,300 in November of that year. Ouch! What if I had bought it at around $400 in 2016 and sold in November 2017? This is hindsight bias, and it is useless to play “what-ifs” in such situations. I talked about hindsight bias extensively on this episode of my Podcast.

Over the years, I have shared my thoughts about Bitcoin (and cryptocurrencies generally) on LinkedIn, Twitter, Instagram, etc. In this article, I have decided to compile some of my thoughts from all of these platforms and organize them into a single piece.

By December 2020, a number of other cryptocurrencies had sprung up, and between December 2017 and January 2020, Bitcoin’s price would range from around $3,000 to $17,500, never to reach its November 2017 peak, at least not until December 2020.

By March 2020, as the Coronavirus pandemic spread around the world, sending the market into a bear frenzy, Bitcoin suffered one of its biggest crashes ever. I wrote about this crash on Linkedin around that time. My argument was that “…,when the chips are down, the masses really cannot buy essentials (bread, potatoes, toilet paper, hand sanitizers, soap, rice, milk, etc.) with bitcoin… at least not yet.”

I added that, although cryptocurrencies were built on revolutionary technology (blockchain and the ancient accounting ledger system / double entry principle) “… I have never quite understood the valuation of Cryptos (other than hype and the expectation that the next buyer would be willing to pay more – for the hype) so I never really accepted them as a currency.” My view has not changed much in this regard.

Most assets are priced based on how much buyers are willing to pay for them, and how much of the assets are in supply – Economics 101. This is not only true for Bitcoin, it is also true for traditional asset classes such as fixed income (bonds, etc.) and equity (shares), and alternative assets like gold, real estate, wine, art, etc.

The prices that buyers are willing to pay for most assets reflect the benefits that they expect to derive from owning them. In the short-to-medium term, these benefits could include convenience and prestige of owning a particular asset or the shares of a successful company (e.g., a painting, Apple Inc. shares, etc) or a popular company or asset (e.g., Tesla and Apple Inc., or Bitcoin), in the long run, the benefits are mostly based on the expected future cash flows from holding the particular asset.

For equity securities – how much dividend and capital appreciation will I get in perpetuity for holding this particular company’s stock? Discount all of these dividends and capital appreciation (cash flows) back to todays Dollar or Euro equivalent. How much you get is how much you should pay for the shares. For fixed income securities (bonds, etc.), a similar principle applies. This is an oversimplification, of course.

Note that the cash flow expectations for equity and fixed income securities are ultimately generated by the company from its operations. The company provides some form of value for which it earns these cash flows. They do not simply arise from someone else paying to hold the assets. Unlike most traditional assets, for Bitcoin, there are no cash flows to be generated from merely holding them. The commodity does not in itself generate positive future cash flows.

This is in no way suggesting that Bitcoin does not offer any utility. The utility includes the elimination of redundant transaction costs and middle men, trust and speed, anonymity offered during transactions (transactions are mostly private and untraceable), independence from Government regulation or interference, prestige associated with holding a trending commodity (not being left out, or put differently, eliminating the fear of missing out) etc.

The above implies that in terms of utility, Bitcoin is in many ways similar to fiat currencies such as the Euro or Dollar, in that it is not backed by gold or any other physical asset, it does not generate any value in itself or any cashflows. It gets its legitimacy from public acceptance, and its value is determined solely by demand and supply. The higher the demand for Bitcoin, the higher its price relative to existing fiat currencies (just like the standard exchange rate principles for fiat currencies).

A lot of Bitcoin enthusiasts argue you that the high volatility currently associated with the commodity is mostly due to price discovery, since it is a relatively new instrument. This is a fair argument, after-all, the forces of demand and supply are the most efficient price discovery mechanisms known – in free and efficient markets.

The more people there are who actively promote Bitcoin as an investible asset, the higher will be its demand, and by extension, the higher the price (or exchange rate) of Bitcoin relative to fiat currencies. So when a character like Elon Musk tweets about or adds Bitcoin to his Twitter profile, up goes the demand for Bitcoin.

To be fair, Bitcoin is not the only commodity which derives its value from the expectation that someone else would be willing to pay more for it, or from other forms of utility which have nothing to do with expected future cash flows. Art, expensive wine, gold, etc., all share some similarities with Bitcoin in this regard. Unlike the other alternative assets, however, Bitcoin is completely intangible. It was literally created from nothing. That in itself, is a miracle.

So the big question is: how does a commodity or a currency that was created from nothing, that has no government oversight, is limited in supply, etc., replace existing currencies? How do governments around the world and their central banks go about replacing their respective currencies with Bitcoin and similar cryptocurrencies?

As I asked on this tweet in December 2020, will China, the US, the EU, etc., simply adopt Bitcoin and other existing currencies as direct substitutes for existing currencies or are these nations more likely to create and issue their own digital currencies on a pro-rata basis, depending on how much fiat (old) money people had (e.g., for every $1,000 you had, you get XX units of a new digital currency issued by the EU)?

With major central banks around the world issuing their own digital currencies – which is more likely than accepting Bitcoin as their respective national currencies -, will they allow Bitcoin to coexist along side their digital currencies, or will Bitcoin and other cryptocurrencies that are not backed by the central bank of a sovereign nation be rendered invalid / illegal?

As I mentioned earlier, I am no cryptocurrency expert. However, I believe that most central banks around the world will find ways for some of the existing cryptocurrencies to exist alongside sovereign-backed digital currencies. This is the most realistic best-case scenario for Bitcoin.

Even as a best case scenario, central banks issuing their own cryptocurrencies already threatens the very core upon which bitcoin valuation is based – demand and supply. The supply of various other cryptocurrencies which offer all of the same benefits as Bitcoin (with the exception of independence and anonymity) definitely increases the supply of Bitcoin-like instruments, and is likely to drive down the price of Bitcoin (demand and supply).

How much will the independence from government control and anonymity provided by Bitcoin be worth when central bank-backed digital currencies with similar utility as Bitcoin are issued? How much value do organizations and individuals place on their Governments not having oversight on the currencies in which they store their wealth? Are governments wiling to give up oversight of currency management and the ability to track or monitor certain transactions?

One more reason why I believe that central banks will be more likely to issue their respective digital currencies, and perhaps restrict the use of other cryptocurrencies in some form is to maintain some control over monetary policy, inflation, etc. The ability to oversee monetary policy and implement specific goals such as currency stability, low inflation and full employment are some of the most important functions of central banks. Can a central bank oversee monetary policy with a currency it does not control?

A lot in the cryptocurrency environment is dependent on future government regulation. Furthermore, although it is yet to happen, nothing on the internet is completely safe. Central banks get hacked from time to time. It is naive to assume that Bitcoin’s independence and decentralization will continue to be an advantage.

So, should you buy Bitcoin? If at this point, you still need my opinion to decide on whether or not to “invest in” / buy Bitcoin, you probably should not.

Bitcoin is a very volatile security. Its value could rise up to $150,000 or it could fall down to what it was selling for when I first heard about it ($400). This represents an unreasonable amount of volatility for many non-professional / inexperienced investors with relatively low net-worths. I believe that good investment strategies are boring, and Bitcoin presents way too much excitement for it to be a good investment product for a retail investor whose primary goal is long-term capital preservation and accumulation. Choose boring!