The stock market has traditionally been the go-to investment vehicle for those who want to retire rich. With an average return of 7% over the long run, inclusive of dividend reinvestment, investors have the opportunity to double their money about once a decade -- or at least a few times throughout their lives. Lately, though, the buy-and-hold thesis has been squarely challenged by the emergence of cryptocurrencies like bitcoin.
Bitcoin, which began the year below $1,000 per coin, recently jumped above $6,100 a coin, marking a better than 500% year-to-date gain. Its "sidekick" of sorts, Ethereum, which is the second-largest digital currency by market cap, was up an even more brisk 3,600% since the year began. Mind you, these are gains for roughly 10 months that have taken decades to be realized for investors in the S&P 500.
Why has bitcoin done so well in 2017?
Buoying bitcoin has been a combination of tangible and emotional factors.
On the tangible and fundamental side of the equation, investors are really excited about the potential for blockchain, which is the digital and decentralized ledger that records transactions without the need for a bank as an intermediary. Blockchain most often are open source networks, which also means that altering logged data could prove impossible without someone else noticing. That could make blockchain one of the most secure payment platforms, which is why financial service firms are particularly excited about it.
The U.S. dollar has also been exceptionally weak of late, likely as a result of uncertainty tied to policy reforms in Washington. While a weaker dollar could pump up U.S. exports, it's bad news for investors who are holding cash. Usually, investors will seek the safety of gold since it has centuries of history as a form of currency, and it's a finite resource. However, protocols for bitcoin limit the number of mined coins to 21 million, making it somewhat of a finite resource, too. In other words, some investors appear to be choosing bitcoin over gold as a store of value while the dollar is falling.
On a less tangible basis, investor emotions have probably played a key role in bitcoin's ascent. Few institutional firms are involved with trading bitcoin, leaving its pricing to the retail investor who is more easily swayed by emotions, both to the upside and downside relative to institutional traders.
Another week, another group of folks who believe bitcoin is doomed
But no matter how high bitcoin goes, or how volatile it becomes, one thing is clear: There's a growing consortium of finance gurus who don't like it. This past week, three new gurus laid out their case as to why bitcoin should be avoided.
Prince Alwaleed bin Talal
Saudi billionaire investor Prince Alwaleed spared no pleasantries when discussing his feelings on bitcoin with CNBC's Squawk Box this past week:
It just doesn't make sense. This thing is not regulated, it's not under control, it's not under the supervision [of any central bank]. I just don't believe in this bitcoin thing. I think it's just going to implode one day. I think this is Enron in the making.
For those who may not recall, energy-trading platform Enron blew up and became the largest bankruptcy in history 16 years ago as a result of massive accounting fraud.
The "Wolf of Wall Street"
Jordan Belfort, who is perhaps better known as the "Wolf of Wall Street" for the penny-stock scams and fraudulent activity he undertook to make money as a stockbroker in the late 1990s, has also chimed in on bitcoin and initial coin offerings (ICOs). An ICO is like an initial public offering for a stock, except in this case it's for a virtual currency, and investors have no actual "stake" in the offering.
Belfort shared the recent sentiment of JPMorgan Chase CEO Jamie Dimon that bitcoin is a fraud, but he saved his harshest criticism for ICOs: "It's the biggest scam ever, such a huge, gigantic scam that's going to blow up in so many people's faces. It's far worse than anything I was ever doing," Belfort told the Financial Times.
Within the past couple of days, we also received commentary from research firm UBS (NYSE:UBS), which came out with a markedly bearish tone on bitcoin. While the investment bank came out positively on blockchain and its long-term outlook, it believes bitcoin is in a "speculative bubble."
Here's what the UBS analysts had to say, courtesy of Business Insider:
The real world benefits are said to take years to materialize, even among evangelists. And the relatively high volume of cryptocurrency turnover, against limited real-world use, suggests that many buyers are seeking speculative gain, never intending to use cryptocurrencies to make a real-world transaction.
The remaining characteristic -- fundamental value -- is the most difficult to assess, since unlike in government-backed currencies, no cryptocurrency has an economy behind it. But with each of the other characteristics of typical bubbles in evidence, a 20-fold increase in bitcoin in just two years, and an absence of any fundamental economic backing, cryptocurrency prices are almost certainly a bubble.
Are these warnings worth heeding?
Regardless of whether or not you believe the commentary from these financial gurus holds weight, they do bring up a pretty central argument when it comes to investing in bitcoin: the payment platform-versus-blockchain debate.
Few pundits would argue that blockchain isn't intriguing. No one has any clue how quickly the technology can be integrated into the financial services or energy industries, or how much this technology is actually worth, but there's definitely excitement about what it could bring to the table in terms of added security.
Yet most bitcoin investors are excited about bitcoin as a virtual currency, which seems like a mistake. The currency itself has no backing that gives it tangible value, and attempting to live off of bitcoin would prove nearly impossible given how few merchants accept it. High volatility caused by the presence of so many retail investors and lengthy transaction settlement times could make it difficult for bitcoin to attract brand-name merchants and retailers.
Plus, as history has shown, investors time and again overvalue and overestimate the adoption of new technologies. Even if bitcoin is to survive and thrive, it would take years for bitcoin to blossom into an accepted payment option and for blockchain to be considered a mainstream option for businesses.
In other words, this investor tends to agree with the growing skepticism of bitcoin from the financial community.