The world is changing fast and to keep up you need local knowledge with global context.
*This content is brought to you by Brenthurst Wealth
By Ruan Breed*
Disclaimer: This article might awaken the inner keyboard warrior in many crypto-guru’s and investors – please feel free to read further before firing off the burning arrows.
The biggest global debate second to the current ‘to-vaccinate or not-to-vaccinate’, is most probably the argument around the cryptocurrency investment world, and whether Bitcoin is a real store of value or on the other hand, a modern day ‘fool’s goldrush’ which may end in total dismay for many investors. To try and write an article for or against Bitcoin, is the equivalent of sticking your head into a beehive and hoping you don’t get stung. The only difference being that you do not have any protective armour, shielding you in taking a public stance for or against Bitcoin.
For many different reasons, as in the vaccination debate above, reactions about Bitcoin being a prudent investment will differ depending on who you ask. With further reference to the vaccination argument, where huge amounts of medical knowledge magically seemed to come to light next to the braai fires, at family dinner tables and at work, where normal (unqualified) people seemed to suddenly have more knowledge than medical doctors themselves, one cannot help to feel that this is also where you will currently find the best Bitcoin investment advice as well – for free!
However, many investors who had Economics 101 will be quick out of the blocks to tell you there is no such thing as a free lunch, and immediately start to shoot bullets through your uncle’s pro-Bitcoin investment advice. Who on earth dares to criticize this well researched investment advice, especially if this specific investment gave your uncle an incredible return on investment of 105% over a one-month period?
Allow me to share a small pearl of wisdom, one which is not for- or against Bitcoin, but rather against the statement – There is no such thing as a free lunch. I tend to disagree with the aforementioned, and firmly believe that the only free lunch in the investment environment, is diversification. As cliché as this might sound, here is why:
Without delving into technicalities as to how Bitcoin is mined, stored, and traded, the focus will be on whether Bitcoin as individual investment presents any real underlying value (as part of a well-diversified portfolio), or if it will more likely leave many investors with sleepless nights and squandered capital.
Store of value:
In the history of the Gold Standard, before Fiat currencies ($/£/€) became the international means of trade, gold was used to define the value of a currency such as the dollar. In short, gold was simply used as a ‘store of value.’ With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard, sets a fixed price for gold, and buys and sells gold at that price. In other words, products derived its value in terms of gold.
Furthermore, gold also offers physical value as this precious metal is used in the production of luxury big ticket items at the high value market end, such as jewellery. Thus, the physical attributes of gold lends underlying value to this precious metal. It is tangible, visible, and puts a bright shine in its owner’s eyes.
Many investors state that Bitcoin is the new digital gold, providing a store of value for the owner of the currency. I am not one of them. The main reason this argument is put forward, is because there is only a maximum amount of Bitcoin that can be mined. Ever. In other words, it once again comes down to Economics 101 – supply and demand. Since there is a fixed supply of Bitcoin, an investment in Bitcoin will treat its investors well if there is a surge in demand for this cryptocurrency, even though I feel Bitcoin has no underlying/intrinsic value itself. It cannot be held or seen, and as opposed to gold, it might rather leave its owners teary-eyed. The intrinsic value is the value placed on an asset based on various assumptions and calculations and is usually linked to the utility of the underlying products that a company delivers to the market.
Bitcoin, in my opinion, has no intrinsic value itself. The price fluctuations in Bitcoin are therefore mainly because of supply and demand, even though other factors are also at play. In contrast with a precious metal such as gold (which serves as store of value AND has physical use in products), Bitcoin has no physical utility in any way.
Another drawdown for investments in the crypto environment, is the lack of regulatory frameworks. The cryptocurrency investment world is currently still largely unregulated in most countries across the globe, and the only legal tender in the South African landscape remains limited to banknotes and coins. Cryptocurrencies are therefore not regarded as money in our terms. This alone proves to present a big downside risk to investments in cryptocurrencies.
The unregulated environment in cryptocurrencies has also paved the way for a lot of scammers and schemes to exploit many investors who chased the mouth-watering carrot which has been put in front of their noses, without doing any due diligence on the legality of the investment being proposed. It might still be too soon to even mention a platform such as MTI Trading for the South African crypto landscape, and I am relatively positive that a few ‘Oom’s & Tannie’s’ who were full of praise for this platform and investment is left with more questions than answers. If it is too good to be true…
Exposure to gold has long been used as a hedge against long term inflation and uncertainty in markets. It is regarded as a safe haven in times of low or no growth environments, and investors normally rush for gold in difficult investing circumstances.
Gold has an extremely long-term track record, against which certain analysis and conclusions can be made. Cryptocurrencies are still in their infant phase and shouting from the sidelines that ‘crypto is the new gold’ is a shot in the dark! As previously stated, one aspect that both Bitcoin and gold puts on the table for the investor, is diversification. This remains the ultimate hedge against inflation/difficult market conditions/low growth environments. Remember another Economics 101 lesson about having all your eggs in one basket?
By taking all the abovementioned factors into account, not excluding your uncle’s coveted crypto advice, the million-dollar/Bitcoin question remains to be asked:
Should I allocate capital to crypto investments?
The common denominator amongst all investors is to achieve maximum return with minimum risk. Risk appetite remains the biggest factor to consider in this case. We already draw the conclusion that Bitcoin (as gold) offers diversification to an overall investment portfolio. One fact which no crypto pundit can argue against, is that Bitcoin is an extremely volatile and risky investment.
In trying to determine whether you should take a position in Bitcoin in your portfolio, first and foremost determine your own risk appetite. No one else knows you as well as you do yourself.
Investments, whether in cryptocurrencies or any other asset class, is more about managing risks than managing returns. Always remember that more often than not, your risk tolerance is not as high as you might think, and therefore only take a position in an investment such as Bitcoin to the margin where you feel comfortable as far as your risk appetite goes.
Beware who you take advise from:
Everyone is an expert with the virtue of hindsight: There are a lot of ‘crypto-investors’ on both sides of the spectrum, both have realized significant gains as well as hurtful losses. Tread lightly in taking investment advice from anyone, because you might be taking advice from someone who cherry-picked Bitcoin as an investment and had Lady Luck on his/her side and bagged huge profits in a short period of time.
There is a saying: A good investor tells his clients where to invest their money, a great investor invests his client’s money alongside his own. Always test this quote against the advisor’s actual ability to take on bitcoin/cryptocurrency as an investment himself, and a lot of questions might be answering themselves.
Therefore, if and when you decide to expose your portfolio to Bitcoin, I regard the following as very important:
- Positioning is key: Never allocate more capital to these types of investments than you are willing to lose.
- High risk investment: If you expose your portfolio to cryptocurrency, it should form part of your high-risk end of your portfolio.
- Always invest in assets and businesses you understand.
- Beware who you take advice from.
Never compromise your hard-earned capital in search of inflated short-term gains, too many people have burnt their fingers to the bone by following this approach. Investing is a long-term activity, one which requires patience, perseverance, and extreme discipline. Do not slaughter your hen that is supposed to lay golden eggs in future, in search of short-term performance. Most of us have seen the outcome before.
For now, it still seems that the best Bitcoin investment advice is still to be found around the family dinner tables from relatives and friends, but by taking a conservative and well-informed approach to crypto investing, they might just be able to say, ‘I told you so.’ Whether Bitcoin will lead to the modern-day digital gold rush, remains to be seen.
Read more about investment planning.
- Ruan Breed is a financial advisor at Brenthurst Stellenbosch. [email protected]
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