Cryptocurrencies in general are a very volatile asset class. They have especially whipsawed in 2021. While Bitcoin prices hit their all-time highs, they're now down over half from those levels. Should you be scared of owning Bitcoins and other crypto assets considering the massive volatility?
Bitcoin remains the most popular and largest cryptocurrency and its market capitalization is in the vicinity of $600 billion. While prices have plunged from the peaks, the drawdown has been lower than some of the other crypto assets like Dogecoin.
Warren Buffett on cryptocurrencies
Berkshire Hathaway chairman Warren Buffett and vice chairman Charlie Munger have very pessimistic views of cryptocurrencies. Buffett has called Bitcoin a “rat poison squared.” He has also said, “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending."
At this year’s annual shareholder meeting, Munger said that he “hates” Bitcoin’s success. “I don’t welcome a currency that’s so useful to kidnappers and extortionists … nor do I like just shuffling out a few extra billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air,” said Munger.
Several others like Nouriel Roubini also hold similar views of crypto assets. In contrast, Paul Tudor Jones sees value in Bitcoins and views them as a portfolio diversifier.
Should you be scared of owning Bitcoins?
Bitcoins and other crypto assets are an emerging asset class. While many people including Tesla CEO Elon Musk and Square CEO Jack Dorsey see them as the future of finance, many others see them as useless assets with no underlying value. If you own Bitcoins, there are valid reasons why you should be scared.
First, Bitcoins don’t have a fundamental value and frankly any real-world usage. Many people see Bitcoin as an efficient way to transfer funds. However, given the massive volatility, not many businesses will be willing to accept payments in crypto assets. Also, as countries globally launch their own sovereign-backed digital currencies, even the efficient transfer appeal of Bitcoins will fade away.
Second, a lot of governments are cracking down on crypto assets with China taking the lead. If governments push for stringent KYC norms for Bitcoin holders even the anonymity associated with them won't hold.
Third, crypto assets are more susceptible to fraud than other financial assets. Finally, as a Bitcoin holder, you expose yourself to massive volatility. The asset class isn't for the faint-hearted since prices rise and fall sharply every trading day. The 10 percent intraday volatility isn't uncommon for crypto assets.
Bitcoins can fall to zero
Many optimists have a target price of $1 million on Bitcoins. However, on the other side of the spectrum, there are people who see Bitcoins falling to zero in the worst-case scenario. Bank of England Governor Andrew Bailey is among those who think that crypto assets can fall to zero.
“Buy them only if you’re prepared to lose all your money,” said Bailey in May 2021 reiterating his previous views on cryptocurrencies.
To sum it up, Bitcoin doesn’t have any intrinsic value. While many people see Bitcoins as the new gold, the metal at least has real-world usage in the form of jewelry apart from the investment demand. For Bitcoins, it’s all about investment demand.
if you think Bitcoin is a good hedge against inflation or a portfolio diversifier, the price action over the last year nullifies this argument. Bitcoin prices tumbled along with equity markets in the first quarter of 2021. The prices have been weak now even though inflation is running at multi-year highs.