Protea Capital Management CEO Jean Pierre Verster said he is not investing in cryptocurrencies like Bitcoin because it is a speculative investment.
Verster is one of South Africa’s top hedge fund managers who is best known for his successful shorts of African Bank and Steinhoff.
Speaking to Moneyweb’s Ryk van Niekerk, Verster said there are a few principles to consider before investing in cryptocurrencies.
The first is that simply because something increased in value in the past does not guarantee it will increase in value in future.
The next is that when you invest in an asset, you would like that asset to return a yield.
This yield is typically generated by the investment itself. For example, if you invest money, you will get interest on that money. If you invest in shares, you get dividends.
Cryptocurrencies, however, are different. They do not produce anything. You can therefore not get interest or dividends from cryptocurrencies.
The only way you can make money from cryptocurrencies is to sell it to another person at a higher price.
“I don’t like those types of investments, because it makes me dependant on what the other person thinks the asset is worth,” Verster said.
“A person may think it is worth more than what I paid, or less than what I paid.”
Verster explained that he cannot logically say how much a certain cryptocurrency is worth because it is not possible to apply fundamental investment principles to calculate this value.
This means cryptocurrencies are per definition a speculative investment, where the yield depends on selling it at a higher price in future.
While there is nothing wrong with speculative investments, it is not part of Verster’s investment strategy.
Verster is in good company. Berkshire Hathaway CEO and chairman Warren Buffett also believes Bitcoin has no underlying value.
Bitcoin doesn’t produce earnings or dividends which, according to Buffett, means it has no inherent value.
“When you’re buying non-productive assets, all you’re counting on is the next person is going to pay you more because they’re even more excited about another next person coming along,″ Buffett said.
He said Bitcoin is no different than Tulip mania in 1636 and predicted “with almost certainty” it will also end badly.
Berkshire Hathaway vice chairman Charlie Munger is equally scathing towards Bitcoin, calling it “worthless, artificial gold”.
Munger added that trading cryptocurrencies are “just dementia.”
Yale University Sterling Professor of Economics Robert Shiller shares this view, describing Bitcoin as a “remarkable social phenomenon”.
“It’s an epidemic of enthusiasm. It is a speculative bubble. That doesn’t mean that it will go to zero. Speculative bubbles recur,” he said.
Federal Reserve Chair Janet Yellen also warned that Bitcoin is not a stable store of value, and it does not constitute legal tender.