What Would ChatGPT Say?
Part III - We asked ChatGPT’s thoughts on “investing” in Bitcoin. It waved the white flag!
We started talking to ChatGPT a couple of days ago. The main question that drives us is this: If there is a long-standing confusion around the word investing, and if ChatGPT is a language model that is being trained on information that largely mirrors the general public, would it simply parrot back the material it is trained on, or, would it identify the inconsistencies and dead-ends to take an internally consistent position? We were hoping for the latter, but so far, it has been the former. We challenged ChatGPT on why it thinks one can invest in gold, and after a few questions, it started apologizing for the confusion. It actually took ChatGPT about 30 seconds before coming up with an apology! At least, it’s polite.
Well… Now we’re really curious. We pressed ChatGPT on gold because it identified both gold and cryptocurrencies as an investment on our first date. Now that we know its position on gold (it apologized, but didn’t change its mind - it still thinks gold has intrinsic value), it’s time to keep it in its corner and keep the pressure on. (Note: The conversation took place on June 29, 2023, around 8-9 pm PST. In what follows, all emphases are added)
F27: Why do you think Bitcoin is an investment?
ChatGPT:
Bitcoin is often considered an investment for several reasons:
Potential for Growth: Bitcoin has shown significant growth since its inception. It has experienced substantial price increases over the years, which has attracted investors seeking high potential returns. The limited supply of Bitcoin (capped at 21 million coins) and increasing adoption and acceptance in various industries and by institutional investors have contributed to its growth potential.
Store of Value: Similar to gold, some investors see Bitcoin as a digital store of value. It is often referred to as "digital gold" due to its decentralized nature, scarcity, and perceived ability to retain value over time. The belief is that Bitcoin's limited supply and the growing demand for a digital currency can act as a hedge against inflation and preserve purchasing power.
Diversification: Bitcoin is often used as a diversification tool in investment portfolios. It has a relatively low correlation with traditional asset classes like stocks and bonds, meaning that its price movements are often independent of those of other investments. Including Bitcoin in a portfolio may help reduce overall risk and enhance diversification.
Technological Innovation: Bitcoin is built on blockchain technology, which is considered a groundbreaking innovation with the potential to disrupt various industries. Some investors view Bitcoin as an investment in the underlying technology and its potential applications beyond digital currency.
Liquidity and Accessibility: Bitcoin is a highly liquid asset, meaning that it can be easily bought or sold on cryptocurrency exchanges. It can be accessed by investors globally, enabling participation in the Bitcoin market with relative ease.
However, it's important to note that Bitcoin is a highly volatile asset. Its price can experience significant fluctuations in short periods, which can lead to substantial gains or losses. Investing in Bitcoin carries risks, including regulatory uncertainty, security concerns, and market volatility. As with any investment, individuals should carefully consider their investment goals, risk tolerance, and consult with financial advisors before making any investment decisions related to Bitcoin or any other cryptocurrencies.
Two themes here: First, ChatGPT thinks like Ric Edelman, a personal finance expert. Edelman actually said, in his latest book, The Truth About Crypto: “Bitcoin might not have any value. But it has one helluva price,” and “When investing, price is what matters-and bitcoin and all other digital assets trade for a price.” Second, Bitcoin piggybacks on gold’s success as an adoption story.
As Warren Buffett points out, Bitcoin depends on the excitement of the next buyer:
Let’s keep going, shall we?
F27: Is price the only thing that matters when investing?
ChatGPT:
No, price is not the only thing that matters when investing. While price is an important factor to consider, there are several other key considerations that investors typically take into account when making investment decisions. Here are some important factors to consider:
Fundamental Analysis: Fundamental analysis involves evaluating the underlying factors that can affect the value of an investment. This includes analyzing the financial health, earnings potential, competitive position, and growth prospects of a company or asset. Understanding the fundamentals can provide insights into the long-term value and potential returns of an investment.
Risk Assessment: Assessing the risks associated with an investment is crucial. Different investments carry varying levels of risk, such as market risk, credit risk, liquidity risk, and geopolitical risk. Investors should evaluate their risk tolerance and ensure that the potential risks align with their investment objectives.
Diversification: Diversification involves spreading investments across different asset classes, industries, and regions to reduce risk. By diversifying, investors aim to mitigate the impact of any single investment's performance on their overall portfolio. Diversification helps to balance risk and potentially improve long-term returns.
Time Horizon: The time horizon of an investment is an important consideration. Investments can be categorized as short-term, medium-term, or long-term. Different investment vehicles may be suitable for different time horizons. Consider your financial goals and the timeframe within which you want to achieve them when making investment decisions.
Investor's Financial Situation and Goals: Each investor has unique financial circumstances, goals, and risk tolerances. It's essential to align investments with your specific needs and objectives. Factors such as age, income, liquidity needs, and future financial obligations should be considered.
Market Conditions and Trends: Evaluating market conditions, trends, and potential future developments can help inform investment decisions. Factors such as economic indicators, industry trends, geopolitical events, and regulatory changes can impact investment performance.
