We’re not having a bit of it
Cryptocurrencies may be new, but investment bubbles aren’t
AT the Sunrise Christmas party I was having a drink with one of our young studio floor crew who was constantly checking his smartphone and trading bitcoin. I then had a drink with one of our wardrobe stylists who told me she was trading … a derivative of bitcoin called “ethereum”.
Alarm bells started to ring so I asked some questions:
What are they? “They’re a cryptocurrency”.
What does that mean? “I’m not sure.”
Who makes them? “Powerful computers”.
Who owns the computers? “No-one knows”.
Are they regulated? “No”. The alarm bells started to ring even louder.
Over the years we’ve seen a string of investment fads from avocados to exotic futures contracts and collectables.
We invest in start-ups and alternative investments so are pretty open-minded about new trends. But these cryptocurrencies do worry us. They have all the signs of an investment bubble, and reports of people mortgaging their house to invest is just crazy.
Hey, if you can make big bucks investing in a fad … great. Just don’t be overexposed when a crash comes.
Take profits along the way, try to get back your original investment and then just play with the profits. Regular readers know we’re disciples of investment guru Warren Buffett who makes his decisions based on five simple criteria. So we thought we’d put cryptocurrencies (we’ll use bitcoin as representing them) through the Buffett filter.
DO I UNDERSTAND
THE BUSINESS?
Bitcoins were invented by a mysterious genius with the pseudonym Satoshi Nakamoto, who decided there would only be 21 million created.
Bitcoins are created or “mined” by supercomputers which solve complex algorithms and, in return, receive a unit. The closer the number of bitcoins gets to 21 million units, the harder it is to mine and the bigger the supercomputers need to be.
The bitcoins are then held in digital wallets of investors which are numbered and password protected. Some describe it as a peer-to-peer electronic cash system.
The bitcoins are traded on markets using “blockchain” technology. This is simply a decentralised network of computers around the world which record all transactions.
Even the Australian Stock Exchange is looking to replace its CHESS share trading platform with a blockchain system, so this technology is getting into mainstream use.
Basically a bitcoin is a means of trading value. Think of it as a digital version of money or before that, shells, or rum during the Rum Rebellion in colonial days.
It’s used to pay for goods and services. Its value is determined by supply and demand.
IS IT RUN BY PEOPLE I ADMIRE AND TRUST?
Mmmm … no idea.
Cryptocurrencies started out on the “dark web” as the favoured currency of drug cartels and arms dealers. This is because it operates completely outside the control of governments, banking systems or regulatory authorities.
Everything is basically anonymous. Bitcoin miners and investors are anonymous.
As the price of bitcoins has skyrocketed, mainstream investors have taken an interest.
Coin Base seems to be the biggest bitcoin exchange platform in Australia. But there are other exchanges like Etoro and AvaTrade.
DOES IT HAVE A SUSTAINABLE COMPETITIVE ADVANTAGE? While bitcoin was the first, and best known, of the cryptocurrencies there are now a whole range of them … Ethereum, Dash, Ripple, LiteCoin, Monero.
As this cryptocurrency investment rage continues there is every likelihood the number of alternatives will also grow to meet that demand.
So while bitcoin had the market to itself in the beginning from being the first, supply will grow as competitors multiply.
IS IT THE RIGHT PRICE? In July 2010 one bitcoin was worth US8c. By January
moneysaver HQ
We wish our readers a safe, happy and fiscally responsible Christmas and a prosperous New Year – moneysaver HQ editor Tim McIntyre, (02) 9288 2226 tim.mcintyre@news.com.au this year it had risen to $US800 ($2390). On December 8 it topped $US18,000 ($23,900).
No, that’s not a typo. From $US800 to 18,000 this year is correct.
As you’d expect, that sort of return has attracted a fair bit of attention. The more investors wanting to compete for the limited number of tokens available means the price skyrockets.
Like all markets, the right price is what someone else is prepared to pay. But when this digital token has no underlying foundation of value it’s near impossible to work out whether it’s over or undervalued.
It seems to simply be based on demand and supply. We’d suspect the more competitors that are created, producing more supply, will take the heat out of the market.
IF YES TO ALL THE ABOVE THEN DO THE DEAL
While we sort of understand how they work, we’d have to say the rest of the answers to the Buffett filter are all “no”.
Yes, there’s lots of money being made, and lots of people bragging about it, but our opinion is to be extremely careful. Only invest what you can afford to lose and certainly don’t take on debt to finance it.
Let’s leave the final word to our corporate watchdog the Australian Securities and Investments Commission: “ICOs are highly speculative investments, are mostly unregulated, and the chance of losing your investment is high. Consumers should understand the risks involved, including the potential for these products to be scams, before investing.”
Enough said.
will return on January 8, 2018