Hype in Bitcoin is putting pressure on less sophisticated investors
TO PARAPHRASE the old joke, “How do you know that someone owns Bitcoin? They tell you.” Cryptocurrencies have become a status symbol in many social circles, despite warnings from leading economists about the risks associated with these “investments”.
While the potential for losing all your money poses the biggest short-term danger, there is an equally damaging long-term effect that has largely gone unchallenged.
It is clear from the hype that cryptocurrencies have created a massive gap between reality and expectations, particularly in the minds of young or less sophisticated investors.
This has the potential to wreak havoc on their long-term approach to saving and investment.
Appalling culture
South Africa is known for its appalling savings culture, with the SA Reserve Bank reporting that household savings rates have declined over the past 16 years, reaching a low of – 2.7 percent in 2013 (currently 0.2 percent).
In such an environment, quick fixes from volatile instruments are an extremely short-sighted way to approach long-term savings vehicles.
In order for South Africa to prosper, it needs a burgeoning middle class with a lower reliance on the state.
This can only happen if a strong savings culture is nurtured.
A necessary requirement is a new generation of consumer with higher financial literacy and an understanding of basic concepts, such as compound interest and the value of long-term investing.
Cryptocurrencies have the exact opposite effect. When younger consumers decide to “throw some money at Bitcoin” rather than invest for the long term, they do so with unrealistic expectations of stellar investment returns.
This for ever turns these consumers away from the more realistic returns of lower risk financial services products.
It is incredibly frustrating to see many of the social media comments in response to one of our low-risk investments that delivers capital security along with a generous fixed interest rate.
These comments are almost exclusively from a less financially literate, Millennial base.
To quote: “It’s pathetic, less than 2 percent per month… come guys… go and buy Bitcoins… and you will make money.”
“No, to me, I earn sometimes between 5 percent to 25 percent per month on my crypto investments.”
Financial literacy
“Times have changed. I invested R3 000 on binary and I get minimum R3 000 a day, which makes your annual return a serious rip-off.”
To any astute investor these types of products are far from a “rip-off ”, but rather form an integral part of a well-diversified investment portfolio.
However, low levels of financial literacy are a perennial problem in South Africa.
The problem is exacerbated when intertwined within a broad and popular social Zeitgeist that creates unrealistic expectations for investors.
This does not bode well for our longterm savings culture, and responsible financial services providers should continue to inculcate more prudent savings practices into the minds of younger South Africans.
Cryptocurrencies have created a massive gap between reality and expectations in the minds of young and less sophisticated investors.