Crypto-nite or the way of the future? Either, way it’s an exciting ride
Crypto comes from an Ancient Greek word meaning “hidden” and the various virtual currencies, most famously bitcoin, live up to their names in being far from open books.
It takes the risk-and-reward question to volatile new heights for the investor. The risks and losses so far have been massive, but so, too, have been the rewards for some people.
Another difference is that as they are generally not issued by a government, cryptocurrencies can’t be regulated or manipulated. Many have found a real problem when things go wrong, such as exchanges going broke, as there’s no law with which to seek redress. The potential in crypto is enormous, which is one reason why so many – but not all – investors are excited.
The technology has the potential to increase efficiency, solve several challenges of the current system and create a more inclusive economy.
These could well be the early beginnings of a new open financial system, requiring inevitable trade-offs and finetuning. But when you’re thinking of investing in crypto, things get more complicated.
It’s a bit like trying to invest in the web in the late 1990s. In 1997, you may know that the internet is the future, but who do you back?
Almost all the significant investment opportunities at that time subsequently collapsed. AOL was the biggest portal, Yahoo! was the preferred search engine.
Today, neither are winning horses. Crypto provides opportunities for trading, but what if you want to invest for the long term?
With its high-energy use, low-transaction speed and increasingly difficult proof of work, bitcoin is unlikely to win the race – whatever the improvements to the infrastructure. Several other coins perform better at one or more of the required characteristics, such as scaling up in terms of size and users.
It comes down to an article of faith. Some believe crypto is the future of money. Others think it’s a bubble, a scam or the biggest Ponzi scheme in
history. Whatever it is now, it’s too big to ignore.
The crypto market has reached a total market capitalisation (i.e. total value of the shares) of almost $US3 trillion. Every week since its launch in 2009, three million users have invested in bitcoin, making it the third largest currency in the world in market cap after the US dollar and the euro.
According to the World Economic Forum, the crypto economy is creating an alternative financial system that is global, open-source and accessible to all, regardless of nationality, ethnicity, gender, and socio-economic class.
These facts are impressive. Plus, you might know that governments, banks and highprofile entrepreneurs have invested in crypto. Perhaps someone you know has made excellent returns.
Knowing this, it’s easy to feel you’re missing out. But before you jump in, you should be aware this new system is rife with complexity, opacity and uncertainty. Many people have lost their money on crypto, especially bitcoin.
In 2014, Mt. Gox, the largest bitcoin exchange in the world at the time, had more than 744,000 bitcoins disappear, leaving them with $US174m in liabilities.
Subsequently, the company found 200,000 of the missing coins, but investors are still chasing 650,000 bitcoins.
Then there are other significant breaches in bitcoin’s history. So, why have you heard that the blockchain technology underpinning crypto is unhackable? The blockchain tracks ownership and transfer of bitcoins. Saying it is unhackable is incorrect, but it is impractical to hack it.
The downsides of this novel system include technical and systemic risks that have resulted in significant technical failures and attacks on crypto services. You might also consider governance complexities and the fact that it offers little consumer protection. And do not overlook the most basic issue: It is complex and hard to understand, making buying difficult for most people.
Many opportunities have the potential to deliver better returns than traditional forex trading for the focused and diligent trader. But can you match the market’s skills and risk appetite?
If you’re less committed, you can try meme coins such as shiba inu. But your chances might be the same you’d get with scratchies or lotto tickets.
My advice? Just don’t bet the farm. An allocation of up to 5 per cent might have a place in a growth portfolio if you have a high-risk tolerance – especially if you’ve done research and understand a crypto project and believe in its potential.
History has not been kind to those who invest in fads, fashions, trends or bubbles. Some make a killing but most end up losing.
He only died a few years ago, but Sir John Templeton made a fortune as an investor. His four most dangerous words in investing: “This time it’s different.”