Crypto-mania

On 12 January 2018, a Japanese girl group named Virtual Currency Girls played their first ever concert. The general public had to pay using one form of cryptocurrency (what else!) to get in. Such is the hysteria and the hyperbolic rise in Bitcoin over the past year that it has been in the news almost every day for the past several months.

We were hesitant to write a newsletter about Bitcoin but with the fast-growing awareness and attention surrounding its price rise, we have received, with increasing frequency, queries about whether or not clients should participate and how?

Bitcoin is simply the first breed of digital coins labelled “cryptocurrency” or “cryptos”. It works without a central bank overseeing the administration of the currency. Transactions are made directly between users and therefore bypasses intermediaries like banks. The transactions are verified using cryptography and recorded in an open source public ledger called Blockchain. With only a fixed 21 million Bitcoins circulating or “mined”, set by a computer code, Bitcoin’s supply is always fixed. That supply constraint can drive up prices.

While there are plenty of sceptics, advocates of Bitcoin argue that this form of currency and the technology underpinning it will change the economy and how it moves money around the world. It’s a very hot debate that has gotten the attention of many CEOs and technophobes alike as to whether this is a huge Ponzi Scheme and massive bubble like the Dotcom or Tulip mania or whether this is the new wave that will see the beginning of the end of the current monetary system.

Discussions and debates to date have been very polarised. It certainly is a topic that can be debated about for hours and we may never find a logical conclusion at the current time.

Our view

With South Korea and China taking a stance on seeking to regulate the use of Bitcoin, given concerns around anonymity, taxation and security, we think other governments will be forced to evaluate their position as well on the use and ramifications of transacting or speculating on Bitcoin. Moreover, it is prone to fraud and hackers. We think that if there is to be any long-term implications on Bitcoin as having any “store of value” then it is only a matter of time when governments around the world pull together to regulate the use and determine what value, if any, they play for Bitcoin to become a medium of exchange. Only then could investors make any form of realistic judgment on the future of cryptocurrencies as a whole.

What we need to differentiate is the technology behind them and the digital coins itself. While we are still just beginning to grasp these new technologies, we believe that the underlying technology and system used – Blockchain – is likely to have implications on payments and currency transactions in the future and could indeed prove to be a game-changer. As for Bitcoin and other descendants of Bitcoin, the fascination by the public may take a turn for the worse down the road. Whether that will be this year, next year or five years from now, we do not know. Bitcoin does not produce any cash and therefore an estimate of its value cannot be determined. The worst thing an investor can do therefore, is to be sucked in by the hysteria and join the herd heading over the cliff.

“It’s not going to end well.” That was the simple message by Warren Buffett, when interviewed by CNBC in mid January 2018.

For those who still wish to get an indirect exposure into Bitcoin without the sleepless nights, an avenue to do this is through buying the shares of the listed futures exchange that enable traders to speculate on the rise or fall of Bitcoin. They are real businesses, make real money and take transaction fees whether Bitcoin becomes mainstream or ends up the same way as the Tulips.

With the many positive news surrounding the sharemarket, it is always important to keep your long-term goals and objectives clear. Markets may fluctuate wildly during the week, month or year, but over a long period of time, markets balance out. To forget your long-term goals in order to speculate on a making a little more money in the short term could derail your hard work and actually set you back.

Please feel free to discuss the above or any financial matters you may have with your advisers.