Dangers of investing in currency like Bitcoin
BLOCKCHAIN technology as we know it today emerged in January 2009 as the underlying technology of Bitcoin. Bitcoin is digital currency also known as cryptocurrency.
It uses cryptography (code solving) to administer the currency by issuing new units and is “mined” through processing data related to the currency network.
We have seen quite an uptick in the hype surrounding Bitcoin, due not only to the fascinating background of this currency, but also the massive return numbers which are widely reported in mainstream media.
However, there are some immediate challenges one needs to consider.
Bitcoin is not approved by the Financial Services Board (FSB) as an investment vehicle.
It also is not monitored by the South African Reserve Bank (SARB).
Since Bitcoin operates without a central authority (ie, a central bank), there is no clear recourse if things go belly-up.
The value of Bitcoin has been three times as volatile as the price of oil and 11 times more than the post-Brexit exchange rate between the US dollar and the British pound, according to European Tech analysts from Credit Suisse’s global markets research department. Their research also points to other risks. Bitcoin transfers are irreversible, so those who inadvertently enter an extra digit when trying to pay for something are out of luck.
Finally, users need a private key to access their bitcoins, and that key operates like a password that cannot be reset.
If the private key is lost or stolen, so are the bitcoins that go with it.
Currencies are often considered as investment vehicles and not investments in their own right.
For PSG Wealth, an accurate assessment of an investments’ intrinsic value requires a linked cash flow stream.
This cash flow stream then needs to be discounted and valued to determine whether the asset is trading at a value under, or above, its intrinsic value.
Without this assessment, we would contend that any allocation is highly speculative.
Bitcoins have been subject to sharp and rapid changes in value, rendering their value highly unpredictable at any given time.
Also of concern is the fact that there are no specific licensing requirements for wealth managers. While there are talks in the US that some ETF’s might start investing in Bitcoin, it is still not recognised as a regulated product which advisers may give advice on.
We would be more comfortable to consider Bitcoin, in some shape or form, in the Wealth management space when credible research and regulatory oversight is commonplace, as well as when wealth managers can be appropriately licensed and accredited.
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