Crypto craziness

Cryptocurrency is something we’ve spoken about a few times already this year – it’s a hot topic and just one in a string of similar investments such as:

– Tesla – who’s stock price is now down 36% from its high
– Gamestop – down 51% from its high
– Shell companies (called SPACs) raising cash to buy companies they’re yet to even identify
– Dogecoin – which was created as a spoof of Bitcoin

Us humans seem to suffer from FOMO (the fear of missing out) and emotions run hot when it comes to investing in the latest crazes.

Just because something has gone up spectacularly, is receiving lots of press attention and is pulling in yet more people  – doesn’t mean it’s a good investment, or even an investment at all.

By the time a ‘one off’ stock is booming you’re already too late to the party and it’s often these latecomers left holding the empty punch bowl when it’s all over.

Understanding what you’re investing in is always a good place to start.

So, what is a cryptocurrency?

A good starting point is defining what money actually is. In simple terms it represents three things: a store of value; a unit of account; and a medium of exchange.

Do cryptocurrencies – using Bitcoin as an example – have these characteristics?

– An asset that can rise or fall on any one day, say by +36% or -27% (Bitcoins largest daily price movements since 2013), is hardly a store of value. The cost of a round in a pub priced in Bitcoin could change materially by the time you reach the bar.
– You could argue that Bitcoin is a unit of account, but it’s not a common one.
– In terms of being a medium of exchange, it fails dismally. Virtually nobody – not even Elon Musk’s firm Tesla currently accepts Bitcoins and few people trust it enough to use in daily transactions.

An amusing anecdote is that of the Bitcoin programmer who traded 10,000 bitcoins for two Papa John’s pizzas in 2010, costing him £280m in today’s money. Tomorrow it may be significantly more or less! Who knows?

Further downsides

We’ve mentioned before how the ‘mining’ of many cryptocurrencies has an extremely poor carbon footprint.

Bitcoin mining is what happens when new bitcoins are entered into circulation, very sophisticated computers solve extremely complex algorithms to make this happen – hence the energy usage.

Bitcoin miners have a carbon footprint equivalent to that of the Czech Republic, as much of it is mined in China where a significant proportion of electricity produced is from coal. Hence, Elon Musk recently rowing back on his enthusiasm for accepting Bitcoin as payment for a Tesla until there’s more energy efficient mining!

It’s also become the favoured unit of exchange for ransomware (blackmail) attacks on governments and companies, such as the recent Colonial Pipeline attack in the US, which was settled, apparently, for 75 Bitcoins or around US$4.4 million.

What’s our point?

Putting money into cryptocurrencies is not investing, it’s just gambling.

Don’t get swept up in the continued hype that looks likely to stick around.

There’s always the possibility of losing your entire capital invested, either through the failure of the cryptocurrency in question, or your crypto wallet (where your ‘coins’ are stored) being hacked.

You might decide to go crazy and chuck a fiver at it that you’re prepared to lose – as you might on a horse in the Grand National – that’s up to you, but don’t call it investing.

Sources
1) Economic lowdown podcast
2) Nature.com

Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.