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Bitcoin, to invest or not to invest?

While Warren Buffett and Charlie Munger said they were no fans of cryptocurrency when responding to a question at Berkshire Hathaway's recent annual shareholders' meeting in May 2021, Jack Poon, Professor of Practice at the School of Accounting and Finance of The Hong Kong Polytechnic University, provides a cautiously optimistic view.

In the Knowledge Transfer Forum held on 3 May 2021 by PolyU, Professor Poon shared his comprehensive insights on the trend of cryptocurrencies and their risks and returns.

Professor Poon presented a more innovative point of view compared with traditional investors. He reckoned that cryptocurrencies are probably here to stay because of the incentive alignment among multiple stakeholders. While the existing bull run is built upon a phenomenal rise of Bitcoin price in the last few years, he warns that the long-term sustainability of cryptocurrencies remains uncertain.

As institutional investors, retail investors, and corporations are rushing into the game, investors’ attention is now fast returning to the digital assets, said Professor Poon.

High-profile institutions continued to accumulate Bitcoin in their treasury. The biggest splash was made by Tesla’s surprising investment in February 2021 when it purchased US$1.5 billion worth of Bitcoin and started to accept Bitcoin as a payment method for its products. BlackRock, the world’s largest asset manager, admitted that it had started to dabble in Bitcoin early this year.

In terms of retail investors, Robinhood reported that 9.5 million customers traded cryptocurrencies on its platform in the first quarter of 2021, up 458% from 1.7 million in the fourth quarter of 2020. And Coinbase reported 56 million verified users and US$335 billion trading volume at the end of April 2021.

Bitcoin reached an all-time high of US$64,900 on 19 April 2021. However, it is a highly volatile investment. Under the threat of rising regulation and higher taxation, Bitcoin price struggled with the last trading week of the month seeing a marked reversal in Bitcoin fortunes.

Professor Poon explained that regulatory uncertainty continues to put the challenge on risk management of cryptocurrencies and their long-term sustainability remains unknown.

Given Bitcoin is an electronic record over a distributed ledger without any asset backing, Professor Poon emphasized that investors should do their own research to understand the fundamentals and assumptions behind any media reports and make sure they understand what they are investing in.

“You should allocate your portfolio prudently. When investors embrace the potential upside, they should also be able to manage downside risk,” said Professor Poon.

Following Professor Poon’s sharing session was a heated discussion moderated by Dr. Jimmy Jin, Assistant Professor at the School of Accounting and Finance of PolyU. 

Bitcoin, to invest or not to invest?