The performance of cryptocurrencies has been hugely disappointing over recent months. Bitcoin, for example, has slumped by 60% since the start of the year. Meanwhile, Ethereum has lost 65% of its value year-to-date. Large declines have been mirrored across most other cryptocurrencies as their holders have become increasingly cautious about the outlook for virtual currencies. In comparison, the S&P 500 is down by a far more modest 24% since the start of the year.
Unfortunately for many that get suckered into investing with a "follow the crowd" approach, cryptocurrencies have become increasingly popular among investors over recent years. In fact, it is estimated that around one in five Americans has invested in virtual currencies. In many cases, they have done so because of a "fear of missing out." They have witnessed price rises of Bitcoin, Ethereum and other cryptocurrencies prior to this year and read about individual success stories where people have made millions from simply buying and selling virtual currencies. This peer pressure has resulted in many people investing in cryptocurrencies despite their unappealing long-term outlooks.
An unattractive proposition
Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice-chairman Charlie Munger (Trades, Portfolio) has long been vocal about his distaste for cryptocurrencies, especially Bitcoin. He once said, âI think that people who are professional traders that go into trading cryptocurrencies, itâs just disgusting. Itâs like somebody else is trading turds and you decide I canât be left out.â
From an investment standpoint, I agree with Munger that cryptocurrencies remain extremely unattractive. There are regulatory uncertainties that could affect demand for cryptocurrencies as many major central banks seek to release their own versions of digital currencies in the coming years.
Furthermore, unlike buying shares in a company, investors cannot assess the value of Bitcoin, Ethereum or other virtual currencies. Their price is based solely on supply and demand. Therefore, holders could end up with a worthless asset if demand for virtual currencies suddenly falls without prior warning, or if the government decides to monopolize digital currencies as a state asset, thereby rendering non-government cryptocurrencies worthless.
Ignoring the consensus view
In my opinion, following the investment herd is never a sound basis on which to allocate capital, and crypto is a prime example of this. All too often, investors buy the story stocks of the day based on their high popularity among other investors and a fear of missing out.
Instead of following the investment herd, I believe investors should ignore their peers and instead focus on their own asessment of company fundamentals when deciding how to apportion capital. For example, they may wish to consider a companyâs financial position and economic moat given the current economic outlook. Companies with low debts and a significant competitive advantage may find it easier to survive the effects of a slowing economy amid rising interest rates. Such companies, when purchased at a price that is below their intrinsic value, can offer exceptional long-term capital growth potential. Although it can take time for their value to be reflected in a rising share price, patient investors who stick to facts and figures, rather than unmerited speculation, are likely to be handsomely rewarded over the long run.
