Wor­ried you are miss­ing out on Bit­coin, Ethereum and Co.?

Cryp­tocur­ren­cies have be­come in­cred­i­bly pop­u­lar in re­cent months, en­joy­ing phe­nom­e­nal growth in price. But do you know enough about these currencies to con­fi­dently in­vest in them?

Finweek English Edition - - Contents - By Si­mon Brown

cryp­tocur­ren­cies are all the rage these days with Bit­coin* and Ethereum get­ting most of the at­ten­tion. So, as is usu­ally the case when one or other as­set sees its price go bonkers, ev­ery­body wants to know if they should buy. How high can it go? And in this case the ques­tion is even sim­pler – what the heck is a cryp­tocur­rency?

So, to start at the be­gin­ning: what are cryp­tocur­ren­cies? Put sim­ply, they are to­kens that can be mined by solv­ing com­plex math­e­mat­i­cal prob­lems or, as most peo­ple do, you can just buy them on an ex­change. These to­kens are trad­able or can be used to pur­chase real-world items. Many will say that they are vir­tual currencies, but I do not agree. The volatil­ity we see makes them very much more like a com­mod­ity, ex­cept that a com­mod­ity has ac­tual use.

Sure, many peo­ple will then counter that glob­ally currencies are not un­der­pinned by any­thing ever since coun­tries stopped peg­ging their currencies to gold. This is true, but con­sider the US dol­lar, for ex­am­ple. It may not be backed by gold, but it is backed by the US govern­ment and that is very sig­nif­i­cant, so much so that the cur­rency is the largest store of wealth for in­di­vid­u­als and coun­tries the world over.

Cryp­tocur­ren­cies have noth­ing un­der­pin­ning them ex­cept for de­mand, and this de­mand is frankly be­ing driven by greed as prices rocket higher.

Some may say that cryp­tocur­ren­cies are a safe haven, but this was dis­proved when North Korea re­cently tested a nu­clear weapon. That same week­end Bit­coin crashed, los­ing some 20%.

More re­cently, JP Mor­gan CEO Jamie Di­mon said that Bit­coin “is a fraud”, send­ing the price crash­ing again. This does not send the mes­sage of a safe haven.

At the end of the day cryp­tocur­ren­cies are noth­ing, but that doesn’t mean they can’t be traded. Heck, in cen­turies past we used sea shells or even bear skins as units of ex­change.

But what does an in­vestor do con­sid­er­ing all the hype and po­ten­tial prof­its that can be made?

Well, the first point is the word “po­ten­tial”. You could make a for­tune buy­ing a cryp­tocur­rency, but you could also lose a for­tune, as we’ve seen with the re­cent col­lapse.

If you re­ally want to buy cryp­tocur­ren­cies, I sug­gest you heed these two rules:

■ Go with one of the ma­jor cryp­tocur­ren­cies, not some odd one no­body has heard of but that is be­ing pro­moted by Paris Hil­ton. Some cryp­tocur­ren­cies fly while oth­ers die, and know­ing which is which is pretty much im­pos­si­ble.

■ Go small. Do not in­vest a sig­nif­i­cant por­tion of your net worth into a cryp­tocur­rency. Rather use a very small amount of money to test the wa­ters. And be pre­pared to lose it all.

If you are still to­tally con­fused, then sit this out. War­ren Buf­fett fa­mously never in­vested in any hot dot-com stocks as he never un­der­stood their busi­nesses and he’s done just fine.

Sure, you may miss out on some fly­ing in­vest­ment, but we’re al­ways miss­ing out. There are lit­er­ally hun­dreds of thou­sands of things we can in­vest in, yet we set­tle for just a dozen or two and miss thou­sands of fly­ers.

Re­mem­ber that the cryp­tocur­rency scene can be likened to the Wild West. Ex­changes are be­ing hacked and the cryp­tocur­ren­cies be­ing stolen.

At the same time, gov­ern­ments don’t like them, with China hav­ing cracked down on them re­cently.

My ad­vice is that, while there may be money to be made, the best op­tion is to ig­nore cryp­tocur­ren­cies un­less you re­ally want to take on board some se­ri­ous risk. Also don’t al­low your­self to be driven by the fear of miss­ing out – that al­ways ends in tears. ■ ed­i­to­rial@fin­week.co.za

*The writer owns two Bit­coin he mined in 2010.

Cryp­tocur­ren­cies have noth­ing un­der­pin­ning them ex­cept for de­mand, and this de­mand is frankly be­ing driven by greed as prices rocket higher.

Jamie Di­mon CEO of JP Mor­gan

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