Do you realise that $10,000 invested in Bitcoin 5 years ago would be worth over $1.1 million today? Makes you think, right?
With lockdowns occurring almost everywhere around the world, no one is travelling and AirBNB’s business has been decimated. Yet, its share price has risen by more than 40% over the past year, and it is currently worth nearly $160 billion. That is $10 billion more than Australia’s most valuable company, CBA. Oh, by the way, AirBNB lost $5.8bn in the 2020 fiscal year. In fact, it’s never reported a profit after tax. By comparison, CBA makes nearly $10 billion profit per year.
The big question is; is this the new normal? Is cryptocurrency the next big thing? Is profit and cash flow no longer an important metric when valuing a business?
Cryptical cryptocurrency
I am no expert when it comes to cryptocurrency. In fact, I admit that I know very little about it. But, then again, I have never spent much time researching it because it fails a few basic fundamental tests.
When contemplating an investment, it is important to form a view about the future demand for the product or asset involved. It’s not enough that its currently popular. You must ensure it will continue to be popular. Therefore, we must ask ourselves; who’s using cryptocurrency today and why? As far as I can see, at the moment, cryptocurrency is held solely for speculative purposes. Very few people are actually using it as a substitute for traditional currencies. The one exception to this may be money launderers.
According to the theory of
diffusion of innovation, for cryptocurrency to become a sustainable alternative currency, it must be widely adopted. Renowned author, Dr Geoff Moore argues that there is a large chasm between ‘early adopters’ and the ‘early majority’. A product must
cross this chasm in order to become self-sustainable.
There are two major impediments stopping cryptocurrency from crossing the chasm
Firstly, cryptocurrency is extremely volatile. The share market’s volatility rate is approximately 20% p.a. compared to Bitcoin at just shy of 50% p.a. On average, Bitcoin’s daily volatility rate is 3% i.e. the price changes on
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