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11 Feb 2021

Econ Digest

Bitcoin…An option for portfolio diversification?

         Bitcoin’s rally has hit its all-time high of over USD48,000 (while the bitcoin price in Thai Baht has spiked at above THB1,450,000) in the second week of February 2021, spurring up a hot market for digital currency or cryptocurrency, creating a hot and steady trend that has attracted the attention of global investment markets. The recent rise in Bitcoin price gained huge momentum after Tesla Inc. said it would set aside about USD1.5 billion to invest in Bitcoin and that it plans to accept customers using Bitcoin to buy its cars and other products. Concurrently, there is also news that Apple Inc. is interested in creating a platform for cryptocurrency trading services.

         After having reviewed the situation in Thailand, it must be admitted that investing in the digital asset market, including Bitcoin, cryptocurrency and other digital tokens, has attracted the interest of a wide range of investors, especially a new generation of investors who are keen on and familiar with cutting-edge technology. However, the underlying valuation of Bitcoin and other cryptocurrencies remains a difficult issue. Unlike stock, it may be valued using a dividend discount model, which evaluates the expected future returns (or dividends) on an investment and discounts them to present value. Meanwhile, investment in bonds will earn a return based on the contracted interest rate or coupon throughout the term of the bond.
         However, some may argue that Bitcoin or other cryptocurrencies have the same potential as safe-haven assets like gold, as they have the same characteristics of limited supply. KResearch believes that gold differs from Bitcoin or other cryptocurrencies in that gold is physically tangible and it is widely accepted that central banks can legally use gold for their international reserves, while digital assets have yet to break through the regulatory barriers in many countries to gain broader acceptance. The latest signal from the U.S. Treasury Secretary reflects that the U.S. authorities continue to monitor and supervise the use of cryptocurrencies in an appropriate manner.

         Although the issue of wider acceptance, especially from the authorities, will take time, it could be the start of an exciting era for digital assets as it gains acceptance by more large entities. Meanwhile, retail investors should be concerned about the highly volatile characteristics of cryptocurrencies, such as Bitcoin that has seen volatility of about 68% over the past year. Besides that, investors must be able to take risks, and investment should be made with cold money rather than expecting short-term profit from a short-lived rally in cryptocurrency prices.

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Econ Digest