Remember that investing involves a degree of uncertainty, and no investment is without risk. It's important to conduct thorough research, seek professional advice when needed, and have a well-thought-out investment strategy that considers a range of factors beyond just the price.
Ok, did we just create a split between Ric Edelman and ChatGPT? Edelman said that price is what matters. ChatGPT was going in that direction, but when we challenged it, it flip-flopped. Let’s press some more.
F27: Can one value Bitcoin?
Valuing Bitcoin is a complex task that involves various approaches and methodologies. Unlike traditional assets such as stocks or bonds, Bitcoin does not have cash flows or underlying financial statements that can be directly analyzed. As a result, traditional valuation methods like discounted cash flow analysis may not be applicable.
Here are a few approaches that investors and analysts have used to value Bitcoin:
Market-Based Approach: This approach considers the supply and demand dynamics in the Bitcoin market. The price of Bitcoin is determined by buyers and sellers in cryptocurrency exchanges, reflecting the current market sentiment and perceived value. Technical analysis, chart patterns, and market trends are often used to assess market sentiment and make price predictions.
Network and Adoption Metrics: Some analysts consider network metrics and adoption as indicators of Bitcoin's value. Metrics such as the number of active addresses, transaction volume, hash rate, and the number of merchants accepting Bitcoin can provide insights into the network's growth and adoption. A larger and more active network may suggest a higher value for Bitcoin.
Metcalfe's Law: Metcalfe's Law states that the value of a network is proportional to the square of the number of its users. Some analysts apply this concept to Bitcoin, arguing that its value is driven by network effects. They may analyze the growth in the number of Bitcoin users, wallets, or transactions to estimate its value.
Stock-to-Flow Model: The stock-to-flow model is often applied to Bitcoin by considering its scarcity and the rate of new supply entering the market. This model suggests that scarcity, as measured by the stock-to-flow ratio (the existing supply of an asset relative to its annual production rate), can influence an asset's value. Proponents of this model believe that Bitcoin's limited supply and halving events contribute to its increasing value over time.
It's important to note that valuing Bitcoin is highly subjective and can be influenced by market sentiment, speculative factors, regulatory developments, and other unpredictable events. Different analysts and investors may have varying opinions on the value of Bitcoin, leading to a wide range of estimates.
Ultimately, investors should conduct thorough research, consider multiple perspectives, and exercise caution when attempting to value Bitcoin or any other cryptocurrency.
All right. So far Chat’s GPT’s position is:
One can invest in Bitcoin because it has experienced substantial price increases over the years;
but,
Price is not the only thing that matters when investing and fundamental analysis matters;
but,
Bitcoin has no cash flows;
but,
One can still value it.
We are not going to let ChatGPT get away with this.
F27: Let me make sure I understand. You think one can invest in Bitcoin because it has experienced substantial price increases over the years, but price is not the only thing that matters when investing and fundamental analysis matters, but Bitcoin does not have cash flows, but one can still value it. Is this an accurate summary of your position?
Yes, your summary accurately captures the key points regarding investing in Bitcoin and the challenges associated with its valuation. Here is a breakdown of each point:
Bitcoin's price increases: It is true that Bitcoin has experienced significant price increases over the years, which has attracted investors seeking high potential returns. However, it's important to note that past price performance does not guarantee future results.
Price is not the only thing that matters: Investing involves considering various factors beyond just the price. Fundamental analysis, risk assessment, diversification, time horizon, and investor's financial situation and goals are all important considerations.
Bitcoin lacks traditional cash flows: Bitcoin does not generate cash flows or have underlying financial statements like traditional assets such as stocks or bonds. This poses a challenge in applying traditional valuation methods that rely on cash flow analysis.
Valuing Bitcoin: Valuing Bitcoin is a complex task, and different approaches have been used to estimate its value. These include market-based approaches, network and adoption metrics, the stock-to-flow model, and other methods. However, it's important to note that the valuation of Bitcoin is highly subjective, and there is no consensus on a definitive valuation methodology.
In summary, investing in Bitcoin carries the potential for substantial price increases, but it is essential to consider factors beyond just the price. Valuing Bitcoin is challenging due to its unique characteristics, lack of cash flows, and subjective nature. Investors should exercise caution, conduct thorough research, and carefully evaluate their own risk tolerance and investment goals before making decisions related to Bitcoin or any other cryptocurrencies.
Thanks for confirming ChatGPT. Time to go for the knockout.
F27: Do you think your position is internally consistent?
ChatGPT:
As an AI language model, I don't hold personal opinions or positions. My purpose is to provide information and assist with answering questions to the best of my knowledge and abilities. I strive to present a balanced view and provide accurate and relevant information based on the input provided. It's important to note that the information I provide is based on patterns and knowledge derived from training on a wide range of data up until September 2021, and it may not reflect the most current market conditions or events. It's always recommended to consult with financial advisors or conduct further research to make informed investment decisions.
Was that a waving of the white flag? ChatGPT took a position, one that is in direct conflict with mainstream finance, stubbornly held onto it, and when it was time to defend it, it took its ball and went home. Not everybody will have the opportunity to learn finance from the greats, many of them will just talk with ChatGPT instead. Is this the best it can do?
